Shariah Screening Criteria

Presently Shariah compliance of stocks is done under the guidance of qualified and
reputed Shariah experts. For stocks to be Shariah compliant, it must meet ALL the six
key tests given below:
1.Business of the Investee Company
The core business of the company should not violate any principle of Shariah. Therefore,
it is not permissible to acquire the shares of the companies providing financial services on
interest like conventional banks, insurance companies, leasing companies or the
companies involved in some other business not approved by the Shariah e.g. Companies
making or selling liquor, pork, haram meat, or involved in gambling, or any other
impermissible activities.
If the main business of the investor companies is Halal, like automobiles, textiles,
manufacturing concerns etc but they deposit their surplus amounts in an interest bearing
account or borrow money on interest, the share holder must express his/her disapproval
against such dealings, preferably by raising his/her voice against such activities in the
annual general meeting of the company and/or by sending a letter to the management in
this regard.
2.Interest Bearing Debt to Total Assets, <37%
The Interest Bearing Debt to Assets ratio should be less than 37%. To understand the
rationale behind this condition, it should be kept in mind that such companies are mostly
based on interest. Here again, the aforementioned principle applies i.e. if the shareholder
is not personally agreeable to such borrowings, but has been overruled by the majority,
these borrowing transactions cannot be attributed to him/her. Debt, in this case, is
classified as any interest bearing debt including Bonds, TFCs, Commercial Paper,
Conventional Bank Loans, Finance Lease, Hire Purchase, issuing preference shares etc.
3.Non-Compliant Investments to Total Assets, <33%
The ratio of Non Compliant Investments to Total Assets should be less than 33%. NonShariah Compliant Investments include investments in conventional mutual funds,

conventional money market instruments, Commercial Paper, interest bearing bank

deposits, Bonds, PIBs, FIB, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives etc. NonCompliant investments also include investments in companies which are declared Shariah
non-Compliant due to non-compliance to any of the mentioned criteria for Shariah
Compliance.
4.Non-complaint Income to Total revenue, <5%
The ratio of Non Compliant Income to Total Revenue should be less than 5%. Total
Revenue includes Gross Revenue plus any other income earned by the company. Non
Compliant Income includes income from gambling, income from interest based
transactions, income from Gharar based transactions i.e. derivatives, insurance claim
reimbursement from a conventional insurance company, any penalty charged on late
payment in credit sale, income from casinos, addictive drugs, alcohol, dividend income
from above mentioned businesses or companies which have been declared Shariah NonCompliant due to non-compliance to any of the mentioned criteria for Shariah
Compliance etc.

5.Illiquid Assets to Total Assets, >25%

The ratio of liquid Assets to Total Assets should be at least 25%. The Sum of all those
assets whose trade price can deviate from par value, according to the rules of Shariah, is
considered the aggregate value of illiquid assets. liquid Assets include inventory of raw
materials, work-in-process, all fixed assets such as property, plant & equipment, stores
and spares, stock in trade etc.
6.Net Liquid Assets/Share vs Market Price/Share
Market Price per share should be at least equal to or greater than net liquid assets per
share.

The Etiquette of acceptable disagreement in Islam:

1. The Muslim should avoid disagreement as much as possible. Disagreement should
come only when there is a valid reason.
2. The Muslims should only have acceptable disagreements among themselves based on
what has been mentioned.
3. In case of a dispute or disagreement in any matter of deen muslims should referee to
the Book of ALLAH and the Authentic sunnah of Prophet Muhammad (S.A.W.).
However in any matter of worldly live should be refereed to those who specialize in the
matters.
4. The Muslim must be ready to accept the verdict from ALLAH (S.W.T.) and His
Messenger with complete submission after the truth becomes clear to them. In this case
they should not stick to the wrong opinion.
5. The intention in the disagreement should be only pure for the sake of ALLAH

(S.W.T.), not to satisfy one's desire or arrogance.

6. Everyone in this disagreement should believe that there is a possibility for the others to
have the truth or the correct opinion.
7. People, who disagree, should have the good Etiquette and behavior in their discussion.
This should include that they look to the matter objectively, not to go out of the subject,
choosing the accurate word, clarifying the meaning of the term that they will use, and
also that they select the best words and statement avoiding the bad ones, that they listen
to the other opinions carefully with an open mind, and finally, to avoid interrupting others
while giving enough time for them to express their points.
8. People who disagree should not continue with aimless arguing, they should end their
discussion soon after the opinions are proven clearly or when believing that the others are
hardheaded with their opinion.
9. Muslims in their disagreement should restrain themselves from accusing others of
deviation, corruption, or other accusations, and should instead believe that they are good
and sincere in their opinions.
10. The goal of the discussion should be only to reach the correct opinion and that it is
not important to reach the correct opinion through you or others.
11. If no agreement is reached, then they should respect each others opinion with finding
an excuse for that person. This is in the frame and methodology of the people of the
sunnah and jama'h. And also to cooperate with other points agreed upon.
12. Supplication to ALLAH (S.W.T.) to open our hearts and minds to the truth.

Trading Guidelines & Ready Buy Deferred Transactions

Trading Guidelines
1. Same day purchase and selling of the same scrip is prohibited
2. Shares should not be sold before settlement i.e. their possession has been transferred to
the fund/owner.
3. Blank sale or short sale is not allowed
Ready Buy Deferred Sale Transactions
Same day trading and forward sale transaction of shares as practiced in stock market is
not allowed in Shariah. However as an alternative, following procedure may be adopted.
1. Day 1: Fund buys shares from stock market via broker. On the same day the broker
enters into a unilateral promise to purchase these shares from Fund at the future date.
(The broker will act as end buyer/Principal).
2. The format for unilateral promise to purchase will clearly state that this document
represents only unilateral promise to purchase shares from bank and actual sale
transaction may take place on future promised day.
3. Day 3: Fund receives the share in its CDC account as per settlement schedule of the
stock market. (T+1).
4. Day X (Transaction Date):On the agreed day the actual sale transaction of the share
take place between the fund and the broker and will be recorded with the help of sale
advice issued by Fund.
5. Settlement Date: Fund would transfer the shares directly into brokers CDC account and
will receive the payment from the broker against the shares sold.
Charity Account & Dividend Purification
Dividend Purification
1. Dividend purification means eliminating prohibited income that is mixed up with the
earnings of the company and the onus is on the owner of the shares.
2. Dividend purification exercise are carried on periodic basis in accordance with Shariah

standards.
3. Dividend is purified by calculating percentage of non-compliant income to the gross
revenue (Gross sales + Other Income) for each investor company. The resultant rate is
called as Charity rate.
Charity rate for each investor company is multiplied with the dividend income from the
respective company to get the amount to be transferred to charity account. The whole
process of income purification is verified by Shariah advisory who then issues a
certificate to be included in the annual accounts of the funds.
Charity Account
1. A separate Charity account is maintained for each Islamic Fund.
2. All contributions to the charity account are recorded as Liability of the Fund.
3. Donations from the charity Account are only made to charitable
organizations/individuals as approved by the Shariah Advisory.

Shariah Compliant Stocks

1. Al Meezan Investments receives a list of eligible stocks from KSE. Usually this list
comprises of over 200 stocks and constituting over 90% of the entire market
capitalization.
2. This list is screened on Shariah filters and around 100 companies (as of last screening)
remain as Shariah Compliant companies. These companies based on the last screening
comprised of approximately 56% of the total market capitalization.
3. Out of the above list, the top 30 stocks based on the methodology discussed are
derived. As of the last screening, this list comprised of approximately 50% of the total
market capitalization.

Issues shariah screening in pakistan