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Criteria 1.

Business of the Investee Company

The core business of the company should not violate any principle of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest like conventional banks, insurance companies, leasing companies or the companies involved in some other business not approved by the Shariah e.g. Companies making or selling liquor, pork, Haram meat, or involved in gambling, operating night clubs, disseminating pornographic content, prostitution etc.

Criteria 2.

Interest Bearing Debt to Total Assets

The Interest Bearing Debt to Total Assets ratio should be less than 37%. To understand the rationale behind this condition, it should be kept in mind that such companies are mostly based on interest. Here again, the aforementioned principle applies i.e. if the shareholder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him / her. Debt, in this case, is classified as any interest bearing debt including Bonds, TFCs, Commercial Paper, Conventional Bank Loans, Finance Lease, Hire Purchase, issuing preference shares etc.

Criteria 3.

Non-Compliant Investments to Total Assets

The ratio of Non Compliant Investments to Total Assets should be less than 33%. Non-Shariah Compliant Investments include investments in conventional mutual funds, conventional money market instruments, Commercial Paper, interest bearing bank deposits, Bonds, PIBs, FIB, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives etc.

Criteria 4.

Non-compliant Income to Total Revenue

The ratio of Non Compliant Income to Total Revenue should be less than 5%. Total Revenue includes Gross Revenue plus any other income earned by the company. Non Compliant Income includes income from gambling, income from interest based transactions, income from Gharar based transactions i.e. derivatives, insurance claim reimbursement from a conventional insurance company, any penalty charged on late payment in credit sale, income from casinos, addictive drugs, alcohol, dividend income from above mentioned businesses or companies which have been declared Shariah Non-Compliant due to non-compliance to any of the mentioned criteria for Shariah Compliance etc.

Criteria 5.

Illiquid Assets to Total Assets

The ratio of Illiquid Assets to Total Assets should be at least 25%. In terms of Shariah, illiquid assets are all those assets that are not cash or cash equivalents. Therefore, inventory of raw material, work in process, among all other fixed assets are considered as illiquid whereas long term investments in interest based institutions are considered to be liquid in terms of Shariah.

Criteria 6.

Net Liquid Assets/Share vs. Market Price/Share

The market price per share should be greater than the net liquid assets per share calculated as

Calculation Formula

Net Liquid Assets To Share Price = (Total Assets – Illiquid Assets – Total Liabilities)

Number of Shares

Showing of Discomfort

If the main business of the investee companies is Halal, like automobiles, textiles, manufacturing concerns etc but they deposit their surplus amounts in an interest bearing account or borrow money on interest, the share holder must express his / her disapproval against such dealings, preferably by raising his / her voice against such activities in the annual general meeting of the company and / or by sending a letter to the management in this regard.

Would you like to know which companies are currently Shariah-compliant?