In this article, I will take you through how to screen for Shariah-compliance of a company.
Most of the time, you might already have an idea which company you would like to invest in.
But even before you go deeper into your research of the company, you would like to quickly understand whether this company is halal (i.e. shariah-compliant) or not.
Yes – you can use readily available shariah-screening app out there like Zoya, Islamicly and Finispia.
However, I believe it is always a good idea to have some knowledge in crunching out the numbers yourself (and also save on the monthly subscription fees).
Disclaimer: I’m vested in Tesla, hence I’m using them as an example based on my own research
You can break it down into 5 parts, of which the first 2 are qualitative and the following 3 are quantitative. They are:
Step 1: Is the company in a halal business?
Step 2: Does the company have good ethical practice?
Step 3: [Quantitative] Debt should not exceed 33%
Step 4: [Quantitative] Haram Revenue must be less than 5%
Step 5: [Quantitative] Cash must be less than 80%
Step 1: Is Tesla in a halal business?
Let’s start with the easiest.
Tesla is in the sustainable energy business. From manufacturing of electric vehicle (EV) cars, to production of batteries and solar panels to name a few, it is pretty clear that it is not in a haram industry.
Clear-cut haram industries are the likes of those in the gambling, pork-related and alcohol-related industries for example.
In this case, Tesla is not, so screen #1 is a pass.
Is Tesla in a halal business? Yes – checked.
Step 2: Does Tesla have good ethical practice?
To understand this, we can refer to Tesla’s mission.
As shown above, Tesla’s mission statement is to accelerate the world’s transition to sustainable energy.
Take a minute to think and reflect about it.
What I understand here is, Elon Musk, the founder of Tesla, hopes and aims to achieve is to make this world a better place by cutting down on carbon emissions, reduce reliance on oil, and overall improve the well-being of our Earth and Mother Nature.
As a potential investor, we indirectly show our support and take the same stance towards the mission.
I’m not sure about you, but I do believe moving towards sustainable energy is the way to go in many years to come, to give the best chance of mankind and our future generations to live in the world where we’re kind to our environment.
In the Quran, there is a verse.
“And it is He (God) who has made you successors (khala’ifa) upon the earth and has raised some of you above others in degrees [of rank] that He may try you through what He has given you. Indeed, your Lord is swift in penalty; but indeed, He is Forgiving and Merciful.” (Qur’an 6:165).
We, as a Khalifa, or in other words ‘guardian’ and ‘deputy’ are the most intelligent beings on earth so it makes sense that we have the responsibility to care for our planet.
Another angle that you can look into the ethical practice of a company is to identify whether they have been a good employer to its workers.
For example, if we hear stories of the company exploiting low-paid labour in emerging countries with little to zero welfare, we will have to strongly reconsider whether it is ethically a good business to begin with.
In this Tesla example, I’ve not heard about this issue taking place, hence I will take it that the company does have good ethical practice in general.
Does Tesla have good ethical practice? Yes – checked.
Step 3: [Quantitative] Check for its Haram Revenue, must be less than 5%
For Step 3 onwards, you will have to dig deeper into its financial statement.
So for the most recent financial report, here’s what we can see:
Highlighted in green are pretty clear where the revenue comes from.
It is mainly derived from:
- Automotive sales
- Automotive leasing and
- Energy generation and storage
These are mainly halal revenues.
Automotive leasing revenue may fall as a ‘questionable’ revenue as it may include charges that result in or are indirectly related to interest based transactions.
Delving deeper, I have to also understand what ‘services and other’ revenue consists of.
A quick google search and I managed to get my answers.
These revenues are from:
- Repair & maintenance
- Extended service plans and
- Sales of used vehicles, merchandises & components
There doesn’t seem to be any big red flags that any of these are haram revenues.
So taking all revenue as halal except for the ‘automotive leasing’ as questionable, I’ll calculate it as such:
Halal Revenue / Total Revenue
= (9034 +752 + 678) / 10,744
Non-halal revenue is less than 5%, hence it is a Pass.
Step 4: [Quantitative] Check for its debt, should not exceed 33%
Again, from the most recent financial report, here’s what we can find:
Total Debt / Total Assets
= (2,132 + 9,556) / 52,148
From the above, take note that I’m only taking the debt figure which I’m confident enough is likely going to generate interest.
In this case, it is the debt and finance leases.
If you’re wondering what debt and finance leases are, here’s a simplified version on how it works:
The others within the Liabilities section such as:
- Accounts Payables
- Accrued Liabilities and other
- Deferred Revenue
- Customer Deposits
does not indicate any material interest-bearing possibilities, so I will omit them out in my calculation.
To summarise, debt did not exceed 33%, hence it is a Pass.
Step 5: [Quantitative] Check for cash to total assets, not more than 80%
There are a few ways to go about this.
What I will be showing you is the easiest (and preferred) method, which is what we called the cash to total assets ratio.
Here, we need to check whether the cash to total assets is not more than 80%.
The rationale behind this rule is that there are public-listed companies out there which are just holding companies for cash.
They’re not actively deploying it to create value and hence, could be seen as aiming to receive interests on this cash.
Cash / Total assets
= 19,384 / 52,148
Cash to Total assets is less than 80%, hence it is a Pass.
Since Tesla ticks off ALL the boxes for the Shariah-compliant checklist, it is considered a Shariah-compliant company.
Note that if a company fails any of the checklist, it will fall as non-Shariah compliant.
Now I want to turn it over to you…
Would you give it a try to do your own Shariah screening analysis?
If you enjoy this series and find this analysis helpful where I cover individual stocks analysis, do leave a comment below.
Let me know too if you managed to get some Tesla stocks along the way.
Thank you Khairul for the clear explanation! I have a question:
For syariah compliant stocks that are above 95% halal revenue, do you compensate the % difference via the profit earned? e.g. Tesla is 97% halal so do I need to cleanse the 3% non-halal element by donating the % equivalent profits to baitulmal/charity?
Hi Sheik, thanks – that’s a good question.
You may donate the % difference if you would like to, for conscience sake. This can go to beneficiaries or charitable organisation of your choice. However, the more important one is to do your zakat on shares on a yearly basis, which is 2.5% x market value of the shares that you hold at the end of the haul or the financial year period.
MUIS did the calculation breakdown here for reference. Hope that helps.
Hi i noticed that the cash portion is 80%? I aware that other screening methodologies (AAOIFI, MSCI, DJIA, S&P and SC) limit it to 30% to 33%+ since having an 80% would only allow companies with much cash to generate interest thereby also affecting their 5% non-compliant income filter. Could you clarify on this?
Hi Muhammad, depends on which methodologies you use. I would advice sticking to one, whichever you’re more at ease following.