A note on Shariah compliance by Khawar Nehal
3 July 2010.
I was reading an article which mentioned that shariah compliant finance
has not taken the majority market share. This got me thinking that the
stock market is also a form of finance and a large one to. So I
searched for the criteria for sharia stocks and found the following.
Here is a sample of shariah compliance for stocks from the KSE.
Shariah Screening Criteria
Shariah
compliance
of stocks is done under the guidance of qualified and
reputed Shariah experts. For stocks to be “Shariah compliant”, it must
meet ALL the six key tests given below.
- Business of the Investee
Company Core business of the company must be halal and in line
with the dictates of Shariah. Hence, investment in securities of any
company dealing in conventional banking, conventional insurance,
alcoholic drinks, tobacco, pork production, arms manufacturing,
pornography or related activities is not permissible.
- Debt to Total Assets
Debt to Asset ratio should be less than 40%. Debt, in this case, is
classified as any interest bearing debts. Zero coupon bonds and
preference shares are, both, by definition, part of debt.
- Non-compliant Investments to
Total Assets The ratio of non compliant investments to total
assets should be less than 33%. Investment in any non-compliant
security shall be included for the calculation of this ratio.
- Non-complaint Income to
Total revenue – Purification of Non-compliant income The ratio
of non compliant income to total revenue should be less than 5%. Total
revenue includes Gross revenue plus any other income earned by the
company. This amount is to be cleansed out as charity on a pro rata
ratio of dividends issued by the company.
- Illiquid Assets to Total
Assets The ratio of illiquid assets to total assets should be
at least 20%. Illiquid asset, here, is defined as any asset that that
Shariah permits to be traded at value other than the par.
- Net Liquid Assets to Share
Price The market price per share should be greater than the
net liquid assets per share calculated as: (Total Assets – Illiquid
Assets – Total Liabilities) divided by number of shares.
Based on these criteria I can safely say that many businesses in the
world could be classified as shariah compliant. What is happening is
that the free market and consumers favor fair business practices and
corporate social responsibility. When companies attempt to plan for
profits, the need to adopt some fair businesses practices. Shariah
compliance is simply adherence to fair business practices with the
added benefit that the people involved are not thinking about profits
or greed as the main intention, but as a duty to God as the main
intention.
God's test is mainly about intention and resulting actions. You can
start to fake it until you make it. God has stated that he knows what
people hide in their chests. Maybe a reference to what is concealed in
the hearts.
Shariah compliance is a tough topic if you try to comply based on
formulas. If you let your heart guide you based on intentions, it
becomes easier to understand. You need the actual words of God from the
book and an un illintentioned heart to understand what values he is
trying to say.
Concocting up complex formulas in an attempt to fool people into
thinking you are compliant is not likely to be acceptable.
Regards,
Khawar Nehal