Is This Stock Halal? Here’s How to Check

Imagine finding a technology company you want to invest in. Its products seem permissible, its profits are growing, and its shares are available on the stock market.

But does that mean the stock is Halal?

Not necessarily. Even companies operating in permissible industries may have interest-bearing debt or earn income from prohibited activities.

That’s why checking a stock’s Shariah compliance is an important step before investing.

In this lesson, you’ll learn how to check whether a stock is Halal, understand the main screening criteria and discover how a Halal stock screener can simplify the process.

What is a Halal stock screener?

A Halal stock screener is a tool that checks whether publicly traded companies meet Islamic investment requirements.

Instead of manually examining every company’s financial statements and business activities, investors can use a screener to identify stocks that meet a particular Shariah screening methodology.

The screening process typically involves two main checks: business activities and financial ratios.

Both are necessary because a company may sell permissible products while relying heavily on interest-bearing debt.

Step 1: Check the company’s business activities

The first question to ask is: how does this company make its money?

Companies whose primary business involves prohibited activities generally fail Shariah screening.

Examples include:

• Conventional banking and insurance
• Alcohol production and sales
• Gambling and betting
• Pork and other prohibited food products
• Adult entertainment

Companies operating in permissible industries, such as technology, healthcare or manufacturing, can proceed to financial screening.

However, a company’s industry alone isn’t enough to determine whether its stock is Halal.

For example, a technology company might earn interest on its cash deposits or hold substantial interest-bearing debt.

Step 2: Check the financial ratios

Once a company passes the business activity check, the next step is examining its financial statements.

Shariah screening methodologies assess factors such as interest-bearing debt, cash holdings and non-permissible income.

Under the AAOIFI methodology described in Tabadulat’s guide, three important thresholds apply.

1. Interest-bearing debt: Less than 30% of the company’s market capitalization.
2. Cash and interest-bearing securities: Less than 30% of the company’s market capitalization.
3. Non-operating interest-bearing income: Less than 5% of the company’s total income.

Other screening methodologies may use different thresholds or calculation methods.

Example: How would you screen a stock?

Imagine you’re interested in a company with a market capitalization of $100 million.

Its main business is permissible, but you still need to examine its finances.

Interest-bearing debt

Company’s figures: $20 million (20%). Screening result: Pass.

Cash and interest-bearing securities

Company’s figures: $15 million (15%). Screening result: Pass.

Non-operating interest income

Company’s figures: 2% of total income. Screening result: Pass.

In this simplified example, the company passes all three illustrated financial checks.

However, if its interest-bearing debt increased to $40 million while its market capitalization remained unchanged, its debt ratio would reach 40%.

That would exceed the applicable 30% threshold, causing the company to fail that screening criterion.

Remember that these calculations are only part of a complete Shariah assessment.

Step 3: Use a Halal stock screener

Manually checking financial statements can take time, especially if you’re interested in several companies.

A Halal stock screener simplifies the process by examining business activities and financial data according to its screening methodology.

For example, Tabadulat’s free Halal Stock Screener allows investors to check the Shariah compliance of stocks and ETFs.

You can use it to:

• Search for a company by its name or stock ticker.
• Check its Shariah compliance status.
• Review the available screening information before making an investment decision.

A screener helps you identify investments that meet its Shariah criteria. However, it doesn’t tell you whether a stock is attractively priced or suitable for your financial goals.

Step 4: Monitor your investments

Finding a Halal stock today doesn’t mean it will remain compliant forever.

Companies regularly change their financial positions, borrow money, acquire businesses and develop new revenue streams.

For example, a company might take on additional interest-bearing debt or begin earning more income from prohibited activities.

These changes can affect its Shariah compliance status.

That’s why screening should be an ongoing process rather than a one-time check.

Tabadulat states that it uses daily screening and provides notifications when a holding’s compliance status changes.

What if your stock becomes non-compliant?

If a stock you own becomes non-compliant, review the reason for the change and the guidance provided by your chosen Shariah screening methodology.

Depending on the circumstances, you may need to sell the investment or take other action in accordance with the applicable Shariah guidance.

You should also check whether any dividends require purification.

Dividend purification involves donating the portion of dividend income attributable to non-permissible activities to charity.

The applicable amount depends on the company’s financial information and the purification methodology used.

Test your knowledge

Question 1: Why isn’t a company’s industry enough to determine whether its stock is Halal?

• A. Because all companies in permissible industries are automatically Halal.
• B. Because a company may have interest-bearing debt or earn non-permissible income.
• C. Because only a company’s share price determines its compliance.

Correct answer: B

Explanation: Shariah screening examines both business activities and financial ratios. A company selling permissible products may still fail financial screening.

Question 2: A company has a market capitalization of $100 million and $40 million in interest-bearing debt. Does it pass the debt criterion covered in this lesson?

• A. Yes, because its business activities are permissible.
• B. Yes, because its debt is below 50% of its market capitalization.
• C. No, because its debt ratio is 40%, exceeding the applicable 30% threshold.

Correct answer: C

Explanation: The company’s interest-bearing debt represents 40% of its market capitalization, exceeding the screening threshold.

Question 3: Why should investors regularly check the Shariah compliance of stocks they already own?

• A. Because a company’s business activities and financial ratios can change.
• B. Because a Halal stock can never lose value.
• C. Because every company changes its industry each year.

Correct answer: A

Explanation: Changes in debt, interest income or business activities can affect a company’s Shariah compliance status.

Sources

Tabadulat | Blog | Why a Halal Stock Screener Matters for Halal Investing — Main content reference.

Frequently asked questions

Is a stock Halal if the company operates in a permissible industry?

Not necessarily. A company selling permissible products may still have interest-bearing debt or earn non-permissible income. Shariah screening examines both business activities and financial ratios.

What financial thresholds does the AAOIFI methodology described in this lesson use?

Interest-bearing debt must be less than 30% of the company’s market capitalization. Cash and interest-bearing securities must also be less than 30% of market capitalization, while non-operating interest-bearing income must be less than 5% of total income. Other screening methodologies may use different thresholds or calculation methods.

Does a Halal stock screener tell me whether a stock is a suitable investment?

A screener helps identify investments that meet its Shariah criteria. It doesn’t tell you whether a stock is attractively priced or suitable for your financial goals.

What should I do if a stock I own becomes non-compliant?

Review the reason for the change and the guidance provided by your chosen Shariah screening methodology. Depending on the circumstances, you may need to sell the investment or take other action in accordance with the applicable Shariah guidance. You should also check whether any dividends require purification.

What is dividend purification?

Dividend purification involves donating the portion of dividend income attributable to non-permissible activities to charity. The applicable amount depends on the company’s financial information and the purification methodology used.

Related terms

• Halal Stocks
• Shariah Compliance
• AAOIFI Standards