The Two-Stage Shariah Screening Methodology
According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standard No. 21 and the Dow Jones Islamic Market Index methodology, every publicly traded company must satisfy two distinct screening stages:
Stage 1: Sector / Business Activity Screen
The primary business activity of the enterprise must be permissible (Halal). Any company deriving its core revenue from conventional interest banking, conventional insurance (Takaful is allowed), alcoholic beverages, pork processing, gambling, adult entertainment, or weapons manufacturing is immediately disqualified regardless of its balance sheet.
Stage 2: Financial Ratio Compliance Screen
Because virtually all global corporations operate within a conventional financial ecosystem, international Shariah supervisory boards have established clear fractional thresholds:
- Debt Threshold: Total interest-bearing debt divided by 36-month average market capitalization must be less than 33%.
- Liquidity Threshold: Total cash and interest-bearing securities divided by market capitalization must be less than 33%.
- Revenue Purification Threshold: Income derived from incidental interest or non-permissible activities must not exceed 5% of total revenue, and that exact percentage of any dividend received must be donated to charity (purified).