Understanding Shariah Compliance Thresholds for Mixed Stocks in Islamic Finance #

Original Question: How was the 33% threshold for shariah compliance and the other 5%, 20%, 49-50% shariah complaint thresholds decided?

Companies that are traded in the stock market can be categorised into 3 main types depending on their adherence to Shariah rulings:

Companies whose all their business activities and operations are lawful (halal). Thus, it is permissible for Muslims to invest.

Companies whose all their business activities and operations are unlawful (haram). Thus, it is not permissible for Muslims to invest.

Companies whose business is a mix of lawful and unlawful activities and operations. (Mixed stock)
And as per the question, the third type is one for which the percentage thresholds are devised to determine the Shariah-compliant status of a mixed stock.

But before we explain and make sense of the different percentage thresholds, it’s important to let our community know that investing in a stock with a mix of legal and illegal activities has been a big topic of debate among modern Shariah scholars around the world. There are two very different points of view, each with its own concrete Shariah justification:

It is unlawful for Muslims to participate in any form of stock exchange related activities with a company whose business is a mix of lawful and unlawful activities and operations, regardless of the percentage of lawful and unlawful factors.

It is lawful for Muslims to invest in a company whose business is a mix of lawful and unlawful activities and operations if the company’s unlawful factors are unavoidable, with the condition of purifying the unlawful earnings on top of several threshold requirements.

To have the answer to the question focused, we would only explain the Shariah basis for the second opinion.

First, as to the general permissibility of investing in mixed stocks, the Shariah basis is as follows:
A negligible portion of unlawful factors when mixed with a great portion of lawful factors, does not affect the lawful status of the matter.

Even though the Arab Jews were described in the Quran as the people who earn their living through illegal trade, riba, and exploiting people, the Prophet (PBUH) used to participate in commercial activities with them. Furthermore, when He (PBUH) passed away, His armor was under mortgaged with a jew.

Established Shriah legal maxim: “mixed of unlawful portion with lawful portion of greater amount does not cause the whole portion to be unlawful” and “the majority holds the ruling for all”.

Secondly, as for the various percentage thresholds for maximum exposure to unlawful factors, where the investor has no choice or control to differentiate between excessive and minor exposure:
49%:
It is the final whole number percentage to remain a minority based on the Shariah legal maxim that the “excessive is given the ruling of the whole”.

33% (one-third):
A Prophetic narration which proposes one-third as being excessive: “Sa’d said: “I was stricken by an ailment that led me to the verge of death. The Prophet (PBUH) came to pay me a visit. I said, ‘O Allah’s Apostle! I have much property and no heir except my single daughter. Shall I give two-thirds of my property in charity?’ He said, ‘No.’ I said, ‘Half of it?’ He said, ‘No.’ I said, ‘One-third of it?’ He said, ‘You may do so, though one-third is also excessive.”

Since there is a reference of excessive amount from the sacred text, scholars of the second opinion view it (one-third) as a more suitable threshold.

One-third is adopted by Maliki mazhab as a benchmark for several matters. Such as rulings in matters of blood money, exempting one-third when selling an unknown quantity of food, tolerating defects in a sale item when it is less than one-third, and wiping one-third of the head in abluation.

In terms of ratio, one-third in a minority of two-thirds, as a 2:1 ratio makes the 2 dominant and makes the 1 inferior.

30%:
30% was deemed an acceptable standard, just below one-third in order to prevent “excessiveness” from being within reach. Despite the fact that this is an ijtihad (independent reasoning by a shariah law expert) , the majority of scholars have adopted this view since then. Consequently, it has gained strength and is now a standard based on widespread scholarly approval of the second opinion.

20% and 5%:
There are no real foundations in the Shariah sources. It is generally founded on the ijtihad of Shariah scholars who consider 20% and 5% as the maximum exposure of a negligible amount.

Despite these thresholds, we advise our community to make a conscious decision when selecting a stock for investment by looking beyond the lens of halal/haram and profit. But ensuring that your selected portfolio of stocks’ exposure to unlawful factors is the lowest of all, as well as incorporating ESG indicators into your investment considerations.