Halal stock screening sits at the intersection of Islamic jurisprudence and modern accounting. The AAOIFI methodology is the most widely-accepted framework. This article walks the screen step by step.
Layer one: business activity. The company's primary revenue must come from permissible activities. Prohibited categories include conventional banking and insurance, alcohol production and distribution, gambling, conventional weapons manufacturing for unjust use, pork and pork products, adult entertainment, and tobacco. Mixed-business companies (where some revenue is from prohibited activities, like a grocery chain selling alcohol) can pass if the impermissible portion is below a small threshold, typically 5%. Some scholars set this threshold lower.
Layer two: financial ratios. AAOIFI Sharia Standard 21 specifies thresholds for three ratios. Total interest-bearing debt should be below 30% of market capitalization. Total interest-bearing receivables and cash holdings should be below 30% of market cap. Total impure income (interest income plus prohibited-activity revenue) should be below 5% of total revenue. A company passing all three at the most recent reporting date passes the ratio screen.
Purification: even passing companies often have a small incidental impure-income component (interest from cash holdings, for example). Investors purify by donating that fraction of dividends to charity without intent of reward. Halal screening providers (Zoya, Musaffa) publish per-stock purification rates. Halal ETFs and mutual funds publish per-share purification disclosures.
Re-screening: a stock that passes today can fail later if debt ratios rise or business activity changes. Most halal-screening providers re-screen monthly or quarterly. If a holding fails screening, sell it within a reasonable window and purify any prohibited gains accumulated during the noncompliant period.
This methodology is editorial. Mufti review on specific companies replaces the editorial assessment per holding.