Shariah compliant investing a prudent approach. Why & How?
Shariah is practiced not just for one community, it’s imperative on Muslims to comply with Shariah while dealing with others regardless of their religion or beliefs. Shariah compliance in simple terms is all about adhering to clearly defined dos & don’ts in Islam. The fundamentals of these rules are based on Social justice, ethical responsibility, equality, transparency and fair treatment amongst each other.
Access Shariah compliant halal companies trading on Indian Stock Markets
In Islam every economic and financial activity should have a positive or no negative socio economic impact on a society, so all economic decisions, dealings and transactions need to be within the ambit of the following Shariah guidelines:
Participatory transactions with risk reward sharing mechanism
The word participatory means taking part in risk and reward while getting into any deal, this ensures no party comes under stress or takes undue advantage of the other party in difficult situations. Participatory transactions enable level playing market forces that help to auto-correct demand supply mechanism. This happens because both parties have proportionately equal rights and say in the deal.
Filter Shariah compliant halal stocks based on sector and market cap
Fair dealing among parties
Under Shariah utmost importance is given to contractual terms that clearly emphasize mutual obligations all the parties involved, this ensures no trust deficit between parties and injustice against one party. Nowadays it’s common with companies to draft one sided contracts to take unfair advantage of the weaker party. E.g. perpetual royalty contracts, undervaluation of assets in collateral based lending etc.
Transparency & disclaimers
Transparency is one of the most critical elements to maintain demand supply equilibrium which in turn helps creating healthy market forces. Transparency & disclaimers help markets establish healthy price discovery mechanism thereby keeping a check on monopoly and inflation manipulation.
Social responsibility towards societies & surroundings
In Islam all economic and financial activities should either have a positive or no negative impact on the society’s socio-economic fabric. All economic decisions, dealings and transactions by businesses or individuals must be made in consideration to the social obligations towards their societies while looking to derive economic benefits. Industries that cause health hazards, social evils, harm the ecological system, violate human rights will not be entertained under Shariah.
Taking into consideration the above guidelines, contemporary scholars, economists and financial experts (both in the current economic system and Islamic economic system) around the world worked together for decades to design Shariah screening parameters and filters that help us identify companies that could be considered compliant/friendly/tolerant with Shariah norms in the context of present economic & financial system.
Let’s take a look at the most common Shariah filters prescribed by scholars and financial experts from across the world:
Business activity screening:- All businesses must give utmost importance to Social responsibility around its ecosystem. Shariah does not permit businesses that spread and cause social evil and injustice.
For example Islam strictly prohibits liquor production, Interest based financial services, illicit entertainment, gambling, tobacco, trading of assets and commodities on leveraged basis etc.
Interest bearing Debt screening
It’s interesting to note that almost all economic slowdowns are directly or indirectly caused by interest based debt defaults that trap millions of lives in the vicious debt cycle. Look at the curious case of massive bailouts, the perpetrators (private and Govt based lenders) are bailed out from innocent taxpayers money who were never involved in borrowing or lending. Isn’t it unfair for them to repay someone else’s loan who don’t even bother to realize their wrong doings.
Invest and trade in socially responsible companies on Indian Stock Markets.
All great economies and businesses have thrived on R&D, Innovation & startups (Japan, US, Germany, Israel). We’ve never seen any lender willing to support high risk & time consuming ideas or experiments because he never wants to take risks and accept failures, but R&D Innovation and Entrepreneurship are the foundation stones of sustainable long term growth of economies and organizations.
Until recently, we had numerous healthy revenue generating companies that died/dying their own death under the burden of piling debt. Reliance ADAG, JP Associates, Videocon, Bhushan steel, Tata steel, ILFS,DHFL, Yes bank, Kingfisher are the poster boys of corporate debt trap. There are many in line waiting to face a similar fate.
Interest Income screening:
In contemporary economic system money is mischievously immortalized as an asset instead of a medium of exchange, this wrong treatment keeps it alive artificially so it could be infinitely cloned and loaned on interest for ever. This unfair treatment traps the consumers or loanees in a vicious cycle of debt that never ends or results in economic catastrophes at micro and macro level for individuals, companies and governments.
Apart from the above reasons, businesses that thrive on interest income gradually become risk averse due to their excessive dependence on interest income, this loss of interest in core business leads them to lose grip over market and eventually die like a frog in hot water.
Excessive cash screening:
Underutilization of resources is one of the major red flags used by analysts to identify early cracks in healthy companies as they find it hard to deploy their resources profitably.
Excessive cash leads to dependence on interest income which in turn kills the animal spirit of an organization. Unwillingness/inability of an organization to generate optimum economic activities signal that the company is fast reaching saturation or falling stage in its life cycle.
In view of the above observations investors regardless of religious affiliations appreciate Shariah filters. These parameters help them narrow down large number of stocks into pre-filtered universe of healthy & socially responsible companies that are less dependent on borrowings, interest income and hoard of cash. Thus Shariah compliant screening of companies regardless of religious beliefs makes healthy stock picking much easier and increases the probability of generating good long term returns while being socially responsible to our societies.
