FOOD options too severely. Criteria had to develop over time, and a 33% debt to total assets or total market capitalization ratio opened up the greatest opportunities for investment while still limiting potential downsides. The stipulation for 33% or less debt within a portfolio was inspired by a conversation between Prophet Muhammad (salla Allahu ‘alayhi wa sallam) and Sa‘d ibn Abi Waqqas. When Sa‘d asked whether he could give 33% of his inheritance away in charity, the Prophet stated, “Yes, but less is better” (paraphrased from “Sahih Bukhari,” 80:725). • Cash. Another well-known standard is that investable companies must not have cash or accounts receivable of more than 45% of total assets. A large amount due in accounts receivable may trigger a company to cover its expenses through borrowing and debt. Islamic law clearly states that those characteristics that comprise the majority of an entity are assumed to be the characteristics of the entity as a whole, and that the minority should not impede the majority. A company holding 50% or more in accounts receivable is therefore considered a cash-based company and thus, by the rules concerning riba, cannot be traded for a premium or discount. Even 49% in cash or accounts receivable comes too close to the majority. Ultimately, scholars determined that 45% would be a comfortable limit. • Haram Revenue. This commonly accepted rule stipulates that any revenues received from haram sources must be limited to 5% or less of the company’s total revenue. This threshold was established in the belief that any percentage of business activities above 5% changes the company’s character. When first determining this rule, scholars referred to the “smell test” used when making ablution: If a Muslim encounters a pond while walking through a forest, he or she must determine whether it’s pure enough to perform the pre-prayer ablution. If it has no detectable smell, abnormal coloration or taste, one can assume that it’s suitable. Although a somewhat arbitrary number, scholars settled on 5% as the way a company could also pass a “smell test.” While 5% is a commonly accepted limit in this regard, generally the Sharia-compliant investment managers’ intention is to avoid haram revenues altogether. These three rules, which have been evaluated and re-evaluated for decades, illustrate how standards can evolve over time while maintaining allegiance to God’s intentions. The Dow Jones Index’s original proposal that a company’s debt be measured as a ratio to its assets led to an investible universe that was too small. Eventually, they settled on the convention of comparing debt to market cap. Some criteria use cash and marketable securities as a percentage of market capitalization instead of the accounts receivable mentioned above. However, the intent is the same. As standards cannot remain static, the complexity of financial markets must be discussed and explored in practice, rather than set in stone. Although the AAOIFI has helped ground and formalize the tenets of Islamic finance, it’s not the only voice in the field. In fact, since Islam encourages difference in opinion, no one standard can claim to be the most authentic. The critical issues for investors to evaluate when it comes to securities are whether an asset manager is using scholar-approved criteria and whether there is an audit process. All other standards should be determined by the individual investor’s unique needs. ih Monem Salam is executive vice president and portfolio manager at Saturna Capital. Stephanie Ashton is business analyst and manager of corporate social responsibility at Saturna Capital.
NOVEMBER/DECEMBER 2020 ISLAMIC HORIZONS 51
Does That Halal Label Really Guarantee Halal Food? The robust U.S. meat and agriculture domestic and export market deserves to have a standard for halal certification agencies BY SHAKEEL SYED
I
n an industrialized world where one must continually prove oneself to one’s investors and stockholders, the bottom line matters. This also holds true in the food processing and packaging sector. With profits in mind, cor Salah Obediallah porate wizards seek to source materials that reap the best yields, be it the end product or manufacturing and marketing efficiencies. As it’s always possible that animal-sourced ingredients may be part of a very complex production process, the presence of a halal logo may not always be enough. In fact, the Muslim consumer’s halal literacy should range from the farm to the fork, for the halal ethos also requires the humane treatment of animals at all times. The definition of halal, which used to be restricted to products and services only, has expanded so much that it has triggered intra-Muslim deliberations focused on what is definitively halal and who makes this determination. Although almost everyone agrees on this term’s general definition, not everyone agrees on a baseline halal standard. As certification standards can vary when there is no single governing body, there is little data on the industry. According to Nielsen, recent halal food sales in the U.S. reached $1.9 billion. Thomson Reuters has pegged the global market at about $415 billion (Esther Honig, NPR, April 5, 2018, “You Might Be Eating Halal Meat And Not Even Know It”). In response, in 2020 the North American Islamic Trust (NAIT), one of the nation’s oldest Islamic organizations, launched the American Halal Institute (americanhalalinstitute.com). This fully owned subsidiary seeks to develop a halal standard for North America so that Muslim consumers anywhere in the world will no longer be shortchanged. This is a particular problem for incarcerated Muslims. For instance, on Feb. 15, 2019, Roman Lee Jones, a Muslim inmate of the Indiana Department of Correction, successfully obtained court intervention after the department refused to provide him with halal meals. His lawyer argued before the U.S. Court of Appeals for the Seventh Circuit that such a refusal substantially burdened his client’s exercise of religion under the Religious Land Use and Institutionalized Persons Act (42 U.S.C. § 2000cc).
