Are stocks halal?
A share is part-ownership of a company. Most contemporary scholars hold that owning shares is permissible in principle, because you own a share of a real business and its profit and loss. This is a form of partnership, close to the musharaka idea explained on our Islamic finance contracts page.
The question is not "stocks or no stocks" but "which company, and how is it financed". Almost every listed company has some contact with interest. It may keep cash in a conventional bank, carry interest-bearing loans, or earn a small part of its income from a non-compliant source. Shariah screening is the method scholars use to decide how much of this is tolerated. A screen is a fiqh judgement, not a market rule.
This page describes the main standards and views. It does not give a ruling. For a personal ruling, ask a qualified mufti or your Shariah advisor.
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Step one: the business screen
The first test looks at what the company actually does. A company fails if its core business is prohibited. Typical excluded sectors are:
- conventional banks, leasing and insurance (because of riba and gharar)
- alcohol and pork-related products
- gambling, casinos and lottery
- adult entertainment
- tobacco, in many screens
- weapons, in some screens
Companies with a mixed business are usually judged by the share of income that comes from prohibited activities. Most screens allow a small part of non-compliant income, on the condition that the investor purifies it (see below). The exact tolerance differs between standards, so check the methodology document of the index or scholar you follow.
Step two: the financial ratio screens
A company with a permissible business can still fail on its balance sheet. Ratio screens ask:
| Test | What it measures | Why it matters |
|---|---|---|
| Interest-bearing debt | Conventional borrowing compared with total assets or market capitalisation | Borrowing at interest involves riba |
| Interest-bearing investments | Cash and deposits in conventional accounts compared with total assets | Earning interest involves riba |
| Non-compliant income | Income from prohibited sources compared with total revenue | Measures exposure to haram earnings |
| Illiquid assets | Real assets (property, stock, equipment) compared with total assets | Shares of a company that is mostly cash or debts may be treated as trading in money or debt |
Each standard sets its own maximum for each ratio. A frequent difference is the denominator: some use total assets from the balance sheet, others use market capitalisation, which moves with the share price. The same company can pass one screen and fail another, and a company can drop out of an index after a price fall or a new loan.
Main standards used
- AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) has a Shariah standard on shares and financial papers. Many banks and funds in the region use it as their reference.
- Pakistan: the SECP has issued Shariah governance rules and screening criteria for companies listed on the Pakistan Stock Exchange. Islamic funds in Pakistan also use the screens of their own Shariah advisors.
- Global index providers publish their own Shariah methodologies with their own Shariah boards.
- OIC International Islamic Fiqh Academy has issued resolutions on dealing in shares of companies that sometimes deal in interest.
We do not reproduce the thresholds here because they change and differ by standard. Read the current methodology document from the body you follow before relying on it.
Purification of dividends
Purification (tathir) means giving away the part of your return that came from non-compliant income. It is usually given to charity, without expecting reward, and it is not counted as zakat.
The usual method works like this:
- Find the company's non-compliant income as a share of its total income for the period.
- Apply that share to the dividend you received.
- Give that amount to charity.
Islamic funds often do this for their investors and report the purified amount. If you hold shares directly, you do it yourself from the company's annual report or the data your Shariah screen provides.
Where views differ on purification
- Many scholars require purification of dividends only.
- Others say that capital gains should also be purified, because the share price reflects the non-compliant income kept inside the company.
- Some hold that an investor who buys and sells without receiving a dividend has nothing to purify, while others disagree.
Zakat on shares is a separate obligation. See zakat on investments and the zakat calculator.
Differing views on screened stocks
Not all scholars accept tolerance thresholds.
- Majority contemporary view: buying shares of a company with a permissible core business is allowed even if it has some interest-based debt or income within set limits, provided the investor purifies and, where possible, opposes the non-compliant dealings. The argument is need (haja) and the general rule that a small, unavoidable amount follows the main activity.
- Stricter view: some scholars hold that buying shares of any company that knowingly borrows or lends at interest is not permitted, whatever the ratio, because the shareholder is a partner in that act.
- Method of trading: many scholars who allow screened shares still object to short selling, buying on margin with interest, and speculation that comes close to maysir. Intention and holding style matter in their view.
Present these views honestly to yourself and follow a scholar you trust. Our Islamic finance principles page explains the underlying rules.
Islamic indices in Pakistan: the KSE-Meezan Index
The KSE-Meezan Index (its main version is known by the short name “KMI-30”) is the best-known Shariah index on the Pakistan Stock Exchange. It is run with Al Meezan Investments and tracks a basket of large Shariah compliant shares chosen by screening and liquidity. There is also a KMI All Shares Index, which covers all listed shares that pass the Shariah screen.
Points to know:
- Index membership is reviewed periodically. A share can enter or leave after a review.
- Being in an index means a share passed that index's screen on the review date. It does not mean every scholar accepts it.
- An index is not a recommendation to buy. It says nothing about whether a share is good value.
Many investors use the KMI lists as a starting point and then check the latest status with their broker or a Shariah advisor. For how the exchange works, see PSX basics.
Buying halal stocks in Pakistan
In Pakistan, Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. On broker lists, per the SECP, lists of licensed brokers are on the PSX and PMEX websites. Check that a broker appears on those lists before opening an account. Our law and regulators page covers this in more detail.
Owning a share is different from trading a contract for difference (CFD) on a share or an index such as NAS100. A CFD gives price exposure without ownership of the company, and many scholars treat it differently from share ownership. See is forex trading halal? and swap-free accounts for that debate. Leveraged CFD trading can also lose money fast. On offshore platforms, per the SECP, offshore forex/CFD platforms operate without regulatory approval in Pakistan, and also per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse.
Share prices go down as well as up. A Shariah compliant stock can lose value like any other.
Frequent questions
Are Shariah compliant stocks guaranteed to be halal?
No. A screen applies one standard's judgement on a given date. Other scholars may disagree, and a company's ratios can change between reviews.
Is the KSE-Meezan Index the only list of halal stocks in Pakistan?
No. The KMI All Shares Index is wider, and Islamic funds use their own Shariah advisors' screens. Lists can differ.
Do I have to purify capital gains?
Scholars differ. Many require purification of dividends only, while others include capital gains. Follow the view of the scholar you rely on.
Can I buy Shariah compliant stocks on margin?
Many scholars object to margin financing that involves interest, even for screened shares. Ask your Shariah advisor and your broker about the terms.
Is a stock CFD the same as owning a halal stock?
No. A CFD does not give ownership of the company. Its Shariah status is debated separately, and it carries leverage risk.
Where can I learn more about Islamic investing?
Start with our Islamic finance section, sukuk explained and saving, investing and loans.