Guide to Investing in Shariah-Compliant Stocks in the Saudi Stock Market
If you are considering investing in the Saudi stock market and are interested in Shariah-compliant stocks, here is a comprehensive guide to ensure your investments align with Islamic principles.
Screening Shariah-Compliant Stocks
Investing in Shariah-compliant stocks is straightforward. You need to follow basic Islamic principles, avoiding investments in companies that derive income from alcohol, tobacco, pork products, pornography, gambling, and military equipment. Investments in financial services, insurance, and investment banks that use derivatives for profit are also prohibited. Major investment figures such as Goldman Sachs, Citigroup, and American International Group do not meet Shariah criteria.
1. Screening via Islamic Indexes
To filter out non-compliant stocks, you can use Islamic indexes. These indexes have been developed to ensure strict compliance with Shariah standards. For example, Standard Poor’s (SP) has compiled more than 20 Shariah indexes, including the Dow Jones Islamic Market Indices, the Toronto TSX 60 Shariah Index, and the SP CNX 500 Shariah Index, in partnership with India’s National Stock Exchange.
The Dow Jones Islamic Market Index (DJIM) includes a wide range of broad-market blue chip, fixed income, and thematic indices. Stocks are screened and grouped accordingly. The DJIM International Titans 100 index, for instance, includes the top 100 Shariah-compliant international stocks, while the DJIM Malaysia Titans 25 Index measures the 25 top Shariah-compliant Malaysian stocks.
The selection process for these indexes is rigorous. Stocks are ranked by size (float-adjusted market capitalization) and liquidity (12-month average daily trading volume) and then sorted based on a combination of both. The final selection includes the top 25 highest-ranking stocks until the target count is met. The final lists are further reviewed and adjusted based on a buffer of 20-30.
Through this process, it is clear that the selected stocks have large market capitalization, are highly liquid, and perform well in their respective countries.
2. Exclude Prohibited Sectors
An easier method to screen stocks is by excluding prohibited sectors entirely. For example, the NASDAQ, which mostly consists of technology stocks, has been filtered to exclude sectors like beverages (alcohol), finance (investment brokers), and insurance (life). The resulting list includes Google, Microsoft, Twitter, Yahoo, Zynga, Intel, and Micron Technology.
According to IdealRatings, a California-based firm providing Shariah-compliant screening services to major fund managers, Twitter, Microsoft, and Google are Shariah-compliant stocks. Referring to existing Shariah-compliant funds is another effective option.
3. Screening via Shariah-Compliant Funds
Many conventional asset management companies offer Shariah-compliant funds to their clients. According to Thomson Reuters, there were 786 Islamic mutual funds globally with a total of $46 billion in assets under management as of September 2012. Companies like CIMB Group, Malayan Banking Bhd, Old Mutual Asset Management, Franklin Templeton Investments, JPMorgan Chase Co, and Schroders can provide a wide selection of screened Shariah-compliant stocks.
To determine which stocks are Shariah-compliant, check the “Principal Holdings” or “Top 10 Holdings” section in the fund factsheet. This section will show the significant holdings or investments made by the fund managers, validating that the stocks are Shariah-compliant and directly representing high-performance and favorable stocks.
For instance, the CIMB Principal Islamic Asset Management’s Islamic Asean Equity Fund includes significant holdings such as Singapore Telecommunications Ltd, PT Telekomunikasi Indonesia, StarHub Ltd, Axiata Group Bhd, and Maxis Bhd.
A Final Thought
Screening Shariah-compliant stocks is a straightforward process with widely available data. Major index websites and existing Shariah-compliant funds are excellent starting points for finding compliant investments in the Saudi stock market. Whether you use Islamic indexes, exclude prohibited sectors, or invest in Shariah-compliant funds, ensuring your stocks align with Shariah principles is crucial for a compliant and ethical investment strategy.