Sharia-compliant shares are one of the modern investment tools that originated and developed with the initiatives of Islamic financial institutions, particularly in the Kingdom of Saudi Arabia. .

Sharia methodologies have developed in the Sharia classification of Sharia-compliant stocks, with the entry of many international names to this sector, such as the Dow Jones Islamic Indexes and FTSE Islamic Indices, until the Sharia classification standards for shares become more than ten criteria. Shares are divided into three types according to their compatibility with Sharia:

• Sharia-compliant companies whose origin of activity is permissible and which do not contain funds, investments or income that are not compatible with Sharia, or those that have Sharia committees, it is permissible to invest and trade in them.
• Companies with activities that are not compatible with Sharia, such as selling forbidden food and drinks, usurious financial institutions and other prohibited activities, it is not permissible to invest and trade in them at all.
• Companies with permissible activities that may contain financing, investments or income that are not compatible with Sharia, then the Sharia classification of shares is applied to them as follows:

1- The initial selection of shares is carried out according to the technical criteria used in the index.

2- The purpose and nature of the company’s activity is reviewed, and the company’s activity must be compatible with Islamic Sharia.

3- In certain cases, the examination of the company’s financial ratios is applied, mainly the ratio of the total amount borrowed on interest to the market value or total assets, and the ratio of the total amount invested in any non-Sharia-compliant investment to the market value or total assets, and the company must not exceed the permissible ratios It is often in the range of 30%.

4- The percentage of forbidden income in the company is reviewed, and it must not exceed a specific percentage of the total revenue, which is often 5%. This step is applied in conjunction with step number 2 because it is reflected in the nature of the company’s activity.

5- In the event that the results of the previous tests and percentages are within the permissible limits, then the shares are compatible with Islamic Sharia, otherwise they are not compatible with the provisions of Islamic Sharia and are excluded from the index.

Dr. Muhammad Al-Shurafa

Managing Partner – Osoul Company for Sharia Consulting

Series of articles on Islamic financial markets – in partnership with Razeen Financial Company