CRITERION FOR SHARIA SCREENING OF STOCKS
The shariah stock screening criteria is based on the fatwa (opinion) of several renowned scholars some of whom have been part of International Islamic organizations like AAOIFI. These rules are supported by reference to Quran and Sunnah and are based on Ijma (consensus) and Qiyas (analogy) of scholars.
Activity : The core activity of the company should not be non-shariah compliant for example companies dealing in interest, alcohol, gambling, non-shariah compliant entertainment, pork, etc.
Ratio 1 : Indicates the ratio of Total Illiquid Assets to Total Assets. This should be more than 20%.
Ratio 2 : Non-Shariah compliant investment to total assets. This ratio should not be more than 33%.
Ratio 3 : Total non-shariah compliant debt to Total Assets. The max permissible is 33%.
Purification ratio : Total non-shariah compliant income to Total income. This should not exceed 5%.(It is an integral part of the screening process to ensure that the amount as per this ratio is given in charity in order to purify and cleanse our earnings.)
Please note that for a stock to be compliant it has to pass all the the criteria. Even if it fails in only one of the criteria , it will not be considered halal and shariah compliant. Please also bear in mind that the compliance of a share can change with change in its financial statement.