Stock Screening – The Shariah compliant method
We follow the guidelines issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which is the world’s premier body for issuing legal opinions (fatwas) and formulating basic rules to be followed in all day to day financial matters including stock trading.
Shariah scholars of the Islamic financial world have termed some industries as inconsistent with Shariah percepts. Therefore, investments in the companies involved in the following businesses are not permitted:
- Pork-related products
- Conventional financial services (Banking, Insurance etc.)
- Weapons & Defense
- Entertainment (Casinos, Discos, Bars, Hotels, Pornography etc.)
After removing companies with unacceptable primary businesses, companies are further excluded based on the below listed financial ratios. The ratios must not be greater than 33%.
- Debt to Assets: Total Debt of the company divided by its Trailing 12-Month Average Market Capitalization.
- Impure Income: Cash plus interest bearing securities divided by Trailing 12-Month Average Market Capitalization.
- Receivables to Assets: Accounts Receivables divided by their Trailing 12-Month Average Market Capitalization.
Dispatching the Shariah List
The list of Stocks which pass the screening will be regarded as Shariah compliant and thereafter dispatched to all our customers, so that they can trade in those stocks keeping in view the Islamic guidelines.
Trading occurs as usual as in any other stock brokering franchisee. We are looking forward to execute delivery based trading on a frequent basis.
From the list of Shariah compliant stocks, our research analysts will screen out companies which are expected to give positive performances using various fundamental and technical analysis tools including GARP, CANSLIM, Monte Carlo Simulations etc. These recommendations will be dispatched to clients on a periodic basis. The research can be used by the fund manager for further processing.
5 % Interest bearing income
As per guidelines given by AAOIFI, the 5 % interest bearing profit (due to companies holding their surplus cash in bank accounts) will be distributed among the poor and the needy. We will advise our clients to do so in this regard.
A portion of dividend will be donated to charity. The dividend portion will be determined as follows:
Impure dividend =
[Dividend * (Revenue from non-shariah compliant business/ Total revenue)] * number of shares