Screening For Halal Stocks: Investing With Islamic Principles
The popularity of halal stocks has increased over the past few years, with Muslim investors seeking to align their investments with their religious beliefs.
According to a report by Thomson Reuters, the Islamic finance industry is expected to be $3.8 trillion in 2022, highlighting the significant growth potential for halal investing.
However, investing in halal stocks is not as straightforward as it may seem, as it requires a thorough understanding of Islamic principles and a rigorous screening process to ensure compliance.
This article aims to provide an overview of the criteria for investing in halal stocks and the practical application of halal stock screening.
It will explore the fundamental principles of Islamic finance, which prohibit investments in companies involved in haram activities such as alcohol, tobacco, gambling, and pornography.
Additionally, it will discuss the concept of purification, which involves cleansing investment returns from any income derived from haram sources.
By understanding these principles and applying them to the stock screening process, investors can make informed decisions and invest confidently following Islamic principles.
- Halal stocks meet specific criteria, such as no income from haram sources, low interest-bearing debt, and a low ratio of illiquid assets to total assets.
- Successful non-Muslim investors also apply the criteria of interest-bearing debt to total assets when investing.
- Purification, which involves giving away a portion of profits to charity, is a common practice among Muslim investors.
- Tools available, such as Halal stock screener and Finispia, can help investors screen for halal stocks, but due diligence should still be done before investing.
Criteria for Halal Stocks
Criteria for investing in halal stocks, such as ensuring no income from haram sources and a low ratio of illiquid assets to total assets, have been previously discussed as essential factors in the stock screening method for halal investments.
In addition, a company’s main business should not be against Shariah.
Financial service companies, like banks and insurers, should also be judged on a case-by-case basis.
Successful non-Muslim investors also apply the criteria of interest-bearing debt to total assets, as Benjamin Graham and Warren Buffett emphasized in their investment strategies.
Investing strategies for halal stocks require careful consideration of Shariah compliance.
Halal stocks should not be involved in any income or activities that are haram, such as gambling, alcohol, or tobacco.
The purification process of an investor giving away a portion of profits to charity is also an essential aspect of halal investing.
It is important to note that there is a difference of opinion among scholars as to whether purification is done solely on dividends or capital gains. Still, the majority agree that it is necessary for dividends.
Overall, the criteria for halal stocks provide a framework for investors to make informed decisions based on ethical and religious principles.
Calculating Interest-Bearing Debt Ratio
The proportion of interest-bearing debt to total assets is a crucial metric stressed by successful non-Muslim investors like Benjamin Graham and Warren Buffett, who consider it in their investment strategies and can be compared to the circulatory system of a company, providing critical insight into its financial health.
This metric is also an essential criterion for screening halal stocks as it signifies the company’s debt level and how it manages its finances. Here are three key points to consider when analyzing debt-to-equity ratios:
Interest-bearing debt includes all types of borrowings that require interest payments, such as bonds, loans, and mortgages. This debt is often used to finance a company’s operations or investments, but too much of it can be a red flag as it can lead to financial instability and high-interest expenses.
Total assets include all the assets a company owns, such as cash, inventory, property, and equipment. A company with a high proportion of interest-bearing debt to total assets may struggle to meet its financial obligations, especially during times of economic downturn.
The interest-bearing debt to total assets ratio can be calculated by dividing a company’s interest-bearing debt by its total assets. A low ratio indicates that the company has a lower level of debt and is better able to manage its finances. A high ratio, on the other hand, may indicate financial distress and a higher risk of defaulting on its debts.
Understanding a company’s interest-bearing debt ratio is crucial for evaluating its financial health and making informed investment decisions, including screening for halal stocks.
Practical Application to Rio Tinto
Analyzing the interest-bearing debt to total assets ratio is a crucial step in evaluating the financial health of companies, as demonstrated by its importance in the investment strategies of successful non-Muslim investors and its relevance in screening for Sharia-compliant investments.
In the case of Rio Tinto, the ratio of interest-bearing debt to total assets is within acceptable limits, indicating that the company has a healthy balance between its debt and assets.
Furthermore, the company released a positive net income in 2016, despite a turn in fortune in 2015 due to macroeconomic factors.
The recent crisis has allowed the company to focus on efficiency and offers good future growth prospects, making it an attractive option for Muslim investors looking for halal investments.
Rio Tinto’s main business does not go against Shariah, and income from haram sources is low.
The ratio of illiquid assets to total assets is also acceptable, and net liquid assets do not exceed market capitalization.
Moreover, Rio Tinto’s zakatable assets are 23.7%, indicating that the company has significant assets that can be purified through charitable giving.
While it is important to note that the text is not intended as investment advice, Rio Tinto’s compliance with sharia principles and its potential for future growth make it a viable option for Muslim investors looking to invest with Islamic principles.