The Two-Step Sharia Screening Process
Islamic scholars evaluate stocks using a two-step process:
- Qualitative screen: Is the company's primary business permissible?
- Quantitative screen: Do the company's financial ratios pass Sharia thresholds?
A stock must pass both screens to be considered halal. A company can have a permissible business but fail due to too much debt or interest income.
Step 1: Business Activity Screen
The first question is: what does this company actually do? Certain industries are automatically excluded from halal investing:
Always Excluded (Haram Industries):
- ❌ Conventional banking and finance — core business is riba (JPMorgan, Bank of America)
- ❌ Alcohol production and distribution — khamr is explicitly prohibited (Anheuser-Busch, Constellation Brands)
- ❌ Tobacco — causes harm, violates la darar principle (Altria, Philip Morris)
- ❌ Gambling and casinos — maysir is prohibited (MGM Resorts, DraftKings)
- ❌ Weapons manufacturing — producing instruments of killing (Lockheed Martin, Raytheon)
- ❌ Adult entertainment — explicit content is impermissible (only fans platforms, etc.)
- ❌ Conventional insurance — involves gharar (AIG, many others)
- ❌ Pork products — selling pork is impermissible (Smithfield Foods, Hormel)
Permissible Industries (Generally):
- ✅ Technology (software, hardware, semiconductors)
- ✅ Healthcare and pharmaceuticals (preserve life)
- ✅ Consumer goods (clothing, household products)
- ✅ Manufacturing and industrials
- ✅ Utilities (electricity, water)
- ✅ Real estate (direct property, not leveraged REITs)
- ✅ Logistics and transportation
- ✅ Food and beverages (halal products)
Step 2: Financial Ratio Screens
Even companies in permissible industries must pass financial tests. These screens ensure the company doesn't have excessive debt (leverage) or earn significant income from haram sources:
1. Debt Ratio
Formula: Total Debt ÷ Total Assets (or sometimes Market Cap)
Threshold: Must be under 33%
Why it matters: Excessive borrowing involves riba (paying interest on debt). Companies with too much conventional debt are partially riba-based.
2. Interest Income Ratio
Formula: Interest Income ÷ Total Revenue
Threshold: Under 5%
Why it matters: Companies hold cash in bank accounts or money market funds that earn interest. If this interest income is too large relative to revenue, it makes the stock impermissible. Under 5% is acceptable with purification.
3. Haram Revenue Ratio
Formula: Revenue from Haram Sources ÷ Total Revenue
Threshold: Under 5% (some boards use higher thresholds)
Why it matters: Some otherwise permissible companies have subsidiaries or product lines in haram businesses. If haram revenue exceeds the threshold, the stock fails.
4. Receivables Ratio
Formula: Accounts Receivable ÷ Total Assets
Threshold: Under 49-70% (varies by Sharia board)
Why it matters: High receivables indicate a company's value is based on money owed to it — which may involve conventional debt structures.
The Different Sharia Screening Standards
Not all Sharia screening agencies use identical criteria. The major standards are:
- AAOIFI Standard: Strict 5% threshold for any haram income
- MSCI Islamic Standard: 5% threshold for impermissible revenue
- Dow Jones Islamic Market Standard: 5% threshold for haram sectors
- FTSE Shariah Standard: Used by HLAL ETF — comprehensive screening
The Dividend Purification Requirement
When a halal stock passes screening but has a small amount of interest income (<5%), shareholders must purify the impermissible portion by donating it to charity.
Example: If Apple's interest income is 1.5% of total revenue and you receive a $100 dividend, you should donate $1.50 to charity to purify the riba portion.
Apps like Zoya can calculate the exact purification amount for each stock automatically.
Practical Tools for Screening Stocks
- Our free Halal Checker: 500+ assets pre-screened with verdicts
- Zoya App: Most popular halal screening app with real-time data
- Islamicly: Another popular screening tool
- SPUS/HLAL ETFs: Just buy the ETF — all screening done for you
The Bottom Line
A stock is halal when it passes both the business activity screen (permissible industry) and the financial ratio screens (debt, interest, and haram revenue thresholds). Use our halal screener for instant verdicts on specific stocks.