What Makes a Stock Halal? Sharia Stock Screening Explained

A stock is ‘halal’ (permissible under Islamic law) when owning a share of that business does not involve you in activities Sharia prohibits. Two tests decide it.

Test 1: Is the business permissible?

The company's core activity must be allowed. Excluded sectors include interest-based finance (conventional banks, leasing, insurance), alcohol, gambling, tobacco, conventional weapons, pork and adult entertainment. A business that earns its money mainly from these is non-compliant no matter how healthy its balance sheet.

Test 2: Do the finances pass the Sharia ratios?

Even a permissible business can fail if it is run on too much interest (riba). The widely-used AAOIFI-style screens check three ratios: interest-bearing debt should be below about one third of market capitalisation; interest-bearing investments / cash below about one third; and income from non-compliant sources below about 5% of total revenue. Any impermissible income should also be ‘purified’ by giving it to charity.

How this works on the PSX

On the Pakistan Stock Exchange you don't have to run these screens yourself. The KMI All-Share Index applies them and publishes the list of compliant companies, reviewed periodically. If a stock is in the KMI All-Share, it has passed both tests at the last review.

Why it can change

Compliance is not permanent. A company can take on more debt, or its non-compliant income can rise, and it can drop out at the next review, so always check the latest screen before you buy.

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