Assalamu ‘Alaikum,

The question of what to do when a stock goes from Halal to invest in to Haram to invest in is one that many Muslim investors struggle with answering.

Admittedly, this is often not an easy question to answer.

Do you sell immediately and give all your profits to charity?

Do you sell but hold on to profits since when you bought the stock it was halal?

If it’s a really bad time to be selling do you hold on a bit and wait until conditions improve? Or until you’re at least able to recover your principal amount?

I’ll tell you how I handle when a stock goes from a halal rating to a haram one, and as a bonus, I included in this video a course, if you will on how to calculate the purification amount for your stocks.

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Ok so let’s get right into it shall we…

At the risk of stating the obvious, I’m not a moral authority of any kind nor do I aspire to be one. 

So be sure to subject anything I say to critical interrogation before accepting it.
What to do when a stock that was halal when we bought it gets classified as haram?

These classifications of halal and haram are likely coming from automated stock screeners.

So I think it’s important we understand what stock screeners do inorder to ascertain whether a stock is halal or haram.

All of them will look at haram revenue to be less than 5% of total revenue this applies to practical islamic finance as well, we do the same thing you can see our reviews for free on practical islamic finance dot com.

These screeners will also use some measure of the amount of debt a company has. Whether it’s debt/equity, debt/assets or debt/market cap and compare it to a predetermined limit.

In the case of Practical Islamic Finance we focus on interest expense in relation to the size of the companies operations.

Also, following PIF’s footsteps, some screeners have recently begun injesting ESG ratings too. ESG refers to the Environmental, Social and Governance impact of the company on the various parties it comes to contact with.

Regarding these criteria it’s important to understand that the commonly used 5% haram revenue limit is not mentioned in the Quran or Sunnah. It is a best-faith estimate and nevertheless, at the end of the day, a made-up number. 

There is also nowhere in the Quran or Sunnah where the amount of debt a company can have is capped at a certain amount. In fact debt isn’t even prohibited at all, interest is. That’s why PIF focuses on the latter. 

However, even the interest standard which PIF employs uses a made-up number that is a 5% cap of interest expense / total operating expense in order to draw a line between that which should be considered trivial and that which isn’t.

Further, the ESG impact part of the rating is almost entirely subjective.

Company X is cutting down the Amazon rainforest but they also found the cure for a terminal illness, what’s the ESG score for that?

Additionally, in most cases, the service or app you are using is being driven by code that is completely oblivious to the circumstances and nuances of the company in question.

Here I should mention that PIF’s comfort ratings are reviewed by a human before they are published.

Not to mention, the financial reports themselves which are being used to determine halal and haram ratings, are typicaly months old. 

The SEC requires that companies report their annual earnings (form 10-K) no later than 60 days from the end of its fiscal year.

So by the time the stock screeners get this information and they change their rating for a stock, their information is already two months old and who knows what the situation is today. 

 All this to say the following: 

These stock screening services are only, at best, subjective moral judgements based on very rough approximations of the truth a few months ago. 

Therefore, I think reacting to the the results of a stock screener changing the rating of a company you invested by abruptly making buy or sell decisions in your portfolio is probably not the wisest course of action.

For example, let’s say the company you’re invested in ran a temporary marketing gimmick last quarter which included selling a pork product.

This pushes their revenue from haram sources, according to the stock screeners rough estimations, from 3.5% to 5.5%

Your average stock screener is going to issue a haram verdict on this stock for the next three months until the next quarter’s financials are released.

Does this mean you should sell your shares immediately?

The marketing gimmick was something that happened in the past, it’s not happening now. The percentage of revenue from haram sources is a rough estimation anyway, because companies don’t normally provide the public with granular breakowns of their revenue which are needed to make accurate calculations of haram revenue. So the best anyone can do is a rough estimation of haram revenue.

Additionally, the stock screener’s rough estimation of haram revenue based on old information only exceeded the made-up limit by 0.5%.

The point of all this is to say: when you see a stock screener change a rating from halal to haram, take it with a grain of salt.

Understand what actually caused the change before you make any rash decisions.

I’ll tell you my rule and they come from the following two beautiful hadith from the prophet muhammad pbuh:

Al-Nawas bin Sam’an Al-ansari (may Allah be pleased with him) said: I asked the Prophet (peace and blessings of Allah be upon him) about righteousness and wrongdoing, He said:

Righteousness is in good character, and wrongdoing is that which wavers in your soul, and which you dislike people finding out about.

Wabisa bin Ma’bad may Allah be pleased with him said: “I came to the Messenger of Allah (peace be upon him) and he said, ‘You have come to ask about righteousness.’ I said, ‘Yes.’ So He, peace be upon him, grouped his fingers and pushed against my chest saying, ‘Consult your heart. Righteousness is that which the soul feels at ease with and the heart feels tranquil and wrongdoing is that which wavers in the soul and causes uneasiness in the chest, even if people repeatedly tell you it’s permissible.'”

So here’s how I know when to sell..

Whether I’m up, down or sideways on my investment, I sell it when it becomes uncomfortable for me to hold.

When it starts wavering in my soul or if I’m embarrassed to publicly say to my Muslim friends or my Muslims audience that I’m invested in this company, that’s when I sell.

There is a prerequisite to applying this rule which is that you have to understand and follow the companies you’re investing in.

If you don’t know what you’re investing in, it’s pretty tough to form an educated comfort level about them.

I don’t really see much merit to the argument that you can keep a stock that you’re uncomfortable with from a halal perspective until you’ve recovered your principal.

I mean why do you have to attempt to recover your principal with the uncomfortable stock?

It’s not like selling implies you’re retiring from stocks forever. 

If a stock becomes uncomfortable for you to hold from a halal perspective, sell it and use the proceeds to buy some other stock that you are comfortable with and recover your principal with the comfortable stock.

In fact, there’s a practical incentive to doing things this way, in addition to a moral one, which is that if you sell at a loss, in most developed countries you can use this loss to lower your tax obligations.

Now for my course on purification.

Regardless of whether you sold your stock because you became no longer comfortable with it or you sold your stock for financial reasons, the way to purify your earnings is the same:

Purification Amount = Profit X (Revenue from Haram Sources / Total Revenue)

Example. 1:

You bought Tesla for $100, Sold for $90, Profit = $0

Purification amount = $0 X (revenue from haram sources / total revenue) = $0”

Example 2:

You bought Tesla for $100, Sold for $110, Profit = $10

Assume: Tesla’s Revenue from Haram sources = $5

Tesla’s Total Revenue = $100

Revenue from Haram sources / Total Revenue = $5 / $100 = 5%

Purification amount = $10 X 5% = $0.5

Now for the Rakaan method.

Purification amount = Profit X 10%

That is to say, to purify my earnings, everytime I sell for profit, I take 10% of my profit, not my principal, 10% of my profit and give it to charity.

So let’s say I bought for $100 and sold for $110, I give $1 to charity for purification.

I don’t do this if I haven’t sold yet because if you’ve been in the market for more than 2 days you know that profits today can turn into losses tomorrow.

Only when I realize a profit from selling a position do I do purification which is not to be confused with zakat which is perhaps the subject of a different topic.

Using my 10% rule for purification buys me some leeway.

I’m investing on the assumption my companies, on average, don’t have more than 5% in income from haram sources, if ever I’m wrong about this, I estimate the 10% should more than cover my error.

Also by donating 10% of my profit, I don’t really have to go into the nitty gritty of a companies financials to figure out exactly what the purification amount should be. The time I save by not having to do that accounting is more than worth paying a little extra for purification.

Plus, you can think of any extra that you gave to purification as an investment in your akhira. So by giving to charity, you’re reinvesting your profits insha’ Allah in an investment that is guaranteed by Allah subhanahu wata’allah to be profitable.

On top of all this, the 10% I donate to charity is tax-deductible. 

End of my course on purification.

So to summarize:

Use halal stock screening apps for general guidance but don’t mistake them for holy text.

Sell your position when you feel uncomfortable with it. A good gauge of this is to ask yourself how would you feel telling an observant Muslim friend who is familiar with this company that you are invested in it.

For purification, regardless of anything, the way to purify is the following:

Purification Amount = Profit X (Revenue from Haram Sources / Total Revenue)

Want to use my method:

Purification Amount = Profit X 10%

Don’t forget to become a member to follow my crypto and stock investing journey. 

Until next time, take care of yourself, assalamu ‘alaikum and peace be upon you all.