Towards a Gradual Methodology for Sharia Stock Rating

Abstract

Researchers are used to distinguishing between Shari’ah-compliant companies and non-compliant companies, and a number of terms have appeared in that regard such as “pure companies”,” mixed companies” and “prohibited companies”. This is because it is unimaginable that all companies would be of the same degree of Shari’ah quality. Therefore, there is an apparent need for Shari’ah stock rating similar to the credit ratings issued by the international rating agencies such as Moody's, Standard & Poor's and Fitch. Shari’ah rating differs from credit rating, which focuses on the company’s solvency and its ability to fulfill its obligations. Shari’ah rating is a complement of the latter. Investors in financial markets check credit ratings to avoid failed companies. Investors in the Islamic stock market would prefer the most Shari’ah-compliant companies; that is, those with the highest Shari’ah quality rating; and they would avoid the stocks of lower purity that is, those with the lowest Shari’ah quality rating. This study presents an appropriate methodology for rating of Shari’ah-compliant stocks.