AAOIFI Standard 21 is the most widely cited Sharia methodology for screening publicly listed equities. Halal mutual funds (Amana, Azzad) and halal ETFs (HLAL, SPUS) typically reference Standard 21 or a methodology aligned with it. This article walks through both screening layers.
Layer 1: business activity. The screen excludes companies whose primary business is in a prohibited category. The standard list of prohibited activities includes conventional financial services (banks, insurers, conventional lenders), alcohol production or distribution, pork, gambling and wagering, weapons, tobacco, and adult entertainment. The principle: revenue derived from haram activity disqualifies the underlying equity from being halal to own. Most screens treat a non-prohibited business with under 5% incidental revenue from prohibited sources as still passable, with that 5% being treated as the purification basis (see below).
Layer 2: financial ratios. Even a company whose business is clean can fail the screen if its balance sheet leans too heavily on interest-bearing instruments. AAOIFI Standard 21 sets three thresholds, each measured as a ratio to total market capitalization (some methodologies use total assets; market cap is the most common in practice):
- Interest-bearing debt below 30 percent
- Cash plus interest-bearing receivables below 30 percent
- Total interest income below 5 percent of total revenue
A company passing layer 1 but failing any of layer 2 is screened out. A company passing both is halal to own.
Purification. Even a passing stock typically carries a small amount of incidental interest income flowing through to dividends. AAOIFI methodology requires the investor to purify this portion by donating it to charity. The purification rate is the share of dividend per share attributable to non-permissible income. Halal funds publish their per-fund purification rate annually; individual stock screening services publish per-stock rates. The HalalRates purification calculator at /tools/purification-calculator takes a dollar dividend amount and a published rate and returns the donate amount.
Recurrence. Screening is a point-in-time test. A passing stock today can fail next quarter if it takes on debt or its business mix shifts. Halal screening services rerun the screen quarterly or monthly; halal funds rerun continuously and rebalance.
Where Standard 21 stops. The standard governs the screen itself; it does not address questions like derivatives, options, short selling, or margin trading. Those are addressed in other AAOIFI standards and in scholarly opinions that vary across jurisdictions. The HalalRates editorial position on those nuances waits for Mufti Saad's corpus to cover them; the screen-only article here stops at the screen.
This article is editorial. Substantive rulings about specific companies wait for the corpus.