How to Check if a Stock is Shariah Compliant

Shariah compliance for listed equities is judged on two things: what the company does and how it is financed. The most widely referenced framework is published by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and used by index providers such as S&P Shariah, MSCI Islamic, and FTSE Shariah. This guide walks through the same checks our Shariah Screener applies.

Step 1 — Business activity screen

Start by rejecting any company whose primary business is non-permissible. The standard haram-activity list is:

• Conventional banking, insurance, and interest-based lending
• Alcohol, tobacco, and recreational drugs
• Gambling, casinos, and lotteries
• Pork, non-halal meat, and related processing
• Adult entertainment and pornography
• Weapons and defence (jurisdiction-dependent)
• Conventional media that promotes the above

Read the company's 10-K, annual report, or revenue-segment breakdown to confirm. Pure-play exposure to any of these activities is an automatic fail.

Step 2 — Impure income ratio

Even otherwise-permissible companies can earn a small slice from non-permissible sources (interest on cash, an incidental haram product line). AAOIFI tolerates this below a threshold:

Anything at or above 5% fails. The impure portion that does pass through to your dividends still needs to be purified — see Step 5.

Step 3 — Debt ratio

Islamic finance prohibits riba (interest), so a company financed mostly by interest-bearing debt is non-compliant. The standard ratio:

Use the trailing 24-month average market capitalisation to smooth out price spikes. Some index providers (e.g. Dow Jones Islamic) use total assets as the denominator instead — be explicit about which methodology you follow and apply it consistently.

Step 4 — Interest-bearing assets ratio

The mirror of the debt test: a company sitting on a huge pile of cash and interest-bearing securities is, in substance, an interest-earning vehicle.

A separate but related screen used by some scholars caps accounts receivable at 49% of market cap — applicable mostly to financial and trading companies.

Step 5 — Purify your dividends

A stock that passes all four tests above is permissible to own, but the non-permissible income that flowed through to your dividend must be cleansed. The purification amount per share is:

Donate that amount to charity with the intention of purification (not zakat, which is a separate obligation). Many companies and Islamic index providers publish an annual purification ratio to make this easy.

A quick worked example

Suppose ExampleCo earns $40m in non-permissible revenue out of $1bn total (4% — passes). Its interest-bearing debt is $2bn against a 24-month average market cap of $9bn (22% — passes). Cash and interest-bearing securities sit at $1.5bn (17% — passes). Business activity is software — clearly halal. ExampleCo is compliant, and 4% of any dividend you receive should be purified to charity.

When to re-screen

A stock's compliance status is not permanent. M&A, share buybacks, large debt issuance, or a new business segment can flip a previously compliant company. Re-run the screen at least annually and after any major capital event.