1. Business of the Investee Company Core business of the company must be halal and in line with the dictates of Shariah. Hence, investment in securities of any company dealing in conventional banking, conventional insurance, alcoholic drinks, tobacco, pork production, arms manufacturing, pornography or related activities is not permissible.
2. Debt to Total Assets Debt to Asset ratio should be less than 40%. Debt, in this case, is classified as any interest bearing debts. Zero coupon bonds and preference shares are, both, by definition, part of debt.
3. Non-compliant Investments to Total Assets The ratio of non compliant investments to total assets should be less than 33%. Investment in any non-compliant security shall be included for the calculation of this ratio.
4. Non-complaint Income to Total revenue – Purification of Non-compliant income The ratio of non compliant income to total revenue should be less than 5%. Total revenue includes Gross revenue plus any other income earned by the company. This amount is to be cleansed out as charity on a pro rata ratio of dividends issued by the company.
5. Illiquid Assets to Total Assets The ratio of illiquid assets to total assets should be at least 20%. Illiquid asset, here, is defined as any asset that that Shariah permits to be traded at value other than the par.
6. Net Liquid Assets to Share Price The market price per share should be greater than the net liquid assets per share calculated as: (Total Assets – Illiquid Assets – Total Liabilities) divided by number of shares.

Courtesy of Al-Meezan Investments Ltd.