How to check if a PSX stock is Shariah-compliant: screening ratios explained

KARACHI: For millions of Pakistani investors, the first question is not "is it profitable?" but "is it halal?" Shariah-compliant investing on the PSX is not a matter of feeling — it follows published screening rules with specific numerical thresholds. Here is how the screening actually works.

The business test comes first

Before any number is crunched, the company's core business must be permissible. Firms whose primary income comes from interest-based lending, alcohol, gambling, non-compliant entertainment or other prohibited activities fail immediately, regardless of their financials. A bank can never be Shariah-compliant no matter how profitable; a cement or textile company usually passes this gate and moves to the financial tests.

The financial ratios that decide

The widely used KMI All-Share Islamic Index methodology applies four quantitative screens (thresholds are published and updated by the index provider, so confirm current values before relying on them): interest-bearing debt must stay below roughly 37% of total assets; non-compliant investments below about 33% of total assets; income from non-compliant sources below around 5% of total revenue; and illiquid assets (inventory, receivables and the like) must exceed roughly 25% of total assets. A company passing all four — plus the business test — qualifies as Shariah-compliant. Because balance sheets change every quarter, compliance is re-tested periodically, and a stock can enter or exit compliant lists.

Dividend purification: cleaning the small remainder

Even compliant companies may earn a tiny fraction of non-compliant income (the up-to-5% allowance). Scholars require purification: the investor estimates the non-compliant portion of dividends received and donates it to charity, keeping only the clean remainder. Many Islamic brokers and fund managers publish purification ratios per company each dividend season, so you rarely have to compute this yourself — but you do have to actually do it.

Where to find compliant lists

Do not screen by gut feel. The KMI All-Share Islamic Index constituent list is the standard public reference for Shariah-compliant PSX stocks, published by the index provider. Islamic mutual funds and several brokers also maintain their own screened universes. Cross-check any "halal stock" tip against these lists — social media halal certifications are worth exactly what you paid for them. Our Shariah investing overview and KMI index guide cover the foundations.

Key takeaway: Shariah compliance is a rules-based screen — halal business plus four financial ratios — with purification for residual income. Use published lists, not tips.