This article is for general education only. It is not financial advice and not a fatwa. Screening thresholds differ between standards and change over time; always check the current methodology. See our Disclaimer.
You’ve decided you want to invest in the stock market without getting involved in riba or haram businesses. But how do you know whether a stock is halal?
The answer is Shariah stock screening: a set of checks that tests a company’s business activities and finances against Islamic principles. In this guide, we explain how screening works, what the main tests are, how the major standards differ, and how to read the results with a worked example.
Why buying shares can be halal
When you buy a share, you become a part-owner of a company. You share in its profits through dividends and price growth, and you also share in its losses. That is a real ownership stake with real risk, which fits Islamic principles of trade and partnership.
The problem is that very few companies are completely “pure”. Most large companies keep cash in interest-bearing bank accounts, borrow money with interest or earn a small amount of income from non-halal sources. Screening helps answer a practical question: is this company’s main business halal, and are its non-halal elements small enough to tolerate?
The two stages of Shariah screening
Almost every screening method has two stages.
- Business activity screening: What does the company actually do?
- Financial ratio screening: How much interest-based debt, interest-earning cash and non-halal income does it have?
A company must pass both stages to be considered Shariah-compliant.
Stage 1: Business activity screening
The first question is simple: is the company’s core business halal? Companies are excluded if their main business is in sectors such as:
| Excluded sector | Examples |
|---|---|
| Conventional finance | Banks, conventional insurers, lenders |
| Alcohol | Brewers, distillers, alcohol retailers |
| Pork | Pork producers and processors |
| Gambling | Casinos, betting companies, lotteries |
| Adult entertainment | Pornography and related businesses |
| Tobacco | Cigarette manufacturers |
| Weapons (varies by standard) | Some standards exclude weapons and defence manufacturers |
But what about a supermarket that sells some alcohol, or a hotel chain with a bar? Most standards allow a small amount of non-compliant income, commonly less than 5% of total revenue (AAOIFI Shariah Standard No. 21 ). If a company passes with some non-compliant income, investors are expected to give away that portion as charity. This is called purification, and we explain how to calculate it in Purifying Your Investment Income.
Stage 2: Financial ratio screening
Even if a company’s business is halal, it may be heavily involved in interest through its finances. Financial ratio screens check three main things:
- Debt ratio: How much interest-bearing debt does the company have?
- Cash and interest-bearing securities ratio: How much money does the company hold in interest-earning deposits or bonds?
- Receivables or liquidity ratio: How much of the company’s value is cash and money owed to it, rather than real assets? (Not every standard uses this test.)
Each ratio must be below a certain limit, often 30% or 33%. Most of the differences between standards come from what the ratios are divided by:
- Market capitalization (the total value of all the company’s shares on the stock market), sometimes averaged over 24 months
- Total assets (everything the company owns, as shown on its balance sheet)
Why one-third?
Many standards use a limit of about one-third. Scholars often link this to the hadith in which the Prophet ﷺ allowed Sa’d ibn Abi Waqqas to bequeath one-third of his wealth and said, “One-third, and one-third is a lot” (Sahih al-Bukhari 2742; Sahih Muslim 1628). Scholars used this as a reference point for what counts as “a lot” versus “a little” in other areas too. It is a scholarly judgment (ijtihad), so different standards have reached slightly different numbers.
How the major standards compare
Here is a simplified comparison of three widely used methodologies. Thresholds and definitions can change, so treat this as an overview, not the official rules.
| Test | AAOIFI | S&P / Dow Jones Islamic indices | MSCI Islamic indices |
|---|---|---|---|
| Non-compliant income | Less than 5% of revenue | Less than 5% of revenue | Less than 5% of revenue |
| Interest-bearing debt | Less than 30% of market cap | Less than 30% of 24-month average market cap | Less than 33.33% of total assets |
| Cash and interest-bearing securities | Less than 30% of market cap | Less than 30% of 24-month average market cap | Less than 33.33% of total assets |
| Receivables or liquidity test | Less than 30% of market cap | Removed (This test is no longer applied) | Cash plus receivables less than 70% of total assets |
Sources: AAOIFI Shariah Standard No. 21; S&P Dow Jones Indices Shariah methodology; MSCI Islamic Index methodology.
Market cap or total assets: which is better? Both have trade-offs:
- Market cap changes every day with the share price. A company could fail screening just because its share price fell, even though nothing about its business changed. Using a 24-month average smooths this out.
- Total assets is more stable, because it comes from the balance sheet. But it is only updated when the company publishes its accounts, usually every three months.
A worked example
Let’s screen a fictional company, BrightTech Inc., a software company. Here are its numbers (in millions of dollars):
| Item | Amount |
|---|---|
| Total revenue | $500 |
| Interest income and other non-compliant revenue | $10 |
| Interest-bearing debt | $200 |
| Cash and interest-bearing securities | $250 |
| Accounts receivable (money customers owe it) | $160 |
| Market capitalization (today) | $1,000 |
| 24-month average market capitalization | $900 |
| Total assets | $1,200 |
Business screen: software is a halal business. ✔
Non-compliant income: $10 ÷ $500 = 2%, which is below 5%. ✔
Now the financial ratios under each method:
| Ratio | AAOIFI (÷ market cap $1,000) | Dow Jones style (÷ 24-month average $900) | MSCI style (÷ total assets $1,200) |
|---|---|---|---|
| Debt | $200 ÷ $1,000 = 20.0% ✔ | $200 ÷ $900 = 22.2% ✔ | $200 ÷ $1,200 = 16.7% ✔ |
| Cash and interest-bearing securities | $250 ÷ $1,000 = 25.0% ✔ | $250 ÷ $900 = 27.8% ✔ | $250 ÷ $1,200 = 20.8% ✔ |
| Receivables or liquidity | Not tested | $160 ÷ $900 = 17.8% ✔ | ($250 + $160) ÷ $1,200 = 34.2% ✘ |
Result: BrightTech passes the AAOIFI-style and Dow Jones-style screens in this simplified example, but fails the MSCI-style screen, because its cash and receivables together are more than one-third of its total assets.
This is why two screening apps can disagree about the same stock. Neither is necessarily “wrong”. They are applying different scholarly methodologies.
What if the share price falls?
Now imagine BrightTech’s share price drops by 40%, so its market cap falls from $1,000 million to $600 million. Nothing else changes.
- AAOIFI debt ratio: $200 ÷ $600 = 33.3%, which is now above 30%. ✘
- AAOIFI cash ratio: $250 ÷ $600 = 41.7%, also above 30%. ✘
The company’s business is exactly the same, but it no longer passes this screen. This is why compliance status needs to be checked regularly.
Who does the screening?
As an individual investor, you usually don’t need to calculate these ratios yourself. Screening is commonly done by:
- Islamic index providers, which publish lists of compliant companies
- Islamic funds and ETFs, whose Shariah boards screen every holding
- Shariah screening apps and services, which let you look up individual stocks
When you use any of these, check which methodology they follow, who supervises it and how often the data is updated. We review screening services in our Reviews & Comparisons section.
Limitations to be aware of
- Screening isn’t a fatwa. It is a method based on scholarly judgment, and scholars differ on the details.
- Data has a delay. Financial statements are published every few months, so ratios can be out of date.
- Compliance can change. A company can pass this quarter and fail the next.
- Passing still requires purification. Most compliant companies still have a small amount of non-compliant income.
- Some scholars are stricter. A minority view holds that any involvement in interest makes a share impermissible.
How to apply this as a beginner
- Start with a screened fund or ETF if you don’t want to check individual companies.
- If you buy individual stocks, use a screening tool and note which standard it uses.
- Check your holdings regularly, for example every quarter.
- Have a plan for stocks that stop being compliant. Many scholars suggest selling within a reasonable time.
- Purify your dividends, and possibly your gains, depending on the view you follow.
Key takeaways
- Shariah screening has two stages: business activity and financial ratios.
- Most standards allow less than 5% non-compliant income, which must then be purified.
- Debt and cash ratios usually have a limit of about 30–33%, but the denominator differs.
- The same stock can pass one standard and fail another.
- Check compliance regularly, and use trusted, transparent screening sources.
New to halal investing? Start with Halal Investing 101. Wondering whether Islamic finance is genuinely different? Read Is Islamic Finance Just Interest With a Different Name?
Disclaimer: This article is general education, not financial advice or a religious ruling. BrightTech Inc. is fictional and used for illustration only. Always check the current methodology of your screening provider.