How it works
There are broadly 5 criteria to assess when analysing a company for sharia compliance. Two are subjective assessments:
- Is the business of the company halal? E.g. a gambling company is obviously haram.
- Is the company being run in a fair and ethical way? As Muslims, we should not support companies which have scrupulous and unethical business practices. For FTSE 100 companies, this should not be an issue.
Then you have some financial criteria:
- The company must not have more than 33% interest-bearing debt compared to its total assets.
- The company should not have haram revenue of more than 5% of total revenue.
- The company should have at least some illiquid assets.
We think Muslims should have a solid grasp of understanding how to analyse this properly. We have a course on how to. We think that apps, whilst helpful, are not the be-all and end-all. Proper reviews are done manually in case of nuance.
What we’ve done
We have run the numbers for the financial ratios. So the excel spreadsheet basically covers 2 of the 3 financial criteria set out above. The one it doesn’t cover is whether haram revenue exceed 5%.
But we’ve also looked at the companies in terms of the subjective criteria too. We’ve put a “Y” if we think the business is generally halal. This will usually mean that its haram revenues do not exceed 5%. But have a think about this yourself whilst you’re researching the company too.
For some companies, we have left it blank when deciding if it’s a halal business or not. The reason for this is that these are edge cases where there is no clear cut answer.
We will update this article with a separate article on how to analyse these edge cases. For now though, it is perhaps best to avoid these.
So that covers 4 of the 5 criteria. The only remaining one is whether the business is being run in a fair way. In my view, the answer to this is always going to be yes for FTSE 100 companies. They have strict governance and controls. This might change if a company is involved in some major scandal but that is unlikely.
How to use the spreadsheet
We have included 4 columns:
Total borrowing as a % of total assets
Here, we have the % figure for how much the company is borrowing as a percentage of its total assets. This should not be more than 1/3. So we filtered this column so that it would only show companies who had 33% or less total borrowing as a percentage of total assets.
Current assets as a % of market cap / 3yr average market cap
These are the next two columns. I’ll explain why there’s two shortly.
The current assets as a percentage of market cap aims to understand which companies have got no illiquid sitting in the company. If a company only has liquid assets, this figure would be 100%.
So we have filtered so that only companies with 99% or less can appear.
The thinking behind including an additional column which measures against the 3-year average market cap is that it smoothes out sudden price fluctuations.
Thus, I have only filtered the 3-year average market cap column to show companies with 99% or less.
Another potential calculation to do here is current assets as a % of total assets. I have not done that here but this is an ongoing area of consideration for me to understand which is the more Islamically sound calculation to do.
Halal Business?
This is a simple Y or N answer (except where we’ve left it blank for edge cases). Examples of a no would be gambling companies or tobacco companies. The list is filtered to include the blanks and the yeses only.
For the ones that are blank, we will update this article with a new article that explains how to think about these. We also have a dedicated section on how to do this in our course.
What Next?
