Shariah Investing

What is Shariah Investing?

It’s an investment process whereby investors aim to invest in a socially responsibly manner adhering to shariah guidelines and achieve adequate returns to beat inflation.

Increasing focus on impact investing:

Impact investing is a type of investing that aims to generate both financial and social or environmental impact. Impact investing is gaining traction in India, as investors are looking to invest in companies that are making a positive impact on society.

Adheres to community investing norms:

Sharia compliant investing adheres to guidelines emphasized by its board. Shariah investing is open to adoption by multi faith communities.

Large universe of compliant stock:

Universe in India is quite large, with over 40% of listed companies on the BSE and NSE being Shariah compliant.

Competitive returns:

Shariah-compliant stocks have historically performed in line with conventional stocks.

Quantitative Screening

These quantitative measures are applied alongside qualitative screenings, which evaluate the nature of the company’s business activities, to ensure comprehensive Shariah compliance. By adhering to these financial thresholds, investors can align their portfolios with Islamic values, promoting ethical and responsible investment practices

Quantitative Screening Comparison

Shariah investing involves selecting investments that comply with Islamic law, ensuring both the business activities and financial practices of companies align with Shariah principles.

Quantitative screening in Shariah investing focuses on the following financial aspects:

1. Interest-Bearing Debt: Companies are evaluated based on the proportion of their debt that is interest-bearing. Typically, such debt should not exceed 33% of the company’s total assets or market capitalization. This screening aims to minimize involvement in riba (interest), which is prohibited in Islam. Most methodologies, including the Dow Jones Islamic Index, MSCI, and S&P Shariah Index.

2. Impermissible Income: This refers to income generated from activities that are not Shariah-compliant, such as alcohol, gambling, or conventional financial services. Companies should have no more than 5% of their total revenue from such impermissible activities. If any impermissible income is identified, it must be "purified" through a process that usually involves donating the income to charity.

3. Cash and Interest-Bearing Securities: Similarly, the allowable ratio for cash and interest-bearing securities is also set at 33% of total assets or market capitalization across major screening methodologies such as those by FTSE, AAOIFI, and others. This aims to restrict companies from generating significant income through interest-based instruments.

4. Accounts Receivable: Companies must also maintain an acceptable ratio of accounts receivable, generally no more than 45% of total assets, to avoid excessive reliance on credit sales. This screening applies to indices such as S&P Shariah and MSCI.

These quantitative criteria are used alongside qualitative screening to ensure full Shariah compliance in investmentsSource IslamicMarkets Learning