Two investors can run the identical stock through a Sharia screen and get opposite answers — one halal, one not. This guide breaks down the three dominant standards (AAOIFI, Dow Jones Islamic Market, and MSCI Islamic), the two-layer screen they share, and the single arithmetic difference that decides who passes.
Almost every Sharia equity screen — whether run by AAOIFI, S&P Dow Jones, MSCI, or FTSE — works in two passes, and a stock has to clear both. The first pass is qualitative and the second is quantitative, so a company can be perfectly clean on one and disqualified on the other.
The activity screen asks what the business actually does. Companies whose core revenue comes from interest-based banking or insurance, alcohol, tobacco, pork products, gambling and gaming, adult entertainment, or conventional weapons are excluded outright, regardless of how strong their balance sheet looks. Standards differ at the margins — some also scrutinise conventional media, music, and hotels that derive material revenue from bars — but the interest-based finance exclusion is universal, which is why traditional banks essentially never appear in a compliant universe.
The financial screen then asks how the business is financed. A company can sell a permissible product and still fail because it carries too much interest-bearing debt or holds too much interest-bearing cash. This is where the standards diverge the most, and where the same ticker routinely passes one screen and fails another.
The quantitative pass centres on three balance-sheet ratios plus an income test. In plain terms:
On top of these three, an impermissible-income test caps the share of revenue that may come from non-compliant sources — typically below 5%. Interest earned on corporate cash is the most common culprit, and it is usually small and incidental rather than a sign the business is doing anything wrong.
Here is the point most retail investors miss: the three ratios use the same numerators everywhere, but the denominator changes by standard, and that single choice reshuffles which companies pass.
Two families exist. Market-capitalisation screens (AAOIFI and the S&P Dow Jones Islamic methodology) divide by the company's equity value. Balance-sheet screens (MSCI Islamic and FTSE Shariah) divide by total assets. S&P Dow Jones adds a further wrinkle by using a trailing 24-month average market cap rather than a spot figure, which deliberately smooths out short-term price swings.
Why does this matter so much? Because market cap moves every day and total assets barely move between filings. A market-cap-based screen can push a company out of compliance simply because its share price fell — the numerator (debt) is unchanged, but the shrinking denominator inflates the ratio. A total-assets screen is far more stable, changing only when the company actually reports new financials. The 24-month averaging sits in between: more forgiving of a sudden drawdown than a spot market cap, less anchored than total assets.
The table below summarises the common thresholds. Treat the exact percentages as the widely published lines rather than legal text — each provider maintains its own detailed rulebook, and boards update them.
| Standard | Denominator | Interest-bearing debt | Cash + interest-bearing securities | Receivables | Impermissible income |
|---|---|---|---|---|---|
| AAOIFI (Standard 21) | Market capitalisation (spot) | < 30% | < 30% | No standalone ratio; instead requires a minimum share of tangible assets for the shares to be tradable | < 5% |
| S&P Dow Jones Islamic (DJIM) | Trailing 24-month average market cap | < 33% | < 33% | < 33% | < 5% |
| MSCI Islamic | Total assets | < 33.33% | < 33.33% | < 33.33% | < 5% |
| FTSE Shariah | Total assets | < 33.33% | < 33.33% | Cash + receivables < 50% | < 5% |
Two structural facts jump out. First, the market-cap camp (AAOIFI) sets a tighter 30% line, while the asset-based and averaged screens sit around 33%. Second, AAOIFI does not run a plain receivables ratio the way the index providers do; it approaches the same concern through a tangible-asset requirement for tradability. Small wording differences like this are exactly why a single "is it halal?" answer rarely exists.
Consider a hypothetical industrial firm, Hypothetical Co, with clean business activities and these figures:
$33B$110B$90B$105BRun the leverage ratio through each denominator:
30.0% → below 33.33% → passes.31.4% → below 33% → passes.36.7% → above 30% → fails.Nothing about the underlying business changed between these three verdicts. The debt is identical; only the denominator differs. Notice, too, that the AAOIFI failure here is largely a price story — if Hypothetical Co's shares recovered so that its spot market cap rose back toward $110B, the ratio would fall to roughly 30% and the company could re-qualify without repaying a dollar of debt. That sensitivity to price is the defining trait of market-cap screens.
Sharia indices are not screened once and frozen. Providers re-run the full two-layer test on a regular schedule — commonly a quarterly or semi-annual review, with reference financials and market-cap averages refreshed each time. Between reviews, a fund tracking the index generally holds whatever passed at the last cut, even if a company's newest filing would fail today.
A stock can fall out of a Sharia index for several distinct reasons:
When a name is removed at a review, index-tracking funds sell it and the constituent list is republished. This is why two Islamic ETFs benchmarked to different index families can hold noticeably different portfolios of the same market.
Passing the impermissible-income test (income below 5%) does not make that small slice permissible — it makes the stock screenable. The residual non-compliant portion is still meant to be removed through purification: giving away the tainted fraction of returns to charity, with no expectation of reward and separately from zakat.
The common method applies the company's non-compliant-income ratio to the dividend received. Worked example:
3% (say, interest earned on corporate treasury cash).$600.$18, to be donated.Many index providers publish a per-share purification figure directly so investors don't have to compute the ratio themselves. Methodologies vary on whether purification also applies to capital gains, and scholars differ on the finer points — so the figure above is illustrative of the mechanic, not a ruling. The consistent principle is that the impermissible fraction is quantified and given away rather than kept.
Because the standard drives the denominator and the denominator drives the result, an Islamic ETF is only as compliant as the specific methodology it tracks — and only as current as its last rebalance. A fund built on a total-assets screen will tend to hold a more price-stable roster than one built on a spot-market-cap screen, and a broad-market fund that has not been screened at all will almost always include non-compliant businesses and heavy leverage. Reading a fund's methodology sheet tells you which denominator, which thresholds, and which review cadence you are actually buying into.
As a whole, a broad market-cap index like the S&P 500 is generally not considered compliant, because it includes conventional banks, insurers, and other excluded businesses, plus many companies that would fail the leverage or liquidity ratios. Sharia-screened variants of major indices exist precisely to filter those constituents out under a stated methodology.
They are strict on different axes, so there is no single answer. AAOIFI uses a tighter 30% line, which is more demanding, but its spot-market-cap denominator can also let a company back in on a price recovery. MSCI uses a looser 33.33% line but a stable total-assets denominator, so its results move less with the market. A company can pass one and fail the other in either direction.
Multiply the dividend you received by the company's reported non-compliant-income ratio, then donate that amount to charity. If a $600 dividend comes from a company with a 3% impermissible-income ratio, roughly $18 is purified. Many providers publish a per-share purification amount so you can skip the calculation.
Usually one of four things: the company added a non-compliant business, took on more interest-bearing debt, built up more interest-earning cash, or — on a market-cap screen — saw its share price fall, which shrinks the denominator and lifts every ratio. A provider may also have revised its thresholds at a review.
An ETF is compliant only if it explicitly tracks a Sharia methodology and is rebalanced on a stated schedule. Its compliance depends on which standard it uses (and therefore which denominator and thresholds), and its holdings always reflect the last review date rather than today's filings. A conventional broad-market ETF is generally not compliant.
Most often it is interest earned on the company's own cash and short-term investments, plus any small revenue from incidental non-compliant activities. Screens cap it below about 5% of total revenue; the residual is handled through purification rather than by excluding the stock outright.
Quintarthai computes the leverage, liquidity, and receivables ratios directly from public filings (SEDAR+/EDGAR) and lets users see a stock measured against different screening conventions — market cap versus total assets, the 30% versus 33% lines, and averaged versus spot denominators — so it is clear which line a company passes or fails and by how much. It also surfaces the impermissible-income share and an estimated purification figure. The Sharia screen is an opt-in, educational tool for understanding these standards; it is one input among many and is not investment advice.
AAPL screens against AAOIFI, Dow Jones, and MSCI rules at once — with the underlying ratios shown — on the free Core dashboard at quintarthai.com/app.