KMI-30 screening: how a PSX company qualifies
The business screen and five financial ratio tests a PSX company must pass for the KMI-30, how impure income is purified, and when the list is reviewed.
A PSX company qualifies for the KMI-30 by passing two layers of screening. First, a business screen: its core activity must be permissible under Shariah, which rules out conventional banking, conventional insurance, alcohol, tobacco, gambling and similar lines. Second, five financial ratio tests that limit how much interest-bearing debt, non-compliant investment and impure income sit on its books, require that a minimum share of its assets be real rather than cash-like, and require that its share price reflect more than the liquid assets behind it. Companies that pass every test are ranked by free-float market capitalisation; the largest thirty form the index. The screen was designed with Al Meezan’s Shariah advisors and is applied by PSX, which publishes the methodology and reviews the list twice a year.
Who sets the rules
The KMI-30 (KSE Meezan Index) was launched in 2008 by the Karachi Stock Exchange, now the Pakistan Stock Exchange, together with Al Meezan Investment Management. PSX calculates and publishes the index; the Shariah screening criteria come from the Shariah supervisory board associated with Meezan, and the technical methodology document lives on PSX’s website.
The thresholds quoted below are the ones commonly published for the index. They are set by the index provider, not by law, and are reviewed from time to time. If a decision depends on a threshold, read the current methodology on PSX’s site rather than relying on a figure from an article, including this one.
Equivest’s stock pages show whether a company is currently in the KMI-30 or the broader KMI All-Share, using the live constituent lists, which is a faster check than working through the ratios yourself.
Screen 1: the business test
The first question is what the company does to earn its money. A business whose primary activity is prohibited fails immediately, whatever its balance sheet looks like. The usual list: conventional banks and leasing companies (their product is interest), conventional insurers, and producers or sellers of alcohol, pork, tobacco, or gambling and adult entertainment services.
Most listed companies pass this test: cement, fertiliser, oil and gas exploration, power generation, textiles, pharmaceuticals, food, autos and technology are all permissible activities in themselves. Islamic banks such as Meezan Bank pass too, because their contracts are structured around trade and leasing rather than interest. The business test is therefore only the first gate. The ratio tests below are what separate a permissible business from a compliant investment.
Screens 2 to 6: the five ratio tests
Each ratio compares one balance-sheet or income-statement figure against another and asks whether the result falls on the acceptable side of a line.
| Test | What is compared | Purpose | Commonly published threshold |
|---|---|---|---|
| Interest-bearing debt to total assets | All interest-based borrowing against total assets | Limits how far the company is financed by riba | Less than 37% |
| Non-compliant investments to total assets | Holdings of interest-bearing instruments and non-compliant securities against total assets | Limits earning riba through the treasury | Less than 33% |
| Non-compliant income to total revenue | Interest and other impure income against total revenue | Tolerates only incidental impurity | Less than 5% |
| Illiquid assets to total assets | Plant, property, inventory and other non-cash assets against total assets | Ensures the share represents real assets | At least 25% |
| Market price versus net liquid assets per share | Share price against liquid assets net of liabilities, per share | Ensures the share is worth more than the cash it represents | Price at least equal to net liquid assets per share |
Debt to assets. A company can be in a permissible business and still run on bank loans. The debt test caps the share of total assets funded by interest-bearing borrowing. It is the test that most often knocks out capital-intensive names: a cement or steel company in the middle of a debt-financed expansion can breach it, then return to compliance as the loans are repaid.
Non-compliant investments to assets. The mirror image of the debt test. Companies park surplus cash in treasury bills, term deposits and bonds that pay interest. This ratio limits how much of the balance sheet is invested that way. An exploration company sitting on a large pile of interest-earning deposits can fail here even with no debt at all.
Non-compliant income to revenue. Whatever the balance sheet shows, some interest income usually arrives, from bank balances if nothing else. The screen tolerates it only as a small fraction of total revenue. This is the ratio that drives purification, covered below.
Illiquid assets to assets. Shariah treats a share as a slice of a real enterprise. If a company were almost entirely cash and receivables, buying its shares above their cash value would amount to exchanging money for money at a premium. Requiring a minimum share of illiquid assets, such as plant, property and inventory, keeps the share attached to something tangible.
Price versus net liquid assets. The same principle from the other side. Net liquid assets per share is roughly cash and near-cash, less liabilities, divided by shares in issue. The market price must be at least that figure, so that the trade is for the enterprise as a whole, not just for its cash at a discount.
Why a halal business can still fail
The ratio tests are why “halal stocks Pakistan” lists change from one review to the next. Oil exploration is permissible, yet Equivest’s fundamentals record marks Pakistan Oilfields (POL) as non-compliant, almost certainly on a financial ratio rather than the business test. Fertiliser is permissible, but a producer that borrows heavily to build a new plant can breach the debt ratio for a year or two. A company can also move the other way: repaying loans, shifting deposits into Islamic instruments or growing revenue faster than interest income all pull the ratios back inside the lines.
The practical lesson is that compliance is a property of a company’s current accounts, not a permanent label. It is also why the screen is applied to the latest published financial statements at each review rather than once at listing.
Purification of impure income
Even a company that passes every test may have up to the tolerated share of impure income, typically interest on bank balances. When that company pays a dividend, a proportionate slice of the cash is considered tainted, and the shareholder is expected to purify it by giving that slice to charity, without counting it as zakat or expecting a reward for it.
The arithmetic is a ratio. If non-compliant income was, say, 2% of a company’s total income in the year, then 2% of the dividend you received from it is set aside. Al Meezan publishes purification figures for its own funds; for direct holdings, the company’s annual accounts show the interest income line and total income, which is all you need. Whether capital gains also require purification is a question on which scholars differ; the published methodology and your own scholar are the references, and this post does not take a side.
Purification is separate from the compulsory zakat deducted from dividends at source, and from the zakat you calculate on the market value of your holdings. The nisab calculator and the zakat on shares guide cover that side.
Recomposition twice a year
PSX reviews the KMI-30 semi-annually. At each review the screen is re-run on the latest financial statements, companies that no longer pass are removed, companies that now pass become eligible, and the thirty largest eligible names by free-float market capitalisation form the new list. PSX announces the changes and their effective date in a notice.
For a holder, a removal raises the question of what to do with shares that are no longer on the list. The methodology and Shariah advisors give guidance on this, commonly allowing an orderly period to dispose of holdings rather than a forced same-day sale, but the details are theirs to state, not this post’s. What matters here is knowing when the reviews happen so that the question is not a surprise.
KMI-30, KMI All-Share and third-party lists
The KMI-30 is the thirty largest compliant companies, weighted by free-float capitalisation like the KSE-100. Alongside it, PSX publishes the KMI All-Share, which includes every listed company that passes the screen regardless of size. A company can be Shariah-compliant and not in the KMI-30 simply because it is too small; the All-Share list is the fuller answer to “which PSX stocks are halal”.
Brokers, fund managers and websites publish their own compliant-stock lists, sometimes using different thresholds or different scholars. On PSX, the index provider’s screen is the one that determines index membership, and it is the reference Equivest uses.
How Equivest helps
Every stock page under /stocks carries a KMI membership flag from the live constituent lists, so a holding that has dropped out at a recomposition shows immediately. The markets page lists the KMI-30 and KMI All-Share levels next to the KSE-100, and KSE-100 vs KMI-30 explains which benchmark fits a halal-only portfolio. When zakat season comes, the nisab calculator works from the same holdings.
Education, not investment advice.