Sharia stocks in today’s market: Halal investment gains popularity

Sharia stocks are increasingly attracting investors who want to invest in line with Islamic principles. They represent ownership in companies whose activities and management do not conflict with sharia rules, rather than gambling instruments.

Companies involved in prohibited sectors, including interest-based conventional banking, gambling, alcohol, pork products, entertainment deemed inconsistent with sharia, and interest-based financial services, cannot qualify. The Financial Services Authority, known as OJK, says sharia investment has a firm legal basis through fatwas issued by the National Sharia Council of Indonesia’s Ulema Council.

Investors still need to understand the risks. Transactions in sharia stocks use the Sharia Online Trading System, or SOTS, which is designed to keep buying and selling free from riba, gharar, and maysir. These refer to interest, excessive uncertainty, and pure speculation.

Not every stock automatically qualifies. OJK and the National Sharia Council conduct screening in two main areas: the company’s core business and its financial ratios. Interest-based debt compared with total assets, along with non-halal income compared with total revenue, must remain below specified thresholds. OJK updates the Sharia Securities List regularly, so a stock’s sharia status can change as its business and finances change.

Indonesia’s two main reference indexes serve different purposes. The Indonesia Sharia Stock Index, or ISSI, includes all listed sharia stocks whose issuers appear on OJK’s list. The Jakarta Islamic Index, or JII, is more selective, containing 30 sharia stocks with the highest liquidity and market capitalization on the Indonesia Stock Exchange. ISSI launched in 2011, while JII dates back to 2000. The exchange reviews the indexes periodically, usually twice a year, to reflect changes in company performance and sharia status.