What is shariah screening of stocks/shares?

Islamic share screening

What is shariah screening of stocks/shares

Islamic sharia prohibits the consumption of riba (interest) and businesses whose core activity is immoral and not beneficial to society. Therefore, companies whose core activity involves such businesses are considered not shariah compliant and it would be haram for a Muslim to invest in such companies.

So companies involved in activities such as  alcohol , companies dealing in interest based lending, music, casinos, etc are all businesses which will be considered haram and non-compliant.

 

Now that we have a basic understanding of the prohibitions of certain kinds of activities and strict prohibition of interest (riba) in Islam, it is not difficult to understand that most modern-day economic activities are not bereft of these elements. 

A lot of these activities have on the contrary been legalised and practised in the modern-day economic system.

It is in this background that the need to screen the companies arises which provides alternates to Muslims for investments wherein the element of such activities is minimal.

stock 624712 What is shariah screening of stocks/shares?

Why do you need shariah screening?

While it is relatively easier to screen and select companies based on their core activity which are in congruence with the Islamic principles, however, it is extremely difficult almost impossible to find a company that is not involved in interest either directly or indirectly.

Interest being such an integral part of modern-day economic system that there is hardly any part of the activity which is left untouched by interest (riba). 

A famous hadith of the Prophet Muhammad  narrated by Abu Hurayrah (RA) states : 

The Prophet , said: “There will certainly come a time for mankind when everyone will take riba and if he does not do so, its dust will reach him.” (Abu Dawud, Kitab al-Buyu’, Bab fi ijtinabi al-shubuhat; also in Ibn Majah)

So we are living in such a time that at the very least the dust of interest is being consumed by us.

 

Since the current economic system is based on interest, which in Islam is one of the biggest sins, for a Muslim it is tricky at times to maintain the balance between the economic benefits of this world and following their deen.

 

Unfortunately, to compound the issue, since the modern-day economic system, the company structure and the share market are recent phenomena the parallels of which were not found at the time of Prophet Mohamad  , the Quran and Sunnah do not have any specific guidelines with respect to this modern-day economic structure.

So as muslims what shall we do?

Either take the extreme path and avoid participation in this flawed economic system which is not in congruence with shariah principles and deprive ourselves of any benefit from this riba based economic system, (a 100% avoidance although is still practically impossible) or the other way is to indulge in the system without worrying about the consequences of the same in the hereafter.

 

Both of these views are extreme, while the first one although unsuccessfully tries to avoid a sin and something that is haram, it also deprives Muslims in general of the wealth and prosperity of this world, thereby making them weak- economically, socially, educationally and in a lot of other ways.

On the other hand, the proponents of the other extreme end up behaving as infidels with no moral values and indulge in activities and actions that are strictly prohibited in Islam.

Scholars to find a solution and a middle path, having taken upon themselves and have advised a solution which is a moderate view of the two extremes.

light bulbs 1875384 What is shariah screening of stocks/shares?

This solution is based on the qiyas ( analogy) and ijma (consensus) of world-renowned scholars, since there are no specific guidelines related to these modern-day issues in the Quran and Sunnah.

 These screening are broadly based on two criterion – Qualitative and Quantitative.

Qualitative aspects refer to the core activity of a company, whether the activity being undertaken is halal and shariah-compliant, for eg a company that produces and sells alcohol is ab initio haram.

Another category of companies is that which have mixed income , while majority of their income is from halal sources, some relatively smaller portion is from non -shariah compliant activities.


While the scholars are unanimous on their non-permissibility of companies that indulge in non-shariah compliant activities, it is with respect to the mixed-income companies that there is some difference in opinion.

For example a company that manufactures FMCG goods, the activity in itself is halal, however, the company may also be using some riba based loan for its business and it may also be investing its money in some non-shariah compliant business or making investments in haram options like a fixed deposit on interest etc.

To overcome such issues, scholars have devised and prescribed, different thresholds and ratios to minimise the non-shariah compliant aspects of these businesses and allow investment in such companies. These are the quantitative criterion for the screening of a business.

As mentioned earlier that since there is nothing specific mentioned related to the issue in Quran and Sunnah , scholars have derived these based on analogy and consensus. There is, therefore, some difference in opinion of the scholars , wherein some criterion are more conservative while others are relatively less. Nonetheless, each such benchmark/criterion have their own justification.  

doors 1690423 What is shariah screening of stocks/shares?

The practical approach that one can follow is to try and understand the reasoning each scholar provides for choosing a particular benchmark, if the ideas sound convincing, accept the view (fatwa) of the particular scholar. 

However, if as a layman this financial reasoning and justification are beyond your realm of expertise, rely on the scholar’s fatwa. 

But before you rely on any fatwa or scholar do a basic research and understand the profile of the scholar giving the fatwa, and if you are convinced of their credentials, only then should you accept their opinion (fatwa).

 

In conclusion, Allah knows our intention, if we are clear and honest in our intentions HE will guide and will inshallah pardon us for any unintentional misgivings and errors.

 

May Allah guide us all to the Right Way.