Shariah Compliant Equities

Introduction

‍

Diversified equities have long been recognized as a key component of successful investment portfolios, with institutional investors such as sovereign wealth funds and foundations allocating a substantial portion (a minimum of 40%) of their assets to this asset class. For instance, the Norwegian pension fund, holding a staggering $1.2 trillion USD of its country's accumulated wealth, invests approximately 70% in diversified equities, highlighting their significance in achieving long-term financial growth.

However, it has historically been a challenge for individuals who would like to invest with a shariah compliant lens to access this opportunity due to the difficulty in understanding which companies are shariah-compliant.

With the help of technology and data, this has now become easily achievable. Companies listed on public markets are now obligated to provide comprehensive information, including details about their revenue sources and debt levels. This transparency enables investors to easily determine the Shariah compliance of said companies.

‍

Investing with a Shariah Perspective

‍

To invest in global public markets with a Shariah perspective, three key principles have emerged:

‍

• Avoid investing in companies that source more than 5% of revenue sourced from Islamically prohibited activities: alcohol, gambling, pork related products, et cetera.
  ‍
• Avoid investing in companies with excessive debt (e.g. total debt over assets can not exceed 33.33%).
  ‍
• Purify income received by removing income from prohibited activities and interest income from any dividends received as an investor.

‍

Conclusion

‍

In 2023, the process of screening and excluding companies that do not meet Shariah criteria has become remarkably straightforward. Islamic screeners are now widely common, and even with the most stringent shariah screening criteria, there are more than 350 companies listed in the developed world. This allows shariah compliant investors to easily get access to diversified global company exposure allowing them access to the global factors of production of goods and services.

‍