How Sharia Screening Works, In Plain Terms

Most Islamic index and screening providers run two checks on a stock. First, a business check: is the company primarily engaged in a permissible activity, ruling out interest-based finance, alcohol, gambling, pork, adult entertainment, conventional weapons, and tobacco.

Second, a financial check: even a permissible business can fail if it carries too much interest-bearing debt, holds too much cash and interest-bearing investments, or has too many receivables relative to its size. The commonly used thresholds are debt under about a third of market cap, cash and interest securities under about a third, and receivables and cash under about half.

If a company passes both checks but still earns a small slice of income from a non-permissible source, such as interest on a bank balance, that slice typically needs to be purified, donated to charity rather than kept or reinvested, even though the stock itself remains permissible to hold.