Screening shares and funds

The activity screen

The first test is what the company does. Conventional banking and insurance, alcohol, pork, gambling, tobacco and adult entertainment are excluded outright. A small tolerance is usually allowed for incidental revenue from prohibited sources — commonly 5% of total income — with that portion given away rather than kept.

The financial ratios

A company can pass the activity screen and still fail on its balance sheet. AAOIFI's standards apply thresholds to interest-bearing debt, to interest-bearing deposits and investments, and to receivables, each measured against market capitalisation or total assets depending on the standard applied. A company carrying too much conventional debt is excluded even if its business is unobjectionable.

The screens are a filter, not a verdict. Index providers apply different thresholds and different denominators, so the same company can be included by one screen and excluded by another — which is why two "sharia-compliant" funds can hold visibly different portfolios. The exact current thresholds should be read from AAOIFI's published standards rather than taken from a summary.