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KembaraXtra–Islamic Finance–Islamic Capital Market
Shari’ah Screening and Purification in Islamic Equity Investing
Overview
To ensure that investments comply with Islamic law, Islamic equity investing applies a structured Shari’ah screening process. This process determines whether a company’s shares are permissible (halal) for investment. The screening has three core components:
Qualitative Screening (Business Activity Screening)
Qualitative screening examines what the company does.
• The company’s core business activities must be halal
• Companies involved in prohibited (haram) sectors are excluded
Examples of non-permissible activities:
• Alcohol, gambling, pornography
• Conventional banking and insurance (interest-based)
• Tobacco, pork-related products
• Weapons and non-halal entertainment
Example:
A company producing halal food passes qualitative screening.
A casino or conventional bank fails immediately, regardless of profitability.
This step ensures that investors are not owners of unethical or forbidden businesses, which is a core Islamic requirement.
Quantitative Screening (Financial Ratio Screening)
Quantitative screening examines how the company finances its operations.
Even if the main business is halal, excessive reliance on interest-based finance is not allowed. Therefore, financial ratios are used to set acceptable limits.
Common AAOIFI-based benchmarks include:
• Interest-based debt ÷ total assets
Shari’ah Screening and Purification in Islamic Equity Investing
Overview
To ensure that investments comply with Islamic law, Islamic equity investing applies a structured Shari’ah screening process. This process determines whether a company’s shares are permissible (halal) for investment. The screening has three core components:
- Qualitative screening
- Quantitative screening
- Purification (cleansing of impure income)
Qualitative Screening (Business Activity Screening)
Qualitative screening examines what the company does.
• The company’s core business activities must be halal
• Companies involved in prohibited (haram) sectors are excluded
Examples of non-permissible activities:
• Alcohol, gambling, pornography
• Conventional banking and insurance (interest-based)
• Tobacco, pork-related products
• Weapons and non-halal entertainment
Example:
A company producing halal food passes qualitative screening.
A casino or conventional bank fails immediately, regardless of profitability.
This step ensures that investors are not owners of unethical or forbidden businesses, which is a core Islamic requirement.
Quantitative Screening (Financial Ratio Screening)
Quantitative screening examines how the company finances its operations.
Even if the main business is halal, excessive reliance on interest-based finance is not allowed. Therefore, financial ratios are used to set acceptable limits.
Common AAOIFI-based benchmarks include:
• Interest-based debt ÷ total assets
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