Islamic Finance Blog & Articles
Earning money had gone a long way from simply working in jobs. Today, people have the option to simply stay in their homes and make a whole lot more than they ever worked for in the many years they've been working in blue-collared jobs. Nowadays, people can invest in the stock market to earn a living.
However, unlike other people, Muslims need to be more careful in deciding which stocks to purchase. Muslims are required to follow the Shariah. Aside from simply choosing which stock option can bring the highest return on investment, they need to select halal stocks. Usually, the stock exchange would only present their statistics and not whether they are Shariah compliant investments. To help you not only decide which stock options to consider, we are also listing down the steps to determine which are halal stocks from those that are not.
What is a Shariah Compliant Investment?
The guidelines presented by the Shariah is for Muslims to aim to find a balance between the needs of the society and their individual needs. Hence, in a nutshell, a Shariah Compliant simply means that Muslims need to be more socially responsible in choosing which stock options they should buy. Practices in halal ensure that you are thinking beyond yourself and considering the welfare of society. Remember, the world is not solely yours to own but, more importantly, for the future generation to have.
One of the most basic things to look for in a Shariah compliant investment is how a stock option should put more premium on profit sharing. In addition, it is also vital that you look into the business' history. No matter how profitable they may seem, it is essential that they do not discount the importance of providing proper compensation to their workers. Their operations are void of any unethical activities.
How to ensure that you're buying halal stocks?
Since not every stock in the market is advertising, whether halal or not, it is your responsibility to be thorough. Although, you may be pleasantly surprised that there is a considerable percentage of halal stocks. However, it would be best if you still were meticulous in buying stocks.
Assess the kind of model a business employs
Perhaps the simplest way to check whether a stock is halal or not is based on their business model. For example, it is best to stir away from businesses that are selling any kind of liquor. You also need to check whether they are selling any type of food product. Remember, there are some products that may not be exactly meat-free. Some food items may use meat products in their food to add flavor.
Additionally, determine whether a business is engaging in any form of gambling or illegal activities. Though the government regulates these kinds of activities, it is still best to be extra careful. Although businesses may engage in exploitation and pornography, you may want to be extra cautious. Typically, these kinds of enterprises disguise themselves as more acceptable businesses to encourage investors. It is crucial to be responsible and thorough in deciding which stock to put your money in. Don't simply accept things at face value. It is best to do research before committing your finances to a business.
Look into how the company is run.
Once the business passes the first step of screening, you might want to look a little deeper into the way they run their system. There are no entrepreneurs who air out their dirty laundry. Some companies may boast about how respectable their businesses are because of their commitment to selling legal and halal items. However, not everything may seem that way.
Remember, the Shariah requirements go far more than legalities. Companies that truly provide halal stocks focus on a holistic approach. For example, some companies may only sell clothes. In fact, they might even capitalize on the fact that they use recycled materials. However, there are some companies that are exploiting their workers to get maximum profit. Again, research is crucial in these kinds of situations. The best way to look into a business is to look into the type of news surrounding it. If there is any kind of exploitation or lack of proper compensation, don't even consider them.
Inquire on their interest-bearing debt
In determining whether a stock can be considered halal stock, it has to have a total interest-bearing debt that will not go over 33% of total assets. It is noteworthy that even non-halal stocks have this rate as a benchmark for their respective stock screens. Most businesses believe that 33% is a level of risk they are comfortable with having.
Although, it can be quite challenging to determine which stocks fall under this amount of interest-bearing debt. You may encounter businesses with borrowings that are categorized as interested free loans that come from directors. It can be tricky to determine which accounts fall under these specifications, but there are ways to assess them further using supplemental notes. By asking supplemental notes, you get to look into the finer details of a business's transactions, including a breakdown of their loans.
Compare illiquid assets with total assets.
Assets such as real estate cannot be converted to cash, hence categorized as illiquid. The moment a business becomes underfunded, the business owners have the capacity to consider selling their illiquid assets. Typically, these kinds of assets may be sold for a significantly lower market value.
When a company mainly works with liquid assets with no existing other kinds of assets, they can sell these at par value. In this kind of circumstances, illiquid assets should at the very least be 20% of the business's total assets. To determine the company's liquid assets, you may request their balance sheets that may include anywhere from property, equipment, and goodwill gestures, to name a few.
Overall, to determine which stocks are Shariah compliant investments, you need to do some work. It is critical to do some research rather than simply accepting a business as it is. Remember, all companies are looking for as many investors to help their business thrive. This means that they are putting their best foot forward. However, some businesses may not be all that they seem. It is best to be meticulous at tall times. Besides, aside from being good Muslims, you are ultimately helping the entire community by choosing the right businesses to commit your finances into.