Key points
A share has to pass two screens. First its business: the company must not live off a forbidden activity (interest-based banking, alcohol, gambling, pork, weapons depending on the method, unlawful entertainment). Then the figures: interest-bearing debt, invested cash and non-compliant income below thresholds set by each method (30% of market capitalisation for debt according to AAOIFI, 5% of revenue for non-compliant income). Then it remains to purify.
Depending on your country
- Türkiye
- Borsa İstanbul publishes participation indices (Katılım) made up of companies screened on their business and on their debt, cash and non-compliant income ratios; for Türkiye, the stock screener applies thresholds of 30%, 30% and 5%.
- Gulf states
- Gulf markets publish, or have others publish, lists of compliant companies; several Saudi boards use their own thresholds, which are stricter on debt.
- France
- There is no official list: the composition of Islamic indices (MSCI, S&P, Dow Jones) often serves as the reference for large European stocks.
Step 1: the business
Read the company’s description (annual report, “business” section). It is excluded if its main business is forbidden: conventional banking or insurance, alcohol, tobacco according to several methods, pork, gambling, adult content, and often weapons. A company may have a small non-compliant activity: it is then assessed at step 3.
Step 2: debt and cash
| Ratio | What is added up | AAOIFI threshold | Dow Jones, S&P threshold |
|---|---|---|---|
| Debt | Short- and long-term interest-bearing borrowings | 30% of market capitalisation | 33% of average market capitalisation |
| Cash | Cash and interest-bearing investments | 30% | 33% |
| Receivables | Amounts owed by customers | — | 33% (Dow Jones); 49% together with cash (S&P) |
MSCI and FTSE divide by total assets instead of market capitalisation, which makes the result less sensitive to stock market movements. The details of each method are on the methodology page.
Step 3: non-compliant income
Look for interest received (“interest income”) and revenue from forbidden activities. Their total must not exceed 5% of revenue.
Step 4: where to find the figures
- Debt: balance sheet, “borrowings and financial debt” (short and long term).
- Cash: balance sheet, “cash and cash equivalents” and “short-term investments”.
- Revenue and finance income: income statement or notes to the accounts.
- Market capitalisation: share price multiplied by the number of shares.
The stock screener pre-fills these figures for US-listed companies; for others, enter them from the annual report.
Step 5: keep track over time
A compliant share can cease to be compliant after a large loan, an acquisition or a fall in the share price. The methods re-check every quarter. If a share drops out of the screen, most boards ask that it be sold within a reasonable time and that gains made after it dropped out be purified.
Step 6: purify
Even when compliant, a company often has a little non-compliant income: the corresponding part of your dividends is given to the poor. See purifying dividends and interest.
Frequently asked questions
Why do two methods give different results?
Because they do not divide by the same denominator (the day’s market capitalisation, an average over 24 or 36 months, total assets) and do not have the same thresholds. Choose a method and stick to it; when in doubt, take the strictest.
Does a listed Islamic bank pass the screen?
Its business is accepted; but its ratios are calculated differently, because its financing is not interest-bearing lending. The methods apply special rules to such banks.