Many Pakistani investors want their savings to grow without compromising their faith. The good news is that the Pakistan Stock Exchange has a well-established system for identifying Shariah-compliant shares, along with dedicated indices and a large Islamic mutual fund industry.
This lesson explains how the system works. It is general education, not a religious ruling. For personal guidance, consult a qualified Shariah scholar.
Why owning shares can be halal
In Islamic finance, owning shares is generally accepted as owning a real part of a real business, sharing in its profit and its risk. That is closer to partnership than to lending at interest.
Problems arise when:
- the business itself is not permissible (for example, alcohol, gambling, or conventional interest-based banking and insurance)
- the company relies heavily on interest-bearing borrowing
- the company earns a meaningful share of its income from interest or other prohibited sources
Shariah screening exists to filter out these cases.
How PSX stocks are screened
The PSX applies a Shariah screening methodology, originally developed with Al Meezan, to decide which listed companies are compliant. The published tests are:
| Test | Requirement |
|---|---|
| 1. Business of the company | Core business must be halal |
| 2. Interest-bearing debt to total assets | Less than 37% |
| 3. Non-compliant investments to total assets | Less than 33% |
| 4. Non-compliant income to total revenue | Less than 5% |
| 5. Illiquid assets to total assets | At least 25% |
| 6. Net liquid assets per share | Share price must be at least equal to it |
Why these tests matter:
- Debt below 37% because the company should not be mainly financed by interest.
- Non-compliant income below 5% allows for small, unavoidable amounts, such as interest on a bank account. That small part is "purified" by investors (see below).
- Illiquid assets of at least 25% makes sure the share represents real business assets, not mostly cash and receivables, which would make trading the share resemble trading money.
Screening is based on each company's latest financial statements, so the list changes over time. A company can drop out if it borrows heavily, and come back in later.
The KMI indices
KMI-30
The KMI-30 index tracks the 30 largest and most liquid Shariah-compliant companies on the PSX. It was launched in September 2008 and is recomposed twice a year. On 30 September 2026 it closed at 243,609, about 10.4% below its high, moving closely with the wider market. Lesson 4 explains how the index is built.
KMI All Share Index
The KMI All Share Index includes every listed company that passes the screen. If you want to check whether a particular stock is compliant, this is the list to check, along with the PSX's published Shariah-compliant list.
What is in and what is out
Large Shariah-compliant companies on the PSX include names like:
- Oil and gas: OGDC, MARI
- Fertiliser: FFC, EFERT
- Islamic banking: Meezan Bank (MEBL)
- Power: HUBC
Conventional banks such as UBL, MCB, HBL and ABL are not Shariah-compliant, because their core business is interest-based lending. Always confirm current status on the latest PSX list before buying.
Two ways to invest
1. Buy Shariah-compliant shares yourself
You open an account with a broker, and pick stocks from the KMI lists. Some brokers offer Islamic trading accounts that block non-compliant stocks and avoid interest-based features. Ask your broker whether they offer this.
Things to avoid if you want to stay compliant:
- Margin financing or leveraged products that involve interest
- Short selling, which means selling shares you do not own
- Conventional futures
Scholars differ on very short-term trading. Many prefer investing with the intention of owning the business.
2. Invest through an Islamic mutual fund
Islamic funds handle the screening, purification and diversification for you. Pakistan has many Shariah-compliant equity funds from asset management companies such as Al Meezan Investments, Al-Ameen Funds (UBL Fund Managers) and others. Each fund has a Shariah adviser and publishes its holdings and performance.
There are also Islamic income and money-market funds, which invest in sukuk and Islamic bank deposits instead of shares. They are lower risk and can hold your emergency savings.
Check fees, past performance against the KMI-30, and the fund's risk category. You can compare funds on the Mutual Funds Association of Pakistan (MUFAP) website. Lesson 11 compares funds with buying shares yourself.
Purification of dividends
Even a compliant company may earn a small amount of non-compliant income, below the 5% limit. Many scholars advise shareholders to give away the matching share of their dividends to charity. This is called purification.
The basic method:
Purification amount = dividend received × (non-compliant income ÷ total income)
Example (made-up numbers): you receive Rs 5,000 in dividends from a company whose non-compliant income is 2% of its total income. You would give Rs 100 to charity, without expecting any reward or benefit from it.
Where to find the ratio:
- Some Islamic fund managers and Shariah advisory firms publish purification ratios for listed companies.
- You can calculate it from the company's financial statements, looking for interest income and other non-compliant income.
- Islamic mutual funds purify for you before distributing returns.
Scholars hold different views on whether capital gains also need purification. Many say only the dividend needs it. Ask a scholar you trust.
Zakat on shares
Zakat on shares is a separate question from purification. Scholars give different methods, such as paying on the market value of shares held for trading, or on your share of the company's zakatable assets for long-term holdings. Some funds and banks deduct zakat automatically unless you file a declaration of exemption. Ask a scholar and your fund or bank how zakat is handled in your case.
Performance: do you give up returns?
Not necessarily. Over many periods the KMI-30 has moved closely with the KSE-100. At 30 September 2026, both were about 10% below their highs. Shariah-compliant portfolios do miss out on conventional banks, which were among the best performers in recent years, but they include strong sectors like oil and gas exploration and fertiliser.
The bigger point is that the same rules of investing apply: diversify, invest for the long term, and do not borrow to invest.
Key points
- PSX screens companies on six tests: halal business, interest-bearing debt below 37%, non-compliant investments below 33%, non-compliant income below 5%, illiquid assets of at least 25%, and price at least equal to net liquid assets per share.
- The KMI-30 index tracks 30 large compliant stocks; the KMI All Share index lists all of them.
- Conventional banks are out; companies like OGDC, MARI, FFC, EFERT and MEBL are typical compliant names. Check the current list before buying.
- Islamic mutual funds offer screening, purification and diversification in one product.
- Purify the non-compliant share of your dividends by giving it to charity, and ask a scholar about zakat.
Next lesson: Risk, diversification and position size. See the KMI-30 live on our market page.