3 things to check if a Stock is Halal
22 Feb 2022
There are 3 main things to take a look at, all of which Kestrl can help you to do:
1. Business activity screen: How the company makes money
2. Financial activity screen: How much interest a company has to pay or is making from its debts and investments, as well as how much cash it is currently holding
3. Ethical screen: This is more a common-sense check of whether the company is doing anything that may be considered morally or ethically questionable like operating a sweatshop or working with apartheid governments
It’s worth noting that different Shariah bodies have different takes on what’s acceptable or not, though they really only differ when it comes to the Financial Activity screening.
There’s no right or wrong answer, it’s really for you to decide what you're comfortable with. You can compare 5 of the major standards within our app or choose to filter by 1 standard alone. You can see the differences between them right here.
1. Business Activity: How the company makes money
Here we take a look at a business’s revenue streams to see if they fall within any of the ‘impermissible’ categories such as alcohol, gambling, pornography or interest-based products.
We’ll also screen for anything considered controversial, such as weapons or tobacco. You can find a breakdown of a company’s revenue by checking its annual financial report (known as Form 10-K in the US) OR you can save some time and check it out in the Kestrl App.
There are very few cases where a company’s revenue is 100% halal e.g., a supermarket that sells pork products (or when Tesla was selling Tequila!). However, the majority of Shariah boards agree that as long as no more than 5% of a company’s revenue is impermissible, then it may be invested in.
2. Financial activity: Interest paid/earned, and Cash held
There are three ratios to consider here:
- Interest-bearing debt
- Interest-bearing investments, and
- What it means: A company’s debt cannot be more than 33% of its market cap, where market cap is basically a company’s valuation (share price x no. of shares issued).
- Why it matters: The lower a company’s debt is compared to its value, the more stable it will be in times of uncertainty, with fewer loans to repay and interest payments to make.
- What it means: A company’s investments into interest-generating assets must be less than 33% of its market cap.
- Why it matters: A company should try to avoid interest at all costs. See more on why interest is haram here.
- What it means: The money and ‘receivables’ (money owed by others to the company) must be less than 82% of a companies market cap.
- Why it matters: If a company is holding too much cash that can be considered hoarding.
Obviously, this can take quite a bit of time to research on your own, BUT you could do it immediately using Kestrl!
3. Ethical screen: A company's practices and behaviour
This is much harder to quantify and is really more of a common sense check. A good example might be a company that passes the business and financial screens, however has been found to be taking advantage of Uyghur forced labour camps in China’s XinJiang province.
Whilst on paper this company may appear halal, we should consider how complicit this business has been in Human Rights violations and whether we want to be associated with that.
Kestrl is going through each of its companies to make this call and will flag a business as ‘Questionable’ if anything comes up. We will also show you the latest news about a certain company within an app for you to browse at your leisure.
Thanks for checking out this blog post! Download Kestrl: The Muslim Money App to start achieving your financial goals without compromise today!