How Islamic Investing Works on the PSX: KMI-30 and the Shariah Screens

Ask most people how Islamic investing works and you get a list of things to avoid: banks, insurance, alcohol, tobacco. Avoid those, buy anything else, done.

That intuition collapses on the PSX within minutes. Almost every listed company — cement, textiles, energy, autos — borrows from conventional banks, parks spare cash in interest-bearing deposits, or both. A cement maker with a running finance facility earns and pays interest. A fertiliser company sitting on a seasonal cash pile collects deposit income. If the test were "no interest anywhere in the accounts", the compliant universe would be nearly empty.

So the scholars who built Pakistan's screening framework did something more pragmatic and more interesting: they made compliance quantitative. A company passes or fails on ratios computed from its published financial statements, with tolerance thresholds, plus a cleansing mechanism for the impurity that remains. Understanding those ratios is the difference between following the methodology and doing vibes-based halal investing — which, on the evidence of most WhatsApp groups, is what a lot of people are actually doing.

The KMI-30 and its bigger sibling

The reference index is the KSE-Meezan Index — the KMI-30 — launched in 2008 as a collaboration between the exchange (then still the Karachi Stock Exchange; the PSX name arrived with the 2016 merger) and Al Meezan Investment Management, with Shariah supervision from Meezan Bank's Shariah board. It contains the thirty most liquid Shariah-compliant companies, weighted by free-float market capitalisation — the same construction philosophy as the KSE-100, which we have covered in detail in how the KSE-100 is built.

In 2015 the exchange added the All Shares Islamic Index, which holds every compliant listed company rather than a liquid subset. Think of it as the full universe, with the KMI-30 as the investable core.

The composition tells you something immediately. The KMI-30 has historically been heavy in energy, fertiliser, cement and technology — OGDC, MARI, PPL, ENGRO, FFC, LUCK and SYS have all spent long stretches in it — because the big conventional banks that dominate the KSE-100, such as HBL, UBL and MCB, fail at the very first screen. The notable financial exception is MEBL, because an Islamic bank's core business is itself structured to be compliant.

The screens, as published

The first screen is the only one that works the way people imagine: the core business must be permissible. Conventional banking, conventional insurance, alcohol, tobacco, pork and gambling are out regardless of any ratio.

Everything after that is arithmetic. The criteria below are as published in the KMI methodology and Al Meezan's screening criteria. They have been revised over the years and can be revised again — verify the current thresholds in the KMI brochure on the PSX website or with Al Meezan before relying on them. The structure matters more than the decimals.

Why the odd-looking screens exist

The debt and income screens are intuitive. The last two are the ones people skim past, and they are the most classically grounded of the lot. Under fiqh rules, money must be exchanged at par — you cannot trade Rs 100 of cash for Rs 80. A company whose assets are mostly cash and receivables is, economically, a pile of money, and trading its shares below the value of that money amounts to exchanging money unequally. Hence the two requirements: enough illiquid assets that the share represents a claim on a real business, and a market price no lower than the net liquid assets backing each share.

Purification: the half of the framework everyone skips

Here is the part the tolerance thresholds make necessary. A company earning 4% of its revenue as interest income passes the 5% screen. Passing does not make that 4% halal. It makes the share permissible to hold, on the understanding that you will cleanse the impure fraction.

That cleansing is purification: you give away, to charity, the portion of your dividend that corresponds to the company's non-compliant income. If 3% of a company's income was interest, roughly 3% of your dividend from it is not yours to keep. Al Meezan publishes per-share purification amounts for compliant companies; if you hold stocks directly and want to compute it yourself, the inputs are in the annual report — our guide to reading PSX financial statements covers where to find them.

Islamic mutual funds handle this before money reaches you. Direct stock investors have to do it themselves, and the honest observation is that very few do. If you take the framework seriously, purification is not optional fine print. The thresholds and the cleansing are one mechanism: the screens tolerate a small impurity because purification removes your share of it. Keeping the full dividend while citing the 5% screen is using half the ruling.

Recomposition: compliance is a status, not a property

The KMI-30 is reviewed against fresh financial statements twice a year, and companies fall out of it routinely. Rarely for anything dramatic — usually for arithmetic. A company takes a large conventional loan to build a plant and its debt ratio crosses the line. A cash-rich year pushes interest income past 5% of revenue. The business did not become sinful; the ratios moved.

This has two practical consequences for you as a holder:

• A stock that was compliant when you bought it is not compliant forever. You have to keep checking, at minimum after each annual report. The general scholarly guidance when a holding falls out of compliance is to exit within a reasonable period and purify any gain attributable to the non-compliant portion — confirm the specifics with your own scholar or fund's Shariah adviser, because rulings differ on the details.
• Recomposition creates forced flows. Islamic funds must sell what drops out and buy what enters, on a schedule everyone can anticipate. Price pressure around index reviews is not a conspiracy; it is mechanics.

Three ways to actually do this

1. Direct stocks. Work from the published compliant list, confirm the ratios against the latest accounts yourself, and purify your dividends manually. Our screener can narrow the field by fundamentals, but the compliance list itself comes from the index provider — cross-check it. Maximum control, maximum work, and the purification burden is entirely yours.
2. Islamic mutual funds. Screening, recomposition and purification are handled for you, in exchange for a management fee. Al Meezan runs the largest Islamic fund complex in the country. For most people who want compliance without a second job, this is the sensible default — the fee is buying real work, not just branding.
3. Listed Islamic institutions. Buying MEBL or another listed Islamic financial institution is a compliant position, but be clear about what it is: a concentrated bet on one company in one industry, not a diversified Islamic portfolio. Owning shares in an Islamic bank is not the same thing as Islamic investing.

Whichever route you take, note that many KMI names — FFC and the wider fertiliser space especially — are held mainly for their payouts, and every dividend-trap warning in our piece on dividend yield versus growth applies with full force. Compliance does not vet the sustainability of a dividend.

What compliance does not mean

Two misconceptions deserve stating plainly, because they cost people money and peace of mind.

Compliant does not mean low-risk. The KMI-30 is concentrated in cyclical, commodity-linked sectors — exploration, fertiliser, cement — precisely because banks are excluded. It swings with the same macro cycle as the rest of the market, and in some drawdowns it swings harder, because it lacks the defensive weight the banks give the KSE-100. When the policy rate peaked at 22% in 2023-24 and the whole market repriced, no screen protected anyone from that. Shariah screening filters how a company finances itself, not whether its price falls.

A screen is a financial-ratio proxy, not a moral endorsement. The ratios say nothing about how a company treats its workers, whether its governance is honest, what it does to the air around its plants, or whether its pricing behaviour is fair. A company can pass every threshold and still be a business you would not want to be associated with. The scholars who designed these screens would be the first to say so: the thresholds are explicitly described as concessions, tolerances adopted so that equity investing is possible at all in an economy where interest is woven through everything, with purification as the honesty mechanism for what slips through. Several boards have signalled that thresholds should tighten as Islamic finance deepens — which means the correct reading of a pass is not "this company is virtuous" but "this company is permissible to analyse".

That framing is the useful one. The screen tells you where analysis may begin. The business, the accounts, the valuation and the exit — all the work we describe everywhere else on this site — still belongs to you.