Most of the world's large companies do nothing wrong in themselves: they make chips, sell groceries, build railways. Yet almost all of them borrow at interest, hold cash in interest-bearing accounts, and earn a little interest on it. A Shariah screen has to answer a practical question: when is a company's contact with interest small enough that owning a share in it is still acceptable?
The answer most screens give comes from the standards of AAOIFI, the Accounting and Auditing Organization for Islamic Financial Institutions, and from the methodologies of the Islamic index providers. It has two parts.
First: what does the company do?
A company whose main business is impermissible fails outright, however it is financed. The usual list:
- conventional banking, insurance and lending
- alcohol, tobacco and pork
- gambling and adult entertainment
- weapons and defence (in many screens)
Screens differ at the edges, for example on hotels, restaurants or media, which earn some of their income from things that are not permitted. A stricter screen excludes them; a more lenient one looks at how large that share of revenue is.
Second: how is it financed?
A permissible business then faces three ratios. The thresholds below are the common ones:
- Interest-bearing debt under 33% of the company's market value
- Cash and interest-bearing securities under 33% of its market value
- Interest income under 5% of its total revenue
Why a third? The figure comes from a hadith in which the Prophet, peace be upon him, described a third as "a lot": many scholars took it as the line between a minor and a major share.
Why "24-month average" matters
Market value moves every day. A company with steady debt can drift over the 33% line simply because its share price fell for a few weeks, and back under when it recovered. Measuring against the average market value over 24 months stops one bad month from flipping the verdict back and forth. Some screens use total assets instead of market value, which moves less still.
Purification: the part that remains
A company that passes still earns a little interest: up to 5% of its revenue. Scholars ask shareholders to give away the matching share of what they receive. If a company's interest income is 1% of its revenue, 1% of each dividend goes to charity. That is called purification.
What a screen is not
A screen is a mechanical rule applied to published accounts. It is not a fatwa, and reasonable scholars draw the lines differently. For your own affairs, the person to ask is a qualified scholar you trust.
Next week: zakat on shares, and why it depends on what the company owns, not just what the share is worth.