Answer
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
Answering your question, Sheikh Mustafa Umar, President of California Islamic University, states:
When investing in the stock market, it is necessary to apply two screens to ensure the investment is halal.
First, a “Business Activity” screen will make sure that the nature of the business is not haram and that it does not sell too much (more than 5%) in haram products, such as pork, alcohol, pornography, gambling, drugs, or weapons.
A coffee shop may sell many products, and one of them may be a marshmallow cake with porcine gelatin as an ingredient.
However, it is the only haram product they sell, and it makes up a tiny percentage of their total revenue and profits.
Therefore, whatever profit you make from the stock, you must give that percentage of ‘tainted’ income in charity to compensate for haram.
Second, a “Financial” screen will check to make sure the company minimizes haram financial activities. A tech company may sell many products and have plenty of cash in the bank, so it is likely loaning that money out on interest, even though loans are not their primary business.
The two main ratios checked by the second screen are:
- The debt to market value ratio is less than 30%. Otherwise, the company may be paying too much interest.
- Cash and interest-bearing deposits are less than 30% of market cap. Otherwise, the company may be receiving too much interest.
Lastly, make sure to purify the tainted income from your investment. Calculate the percentage of income that came from unlawful sources so you can give that amount to charity, but without any expectation of reward. This is like what the average Muslim does when they keep their money in the bank for safekeeping but are unable to prevent their bank from paying them a small percentage of interest income on it. This charity attempts to make income 100% halal and also acts as an ethical protest against those practices.
Most insurance companies will not pass the screen and the asset management companies depend on the type of investments they deal in.
Almighty Allah knows best.