- Published on
KembaraXtra–Islamic Finance–Islamic Capital Market–Islamic Investment Criteria
Overview
Islamic investment criteria are the rules used to decide which companies are allowed for investment under Shari’ah principles. Before any company is included in an Islamic mutual fund, it must pass a strict screening process to ensure that both its business activities and financial structure comply with Islamic law. This screening is essential to protect investors from engaging, even indirectly, in prohibited (haram) activities.
Islamic investments rely on two main types of screening:
Qualitative (business activity) screening and Quantitative (financial ratio) screening. A company must pass both to be considered Shari’ah-compliant.
1. Qualitative Screening (Business Activity Screening)
This screening examines what the company does.
The company’s core business and main sources of revenue must be halal and ethical according to Shari’ah. Any company primarily involved in prohibited activities is automatically excluded, regardless of how profitable it is.
Examples of prohibited business activities include:
• Interest-based banking and conventional insurance (riba)
• Alcohol, pork, tobacco, and non-halal food production
• Gambling, betting, casinos, and games of chance (maisir)
• Pornography and non-Shari’ah-compliant entertainment
• Weapons and arms manufacturing
• Activities involving excessive uncertainty or speculation (gharar)
Key idea:
👉 If the main business is haram, the stock is rejected immediately.
2. Quantitative Screening (Financial Ratio Screening)
This screening examines how the company is financed and earns income.
Since it is difficult to find companies that are 100% free from interest-based dealings in modern markets, Shari’ah allows limited tolerance levels under strict thresholds approved by bodies such as AAOIFI.
Common financial ratio limits include:
• Interest-based debt ÷ total assets
0 Comments