A beginner's guide to Shariah-compliant investing on PSX

A large part of PSX's market capitalisation is in companies that pass Shariah screening, and Islamic mutual funds and ETFs are well established in Pakistan. Investing in line with your faith doesn't mean giving up a diversified portfolio.

How screening works

Screening looks at two things. First, the core business must be permissible, so conventional banks, insurers, alcohol and similar businesses are excluded. Second, the company's finances must stay within set limits. Typical tests include:

• Interest-bearing debt as a share of total assets below a set threshold.
• Non-compliant investments as a share of total assets below a set threshold.
• Income from non-compliant sources as a small share of total revenue.
• A minimum level of illiquid (real) assets, and a share price above net liquid assets per share.

Indices to follow

The KMI-30 tracks 30 large, liquid Shariah-compliant companies and is the main benchmark for Islamic equity funds. The KMI All Share index covers every compliant listed company and is useful as a broad universe to pick from.

Purification

Even compliant companies may earn a small amount of non-compliant income, such as interest on bank deposits. Many investors 'purify' their returns by giving the proportional share of dividends to charity. Islamic funds generally do this on investors' behalf.

Getting started

• Open an account with a licensed broker, as you would for any PSX investment. Some brokers offer dedicated Islamic trading accounts.
• Build your shortlist from the KMI All Share universe and research each company as you normally would.
• Consider Islamic mutual funds or ETFs for instant diversification.
• Consult a qualified Shariah scholar on questions of personal practice.

PakStockLab's screener shows each company's index membership, so you can quickly see which companies are KMI constituents.