Educational content only. We analyze stock market investing through the standards set by AAOIFI and major Islamic scholarship bodies regarding Musharakah (Partnership) and Ikhtilat (Mixed Assets).
This is not financial, legal, or religious advice. Please consult a qualified scholar for your specific situation. We do not issue fatwas.
The stock market is essentially a marketplace for businesses. In Islam, business is encouraged (`Allah has permitted trade...`). Therefore, buying a share (which represents fractional ownership) of a company is permissible in principle. However, because modern corporations operate in complex ways, scholars have developed a strict Screening Process to determine which specific companies are Halal to own.
Scholarly consensus overview
1. Owning a Part of a Business
When you buy a stock (e.g., Apple, Tesla, or Tesco), you are entering a Musharakah (Partnership) contract. You become a part-owner of that business.
This means you share in its profits (dividends/growth) but also share responsibility for its actions. If the business sells alcohol, you are effectively an owner of a business selling alcohol, which is Haram. Therefore, you cannot buy every stock. You must filter them.
2. Screen 1: Business Activity
The first and most obvious filter is the Sector Screen. The core business activity must be permissible.
You strictly cannot invest in companies whose primary income comes from:
- Financial Interest (Riba): Conventional Banks, Insurance firms.
- Prohibited Goods: Alcohol, Pork, Tobacco, Weapons.
- Immoral Entertainment: Gambling, Adult content, Cinema (some scholars differ on general media).
The 2-Step Screening Process
Step 1: Business Activity Screen
Is the core business permissible? (e.g. Selling Alcohol vs Selling Software)
3. Screen 2: Financial Ratios
Even if a company's business is Halal (e.g., a Technology company), it might still deal with Interest (Riba) by borrowing money from banks or holding excess cash in interest-bearing accounts.
Ideally, a Muslim would only invest in 100% debt-free companies, but in the modern global economy, these barely exist. Recognizing this difficulty (Umum al-Balwa), scholars have set tolerance thresholds to allow investment in "Mixed" companies provided the Haram element is minor.
Common Rule (AAOIFI Standard):
Total Interest-Bearing Debt should be less than
30% or 33% of the company's Market Cap (or Total Assets,
depending on the standard used).
4. Dividend Purification
If you invest in a "Mixed" company (one that passes the screens but still has some interest income), your profit is slightly tainted.
To fix this, you must performing Purification. This means calculating the percentage of the company's revenue that came from non-compliant sources (e.g., 2% from interest on cash) and donating that percentage of your dividend income to charity. You do not expect a reward for this charity; it is simply to clean your wealth.
Dividend Purification
Even "Halal" companies may earn small interest on cash deposits. You typically need to donate this portion.
Legitimate profit from sales/services.
Estimated interest income (Purification).
*Percentages vary by company. Check an Islamic Finance app or annual report.
Where scholars usually draw the line
Differing Standards.
- • Debt Divisor: Some scholars use Market Cap (Market Value) while others use Total Assets (Book Value) to calculate ratio percentages. This can affect which stocks pass.
- • Purifying Capital Gains: Most scholars agree you only purify Dividends. However, some stricter opinions suggest purifying Capital Gains (profit from selling the stock price increase) as well.
Summary
- Permissible in Principle: Buying stocks is allowed as it is simple trade/partnership.
- Must Screen: You cannot buy blindly. You must ensure the Business Activity is Halal and the Debt levels are low.
- Must Purify: Any incidental earnings from interest must be given away.
Transparency
How we wrote this
We referenced the standards set by large indices (S&P Shariah, MSCI Islamic) and the AAOIFI Shariah Standard No. 21 regarding Financial Papers.
- AAOIFI Shariah Standard No. 21 (Shares)
- S&P Shariah Methodology Documents
- Fatwas from Al-Qalam Institute and others on purification.