Fireside Chat with Monem Salam – Islamic Investing: A Viable Alternative?
April 20, 2010
Mr. Salam explained that the overarching principle of Islamic investing is the avoidance of interest. He indicated that relaying on historical precedent Islamic scholars have determined the following criteria to assess the “Sharia complaint” eligibility of an investment.
Primary source of income/revenue. This has to be in consonance with the laws of Islam, for example, all illegal activities, sale of alcohol, gambling, financial services entailing interest would be excluded.
Total debt to market capitalization ratio. Islamic scholars, based on historical precedents, have stated that a company or business with a less than 33 percent of the ratio is eligible for investing.
Total receivables to total assets ratio. As long as this ratio is less than 45 percent, the business is eligible for investing. The reason for this is that a higher ratio means that the business is mostly operating by offering an implicit loan to the client and in turn will be forced to borrow for operating capital. This would largely exclude business which engages in high degree of “factoring” that is, selling their receivables at a discount to generate cash.
Haram revenue to total revenue ratio. This ratio has to be less than 5 percent, as it is assumed that such revenue is only an auxiliary source of income and not the primary source of revenue for the business. For example, the sale of alcohol by airlines.
In responding to various questions, Mr. Salam indicated that while making a living through business is a legitimate undertaking, but doing so within the context of Islamic principles is the main consideration.