Screening Shariah-compliant stocks requires evaluating two dimensions: business activity screening (the company must not derive significant revenue from prohibited activities
like alcohol, gambling, or interest-based lending) and financial ratio screening (debt-to-assets must be below 33%, interest income below 5% of revenue, and liquid assets below 45% of total assets).
!Shariah-compliant investing with Islamic geometric patterns and stock charts
Islamic equity investing combines faith-based principles with modern portfolio management.
Key Takeaways
- Shariah screening has two stages: business activity and financial ratios
- Debt-to-total-assets must be below 33% (one-third)
- Interest income must be below 5% of total revenue
- The KMI-30 and KMI All Share indices list pre-screened Shariah stocks on PSX
- Annual re-screening is required as company financials change
Islamic finance prohibits interest (riba), excessive uncertainty (gharar), and investment in businesses that profit from activities forbidden in Islam. Shariah stock screening provides a structured framework for identifying permissible investments.
What Is Shariah Stock Screening?
Shariah stock screening is the systematic process of evaluating whether a publicly listed company's business activities and financial structure comply with Islamic law (Shariah).
Two-stage screening:
- Stage 1: Business Activity Screen — What does the company do?
- Stage 2: Financial Ratio Screen — How is the company financed?
A stock must pass both stages to be considered Shariah-compliant. If either test fails, the stock is excluded.
What Are the Business Activity Criteria?
Companies whose primary business involves the following activities are automatically excluded:
- Conventional banking and interest-based financial services
- Alcohol production or distribution
- Pork-related products
- Gambling and gaming
- Tobacco (contested — some scholars permit)
- Weapons and defense (contested)
- Entertainment deemed impermissible (adult content)
Tolerance threshold: Most screening standards allow up to 5% of revenue from impermissible sources. If a company's impermissible revenue exceeds 5%, it fails the screen.
What Are the Financial Ratio Criteria?
Even if a company's core business is permissible, its financial structure must meet specific thresholds:
|
Ratio |
Threshold |
Reasoning |
|
Total debt ÷ Total assets |
< 33% |
Excessive leverage involves interest-bearing debt |
|
Interest income ÷ Total revenue |
< 5% |
Income from interest is riba |
|
Cash + Interest-bearing securities ÷ Total assets |
< 33% |
Excessive idle cash earning interest |
|
Accounts receivable ÷ Total assets |
< 45% |
Receivable-heavy companies resemble lending businesses |
Screening standards vary: AAOIFI (Bahrain), MSCI Islamic, Dow Jones Islamic, and Meezan Bank each use slightly different thresholds. The most commonly followed standard in Pakistan is Meezan Bank's methodology for the KMI indices.
Which PSX Stocks Are Shariah-Compliant?
PSX maintains two Shariah-compliant indices:
|
Index |
Stocks |
Screened By |
Rebalancing |
|
KMI-30 |
30 most liquid Shariah stocks |
Meezan Bank's Shariah Board |
Semi-annual |
|
KMI All Share |
All qualifying Shariah stocks |
Meezan Bank's Shariah Board |
Semi-annual |
Major KMI-30 constituents (2026):
- Engro Corporation
- Lucky Cement
- Mari Petroleum
- Systems Limited
- Fauji Fertilizer Company
- Hub Power Company
- Pakistan Petroleum Limited
For dedicated Shariah-compliant trading with pre-screened stock lists and Islamic account structures, explore Shariah-compliant stock trading.
How Do You Build a Shariah Portfolio?
Step-by-step:
- Start with KMI-30 or KMI All Share as your universe of eligible stocks
- Apply your own fundamental analysis (balance sheet, earnings growth, dividends)
- Diversify across 5–10 stocks in 4+ sectors
- Set your target allocation (no single stock above 15%)
- Review compliance annually — companies may fall out of compliance
Dividend purification: If a Shariah-compliant company earns a small portion of income from impermissible sources (below 5%), you must donate that proportional percentage of your dividends to charity (purification).
Frequently Asked Questions
Are all PSX banking stocks excluded from Shariah screening?
Conventional banks are excluded. However, Meezan Bank — Pakistan's largest Islamic bank — passes the Shariah screen and is included in the KMI-30.
How often does the Shariah-compliant list change?
The KMI indices are rebalanced semi-annually (every six months). Companies can be added or removed based on updated financial statements.
Can I invest in mutual funds that follow Shariah principles?
Yes. Several Pakistani mutual funds (e.g., Al Meezan investments, Meezan balanced fund) are structured as Shariah-compliant and invest only in screened equities.
Is stock trading itself Halal?
Buying and selling shares in Shariah-compliant companies is generally considered permissible by Islamic scholars. However, practices like short selling and interest-based margin trading are prohibited.
The Bottom Line
Shariah stock screening is a rigorous but manageable process. Use the KMI-30 index as your starting point, verify financial ratios annually, and purify any impermissible dividend income. Islamic investing does not mean sacrificing returns — the KMI-30 has historically tracked the KSE-100 closely while adhering to ethical guidelines.