Building a Shariah Compliant Portfolio
Ethical investments aligned with Islamic principles through a disciplined, values-based approach.
Shariah-compliant investing adheres to Islamic finance principles that emphasize ethical, interest-free investments aligned with religious values. This approach focuses on:
Ethical Investments
Avoids industries considered harmful or unethical, including alcohol, gambling, tobacco, weapons, and conventional financial institutions dependent on interest income.
Prohibition of Interest (Riba)
Avoids investments that involve paying or receiving interest, as this is considered exploitative under Islamic principles.
Financial Screening
Companies must pass debt and interest income ratios to ensure minimal exposure to non-compliant financial activities.
Community Benefit
Emphasizes investments that deliver positive social impacts and support ethical business practices that benefit the community.
| Ratio | Threshold | Explanation |
|---|---|---|
| Debt to Total Assets | < 33% | Interest-based debt should be less than 33% of total assets |
| Interest Income | < 5% | Income from interest should be less than 5% of total revenue |
| Accounts Receivable to Assets | < 45% | Accounts receivable should be less than 45% of total assets |
| Non-Compliant Income | < 5% | Income from non-compliant activities should be less than 5% of total revenue |
Purification Requirement:
Any income derived from non-compliant sources (like minimal interest) should be "purified" by donating that portion to charity. This typically amounts to a small percentage of dividends received.
Step 1: Start with Shariah-Screened ETFs
Begin with a foundation of Shariah-compliant ETFs that handle the screening process for you:
Step 2: Add Individual Shariah-Compliant Stocks
Supplement ETFs with individual stocks that pass Shariah screening for potentially higher returns:
| Industry | Shariah Compliance | Focus Areas |
|---|---|---|
| Technology | Generally Compliant | High Potential |
| Healthcare | Mostly Compliant | Recommended |
| Consumer Goods | Selective Screening | Case-by-Case |
| Financial | Mostly Non-Compliant | Avoid |
At EstimatedStocks, we've developed a custom filter to help identify stocks that meet basic Shariah compliance criteria. Look for the "Shariah-Screened" indicator on our stock analysis pages.
Step 3: Implement Regular Rebalancing
Companies can shift in and out of Shariah compliance based on changing debt levels or business activities. Review your portfolio quarterly to ensure continued alignment with Shariah principles.
Regular Actions:
- Quarterly compliance check of individual holdings
- Calculate and donate any purification amounts
- Replace non-compliant securities promptly
Resources:
- Use our financial health panel to monitor debt ratios
- Check Shariah stock screeners quarterly
Ready to build your Shariah-compliant portfolio?
Start exploring our Shariah-screened stock picks and discover investments aligned with your values and principles.