I have spent hours and days in the last few months trying to understand the various criteria, methodologies and schools of thought, and to select an approach that I would like to apply and follow for my investments. Unfortunately, as is the case in other aspects of life, there is so much difference of opinion between reputed scholars and organisations, that it has become quite challenging for me to seek the answer on my own.
Q. Please help me understand logically the following points:
Liquid assets
A company, especially nowadays with ground-breaking and ingenious innovations that we are seeing, is surely much more than the cash or other assets it has. Does this ratio (still) really makes sense?
Illiquid assets
Similar to above. Consider Airbnb (ABNB) when looking at this. Airbnb had become a universal example of innovation wherein it is touted as ‘The world’s largest accommodation provider, but with no real estate of its own’. Unfortunately, Shariah application doesn’t seem to be evolving to consider such innovations and radical business models.
Interest-bearing Debt
Shouldn’t it be the interest expense rather than the debt that should be considered?
While we no longer use the liquidity filter in Zoya, I recall Shaykh @Joe mentioning there being a two pronged reason for this measure:
Hoarding (احتكار) indicates mismanagement of funds that should either be reinvested or distributed. it’s also a warning sign that the price is being artificially inflated. Misrepresentation of value is another principle to be avoided.
Some scholars looked at cash, cash equivalents, and accounts receivables in the transaction and problematized the trade of the stock being a form of riba if there wasn’t a significant amount of capital assets being held by the company. This is an issue known as Mudd ajwah wa dirham (ﻣﺪ ﻋﺠﻮﺓ ﻭﺩﺭﻫﻢ).
This filter is also sensitive to one-time events such as a fundraise/IPO, merger/acquisition, etc. I’d recommend doing additional research to determine whether or not the long-term outlook of the company has changed before making a judgement call.
I have studied the filter topic very long and intensively. I knew about this elaboration already.
I hope that the AAOIFI has been made aware of it. AAOIFI wanted or wants to revise their standards.
I think filters like:
Impermissible + Interest Income <X% Of Total Income of the Company
and
Interest Expense <X% of the Total Income of the Company
make a lot more sense.
But I am not a scholar, I just follow the guidelines I find and I question them in detail.
An interesting question was recently posed to me. Are Sharia screenings automatically Sharia compliant?
thanks for sharing the paper @saad. It is interesting and I like the idea of checking interest expense relative to the operating income of the company. In fact, that is very similar to how I check interest coverage levels when doing fundamental analysis. Measures such as EBIT / Interest expense or times interest covered, The higher the number, the safer the company is in terms of being able to service the debt.
Responding to the last question; No. You will always retain responsibility for your actions. Shariah screening is a service based on principles the providers deem to be shariah compliant. Whether to trust this service is your call based on screening rules and the fiqh (or sheikh) you choose to follow. No one can take away that responsibility.
