INDIA has a population of about 1.3 billion people out of which only 30 million people invest their money in the stock market. which is approximately 2.5% of the total population of the country. 90% of the retailers lose their money without any knowledge of stock market analysis. The majority of Muslims trading in the stock market are ignorant about the norms of the shariah which are to be followed while trading. Due to this lack of knowledge, most Muslims trade-in non-permissible ways which not only make them lose their capital but trading in such ways will also affect their Akhirah. The stock should clear the following criteria to be a Shariah-compliant stock.
( A stock in which Muslims can trade or invest) Companies that derive less than 5% of operating revenue (core or active business activity related) from the below non-permissible areas, pass the sector screening.
And those non-permissible activities are as follows:
- Alcohol
- Pork
- Tobacco
- Internet-based activities
- Pornography
- Gambling
- Conventional Entertainment
- Trading of gold & Silver on a differed basis
Another thing to look for is Financial ratios.
Now, what are financial ratios?
There are three financial ratios which a listed company has to clear to pass the financial ratio screening and they are as follows:
- Interest bearing debt/36 month average Market Cap < 33%
- Cash + short term investments/36 month average Market Cap < 33%
- Accounts Receivables/36 month average Market Cap < 49%
If all three ratios are below the mentioned threshold, the company is said to have passed the financial ratio screening.
A company that passes both the levels of screening
i.e. Sector screening as well as Financial ratio screening is said to be a “SHARIAH COMPLIANT COMPANY“. Investment in the common equity of such companies is permissible for Muslims.