The criteria and guidelines that are used by shari’a-compliant equity indexes to verify that their stocks meet the screening requirements of Islamic investors. Companies in a given index are screened for compliance and reviewed on a frequent basis. Listed companies must meet shari’a requirements for permissible products, debt levels, and interest income and expenses.
The main stock screening criteria are: prohibited business sectors and mandatory financial ratios:
Business sectors:
- Alcohol.
- Pork and pork-related products.
- Tobacco.
- Weapons and related production.
- Conventional finance, banking, and insurance.
- Indecent entertainment and recreational activities (pornography, obscene cinema, music, arts, etc) and gaming (casinos, betting and wagering, etc).
Financial ratios:
- Debt/ total assets < 33%.
- Cash and interest-bearing holdings < 33%.
- Accounts receivable and cash < 50%.
- Total interest income < 5%.
- Non-compliant income other than interest < 50%.
- Purification ratio: 5% of dividends.
The screening methodology is subject to the review of an independent shari’a supervisory board.
