Investments are considered Islamic-compliant only if they pass a series of asset classes, business and financial Islamic guidelines. Shariyah Review Bureau in Jeddah Saudi Arabia is the provider of the Islamic guidelines used by IdealRatings to screen stocks for the Saxo Bank Islamic Stock Screening Service.
To be considered compliant, the respective investments have to adhere to the following rules:
Only stocks and Islamic ETFs are eligible for Islamic-compliance consideration. Derivative or interest-based financial instruments offered through the Saxo Bank Trading Service such as bonds, futures, options, CFDs (Contracts for Difference) and conventional ETFs are all to be considered non-compliant. Preferred shares are considered to be non-compliant.
General Islamic Considerations
Underlying companies of the investment instrument that have an appointed Islamic board and state in their bylaws that they operate according to Islamic (such as Islamic Banks, Islamic Insurance Companies or Islamic ETFs) are to be considered compliant without applying financial Islamic guidelines.
Equities of Islamic Banks and Islamic ETFs that have an appointed Islamic board and state in their bylaws that they operate according to Islamic are to be considered directly compliant. Other companies that have an appointed Islamic board such as Islamic Insurance companies are screened on a case-by-case basis and have to pass the financial screens.
Business activities screens
Companies are only to be considered compliant from a business perspective if the cumulative revenue from non-compliant activities and non-operating interest income does not exceed 5% of their total income. Non-compliant income sources include the following:
|Adult Entertainment ||Investment services ||Mortgage & Lease |
|Alcohol ||Gambling ||Interest income|
|Cinema / Broadcasting||Hotels ||Pork |
|Insurance companies||Music||Defense |
|Financial services||Tobacco |
Following screens have to be fulfilled to ensure Islamic-compliance according to the defined rules:
- Interest-bearing debt over 12-month avg. market capitalization less than 33%
- Cash, cash equivalents and short-term investments over 12-month avg. market capitalization less than 33%
- Cash, cash equivalents and receivables over 12-month avg. market capitalization less than 67%
From a Islamic perspective trading can only be conducted on investments owned and thus short-selling is not compliant as well as interest-based margin trading.