Evaluating income of companies with no/low income

As salaamu alaikum

There is a stock I am looking at (AFC.L) which has 100% of its income coming from interest as they do not have income from selling their product yet. On Zoya, it is therefore not shariah compliant. The amount of this interest is very small for the company (~£4k) - less than the gains on my small investment even. The market cap of the company is in the 100s of millions. This valuation is justified based on the r&d they have put into creating industrial hydrogen fuel cells and contracts they have to sell them rather than the very small amount of income.

Given this analysis can the stock be considered permissible on this point and can my capital gains be purified?

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Walaikumus salaam! Creator of Zoya here.

As you noted, AFC Energy is currently pre-revenue so the only income reported on their financials is that from the interest generated on their deposits. Since this is their only income stream at the moment, Zoya flags it as non-compliant.

That being said, it’s important to note that since AFC Energy not a financial institution, this is considered to be non-operating interest income (as opposed to a conventional bank where it falls under their core operations and therefore would be considered operating income instead). Some scholars believe that this should be counted towards total revenue while others believe this should be excluded when assessing shariah compliance since it’s not related to the primary activities of the business. While we recognize that this may unfairly punish companies that are pre-revenue/in R&D phase, Zoya does its part in flagging this for you, in accordance with the AAOIFI shariah standards, so that you can make your own informed decision.

Hope that helps!

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Walaikum assalam,

I was wondering the same thing.

I’m not sure how the 5% rule would apply here as all businesses pre-income, on and off the stock market will likely be earning 100% interest income.

e.g. If me and a brother went into a partnership to open a shop. We both had £50k each and put it into the bank whilst we work out the details, it will earn interest income. If it takes us 12 months to start earning revenue then our earnings during the period before income will be 100% interest based.

@Mufti_Faraz_Adam @Mufti_Billal, would it be possible for one of you brothers to clarify this position on whether we can invest/assess pre-revenue businesses?

As a second point, would it not be more relevant to assess the interest income against the market cap in these specific cases? i.e. so if a business was pre-revenue, if 5% or more was interest income vs market cap, we would class it as not halal. If it was under 5% then it would meet that rule for being halal.

P.S. I hope you don’t mind me directly @ ing yourselves. I see that you responded to many questions and was just hoping for scholars views.

Jazakallah Khair

@saadm Thank you for your detailed reply. If I go with the opinion it is impermissible the course of action is clear - donate any capital gains to charity. However if I were to go with the opinion it is permissible - how would I go about calculating the purification percentage on the capital gains? If one of the mufti’s that were @ed above could weigh in on this question that would be really useful for me to help me understand what to do

No problem! If you follow the dividend purification method, you only need to purify any dividends earned, not capital gains. In this case, you’d have to give away 100% of the dividends since the company’s only revenue stream at the moment is from interest.