How Halal Stocks Are Screened in Canada

Why "which halal stocks should I buy?" is the wrong question

Every week someone asks me for a list of halal stocks. I understand why. But a list is out of date the day it is written.

A company can pass the Shariah tests this quarter and fail them next quarter, simply because it took on a loan or its share price fell. What protects you is not a list. It is knowing how the screening works, and having it done for you every quarter.

Here is how it works, in plain language.

Screen 1: What does the company actually do?

The first test is the business itself. A company is removed if its main business is in:

• Conventional banking, lending and insurance, because they earn interest (riba)
  
• Alcohol, pork and non halal food
  
• Gambling and casinos
  
• Adult entertainment
  
• Tobacco, and in many standards weapons and some media
  

This removes the obvious problems. The harder part is the second screen.

Screen 2: How much debt and interest is in the company?

Almost every public company has some bank debt and some cash earning interest. Scholars allow a small, limited amount. The main standards draw the line at about one third:

• Interest bearing debt: under 30% of market value (AAOIFI), or under 33% of market value or total assets (S&P, Dow Jones, FTSE, MSCI)
  
• Cash and interest bearing investments: under 30% of market value (AAOIFI), or under 33.33% of market value or total assets (S&P, Dow Jones, FTSE, MSCI)
  
• Income from forbidden sources: under 5% of total income, in all major standards
  

The standards measure in slightly different ways, so the same company can pass one and fail another. That is why two halal stock apps sometimes disagree. The honest approach is to pick one recognized standard and follow it consistently, not to shop for the screen that approves the stock you already like.

Purification, and why the list keeps changing

Purification. Even a compliant company may earn a tiny share of its income from interest or other impure sources. Your portion of that income is calculated and given to charity, so what you keep is clean. Good Shariah funds calculate this for you.

Stocks move in and out. The ratio tests use the company's latest financial statements and its share price. If a company borrows to expand, or its share price drops, it can fall out of compliance. Funds that follow a Shariah standard re screen their holdings regularly, often every quarter, and sell what no longer qualifies.

This is the real risk of building your own list of halal stocks: you have to repeat all of this, every quarter, for every company you own. Most busy families and professionals simply do not have the time.

The better way for most families

For most people, the smarter path is a professionally managed, Shariah screened fund held inside your TFSA, RRSP, RESP or FHSA. You get:

• Screening done for you, every quarter, by a Shariah board
  
• Diversification across many companies, instead of betting on a handful
  
• Purification handled and reported
  
• Tax advantages of Canadian registered accounts, without riba
  

In a complimentary review, I look at the accounts you already have, show you what is and is not Shariah compliant today, and build a plan to move everything onto a halal footing.

Click here to book a Zoom meeting with me, or reach me at 905 966 0066.

Pierre Zgheib · Branch Manager · More than 27 years helping Canadian families and professionals plan for retirement · Licensed in Ontario, British Columbia, Alberta and Nova Scotia

This article is general information, not personal tax, legal or investment advice. It does not recommend any individual security.