Checking yourself whether a share is halal

A screened fund hands you a basket that has already been sorted: someone applied a methodology before you, and you inherit the result. A single share, no. Nobody has put it through a screen, no label comes with it, and the word “halal” does not exist at the level of an individual security. Checking a halal stock is therefore a reading exercise — the company's published accounts — carried out company by company, then repeated once a year. If your situation is the other one, a fund whose screening is handled by an index, it is covered in our guide to halal ETFs. Here, the screen is you.

Is a share halal in itself?

The question is badly put, and that is where most mistakes begin. A share is not an abstract financial product: it is a share of ownership in a real company. Whoever holds one is a co-owner, on a very small scale, of factories, stock, contracts, employees, debts and profits. So it is not the security that is permissible or not — it is what the company does, and the way it finances its activity.

That reading changes everything. It explains why two companies in the same sector can produce opposite verdicts, why a verdict reached three years ago no longer necessarily holds today, and why no shortcut replaces opening the annual report. It also explains why holding shares has its place within the framework of Islamic finance, where a loan paying interest does not: the shareholder takes a share of the capital and of the risk, rather than renting out money against interest. That is the principle of risk sharing, set out in detail in our guide to investing without riba.

The check runs in two stages, in that order, and the order matters. First, what the company sells: a binary examination, settled in a few minutes. Then, how it finances itself: a numerical examination, which means opening the accounts. A company ruled out at the first stage is never rescued at the second.

The sector screen: what is ruled out from the start

The first examination bears on the activity itself. A company whose business rests on a prohibited activity is ruled out with no need to look at its balance sheet. The categories set out in the AAOIFI standards are stable, and they are found, with slight variations, in every existing screening methodology.

Company activity	Treatment
Alcohol, tobacco Ruled out	Production, distribution or sale as the main business. The examination stops there, whatever the financial ratios may say.
Gambling Ruled out	Casinos, betting, lotteries and gaming platforms. What is at issue is the logic of random gain, not merely the sector.
Armaments Ruled out	A category set out in the standards. Screening methodologies draw its perimeter more or less widely.
Pornography Ruled out	Production as well as distribution. The question also arises for media companies that draw an incidental share of their income from it.
Conventional finance Ruled out	An activity whose product comes from interest received is ruled out by its very nature. It is the largest category by number of listed companies.
Permissible business, incidental non-compliant share To be measured	A transport company that sells alcohol on board, a retail group with a dedicated aisle: the main activity passes, and the incidental share is measured at the second screen.

The sixth row is the one that takes up most of the time in practice. Very few listed companies have an entirely pure activity, and very few are entirely prohibited. Most of the work happens in that intermediate zone, and that is exactly what the ratios are there to settle.

The financial ratios: the three thresholds

Once the activity is admitted, you turn to the balance sheet and the income statement. The AAOIFI standards set three thresholds. They are not recipes but tolerances: they acknowledge that a company operating in an economy where interest is the norm cannot be entirely free of it, and they fix the limit beyond which that exposure is no longer incidental.

What is measured	Threshold and reading
Interest-bearing debt	Must remain below 33% of market capitalisation. Read on the liabilities side of the balance sheet: bank borrowings, bond issues, short-term and long-term financial debt. Operating liabilities, such as supplier invoices, bear no interest and do not enter this calculation.
Interest-bearing cash	Must remain below 33%. Read on the assets side: cash placed on deposit, interest-bearing deposits, debt securities held. A company sitting on a large treasury placed at interest fails here, even with an impeccable business.
Non-compliant income	Must remain below 5% of total income. Read in the income statement: interest income, and turnover drawn from incidental prohibited activities. It is the lowest threshold, and most often the decisive one.

Three practical points. Market capitalisation moves with the share price: the same debt passes the threshold or no longer does depending on when you run the calculation, which makes the reference date as important as the figure itself. The denominator used must stay the same from one year to the next, otherwise the results do not compare. And a security that crosses a threshold does not become retrospectively impermissible: it ceases to be compliant from the moment that is observed, which opens a question about exiting rather than a past fault.

Where to read these figures in the published accounts

The three ratios are nowhere to be found as ratios: they are built from raw data, all of it public. A listed company publishes an annual report and, in most cases, interim accounts. Those are the only sources that bind the company.

The balance sheet provides the first two numerators. On the liabilities side, financial debt, which you distinguish from operating liabilities by reading the line item and the notes that detail it. On the assets side, cash and equivalent holdings, where the notes usually state whether they bear interest. The income statement provides the third: turnover by business segment, and financial income. The notes are often more instructive than the tables themselves, because that is where the breakdown by activity sits.

The denominator of the third ratio is internal to the accounts. The denominator of the first two is not: market capitalisation is calculated by multiplying the share price by the number of shares in issue, that number also appearing in the annual report. None of these operations calls for advanced accounting knowledge — what they call for above all is consistency of method. Our compliance check lets you run these same criteria over your own positions, free of charge and without registering.

Purification: what remains to be corrected

A company that passes the three thresholds is not thereby entirely free of non-compliant income: it is simply below the limit of tolerance. The difference between “below the threshold” and “at zero” is not ignored — it is handled through purification. The share of non-compliant income is estimated, then given away, every year.

The reasoning is proportional. If an identified share of the company's income comes from a non-compliant source, the same share of what the security has paid you is treated as not yours to keep, and is given away. The calculation therefore assumes two figures: the proportion read in the income statement, and the amount actually received over the period. A security that pays no dividend does not make the question disappear; it merely makes it less visible.

Two confusions to set aside. Purification does not rescue a failed sector screen: a company ruled out at the first examination does not become holdable because a share of it would be given away. And purification is not zakat: one removes from an income stream what should never have entered it, the other is an annual levy on wealth held, with conditions of its own. Calculating zakat on an asset held follows distinct rules, which we set out for the metal in our guide to zakat on gold.

Screening a share from Switzerland

This is the part found in no other guide, because none of them is written from Switzerland. Three features of the Swiss framework change, in concrete terms, the way this check is carried out.

A reference date already set by the administration

Securities held by a private individual form part of taxable wealth and are declared at their tax value on 31 December. That value does not have to be estimated: it is published in the ICTax price list of the Federal Tax Administration. Put differently, every Swiss taxpayer already draws up, each year, a dated and valued inventory of their securities. Anchoring the compliance check to that same date avoids inventing a parallel calendar, and gives an identical point of comparison from one year to the next.

Private capital gains are not taxed

For a private investor, the gain realised on reselling a security is in principle not taxable, under article 16 paragraph 3 of the federal act on direct federal taxation. The consequence for our subject is direct: observing that a company has crossed a threshold and deciding to exit does not, for a private individual, produce a tax bill on the gain. The compliance constraint and the tax constraint therefore do not pull against each other, unlike what happens in several neighbouring countries. One caveat remains: sustained buying and selling can lead to the activity being reclassified as professional, and the regime then changes entirely.

The accounts are not published in francs

Most of the companies examined report in a currency other than the franc. That is not a problem for the ratios themselves, which are relationships between two quantities expressed in the same unit and therefore hold whatever the currency. It becomes one as soon as those figures are brought alongside the tax value of the position, which is expressed in francs. The practical rule fits in one sentence: the ratios are calculated in the currency of the accounts, the portfolio is valued in francs, and the two are never mixed within the same line of calculation.

The most common mistakes

The recurring errors are not errors of arithmetic. They are almost always shortcuts in method, and they can be corrected without any particular technical skill.

Taking the sector for a verdict

“It is technology, so it is fine” is the most widespread shortcut. The sector says nothing about borrowing, nor about cash placed at interest, nor about financial income. Companies that are perfectly permissible by their activity fail the debt ratio, and the reverse is just as common. The sector screen eliminates; it does not validate.

Checking once, then never going back

A company issues debt, repays it, builds up or spends its cash, disposes of a business. The three ratios move with it, and market capitalisation moves with the share price. A check that is not repeated goes stale in silence: nothing warns you when a threshold has been crossed.

Relying on a list without its methodology

Lists of securities said to be compliant circulate freely. They are worth only three things that are rarely supplied: the thresholds used, the denominator applied, and the date of the accounts. Without those three pieces of information, a list is an opinion with no instructions for use, impossible to verify and impossible to update.

Mixing figures from different dates

Last year's balance sheet, today's market capitalisation, a half-year turnover figure: three honest sources which, combined, produce a false ratio. Every calculation must rest on a coherent set of data, and the date used must be written next to the result.

Confusing tolerance with indifference

A threshold of 5% does not authorise 5% of non-compliant income: it tolerates a residual exposure, on condition that it is purified. Skipping that step means keeping only the comfortable half of the standards.

Screening a share therefore calls for neither sophisticated tools nor accounting training: an annual report, three divisions, a date written down in black and white, and the discipline to start again each year. To place these criteria back within the wider framework they come from, our guide to the principles of Islamic finance takes the reasoning from the beginning, and our dossier on cryptocurrencies shows how the same question arises for an asset class where there are no accounts to read.

This content is provided for educational purposes by a private training organisation. It constitutes neither a fatwa nor a financial service within the meaning of the LSFin. As questions of compliance involve differences between schools of jurisprudence, it is for each person to refer to a competent religious authority for their own situation.

This content is provided for educational purposes and does not constitute a fatwa: as questions of compliance involve differences between schools of jurisprudence, it is for each person to refer to a competent religious authority for their own situation. Nor does it constitute a recommendation to buy or sell.