Understanding Stock Investing #
Original Question: May I ask in terms of shariah compliance screening, the terms “not related to arms/ military equipment” are quite common…I have a concern for investing in stocks of 2 companies: Alphabet/ Microsoft, (who are also constituents of HLAL/ SPUS ETFs) For these companies, they do have defence contracts with the US Military/ Pentagon. E.g. “Joint Warfighter Cloud Capability” among others…While it seems they don’t directly manufacture physical military equipment, they aid in primarily enhancing the digital military prowess/ capabilities. How and where should the line be drawn for shariah compliance as to the involvement of a company in military related equipment/ activities?
Answered by Ariff Sultan, Regional Director for Ideal Ratings -> it’s a Shariah, ESG, and other screening methodology screening service on stocks used by institutions such as Maybank etc.
“Point taken that the US Defense sector might bring in some revenue for US-listed companies.
Firstly, Islamic Finance does not exist in a vacuum; it interacts with the conventional business world. As a result, businesses will engage in non-shariah-compliant activities. Interest Income is haram, but we cannot assume that Microsoft has no Interest Income from its business activities or fixed deposit interest income in its finances. As a result, shariah scholars have stipulated that any such non-permissible income cannot exceed five percent of their overall revenue. In addition, we now benchmark any publicly traded company based on the percentage of their operating income derived from pork, alcohol, weapons, interest income, etc. if any such income exceeds the 5 percent threshold; these companies will be deemed non-shariah compliant.
In light of this monitoring of non-permissible income, Alphabet and Microsoft are considered shariah-compliant, as their non-permissible income accounts for less than five percent of their total revenue. Even if we include iTunes which involves music and entertainment, Apple is still Shariah-compliant since it accounts for less than 5 percent of the company’s revenue.”
