How do Shariah screening methodologies compare?

Two investment funds can both be described as Shariah-compliant yet hold different companies. One reason is that they may follow different Shariah screening methodologies.

Although these methodologies share many Islamic investment principles, their financial screening rules can produce different results.

What is financial screening?

After excluding companies with prohibited primary business activities, Shariah screening examines their finances.

The main considerations are:

• Debt: How much interest-bearing debt does the company have?

• Cash and interest-bearing investments: How much of the company's assets are held in conventional interest-bearing instruments?

• Receivables: Does the methodology impose a separate test relating to cash and money owed to the company?

• Non-compliant income: How much income is generated from prohibited activities or interest?

The differences lie in which figures are measured, what limits are applied and which denominator is used.

Comparing the main methodologies

The following table summarises the published financial screening rules.

The MSCI limits shown are the normal thresholds for existing constituents. Lower entry thresholds and certain exit buffers also apply.

1. AAOIFI

AAOIFI is an Islamic finance standards-setting body rather than an index provider. Its Shariah Standard No. 21 sets conditions for investing in shares of companies whose primary activities are permissible but which undertake some interest-based transactions.

Its principal financial limits are:

• Interest-bearing debt must not exceed 30% of the company's market capitalisation.

• Interest-bearing deposits must not exceed 30% of market capitalisation.

• Income from prohibited sources must not exceed 5% of total income.

AAOIFI's share-investment criteria do not impose the same standalone accounts-receivable ratio used by MSCI. However, the standard also contains separate rules concerning trading in shares where the underlying assets consist of cash and debts.

2. MSCI Islamic

MSCI's main Islamic Index Series uses total assets rather than market capitalisation.

Its financial screening examines three ratios:

• Total debt divided by total assets: 33.33%.

• Cash and interest-bearing securities divided by total assets: 33.33%.

• Accounts receivable plus cash divided by total assets: 70%.

The figures above are the normal thresholds for existing constituents. For a new company to enter, MSCI uses lower thresholds of 30%, 30% and 46%, respectively.

MSCI also publishes an Islamic M-Series. Instead of total assets, it uses average market capitalisation over 36 months. Its debt and cash thresholds are also 33.33%, while its receivables-plus-cash threshold is 49% for existing constituents.

3. Dow Jones Islamic Market (DJIM)

DJIM is an Islamic index family operated by S&P Dow Jones Indices.

Its September 2026 methodology applies two principal financial ratios:

• Interest-bearing debt must be below 30% of trailing 24-month average market capitalisation.

• Cash and interest-bearing securities must be below 30% of trailing 24-month average market capitalisation.

It does not include a separate accounts-receivable ratio in these financial screens.

Using average market capitalisation reduces the immediate effect of short-term share-price movements on the denominator.

4. S&P Shariah

S&P Shariah uses a similar market-capitalisation approach, but with a longer averaging period.

Its September 2026 methodology applies:

• Debt below 30% of 36-month average market capitalisation.

• Cash, deposits and interest-bearing securities below 30% of 36-month average market capitalisation.

The difference between S&P Shariah and DJIM is therefore not simply the percentage threshold. The period used to calculate average market capitalisation also matters.

Why does the denominator matter?

Consider a hypothetical company with:

• Total assets: £100 million

• Interest-bearing debt: £25 million

• Market capitalisation: £60 million

Using total assets, its debt ratio is 25%.

Using market capitalisation, its debt ratio is approximately 41.7%.

The company would meet MSCI's main debt threshold but breach the 30% market-capitalisation threshold used in AAOIFI's share-investment criteria.

For the DJIM and S&P methods, this example assumes their respective historical average market capitalisations are also £60 million. The company's final screening result would additionally depend on its other financial ratios, business activities and any applicable entry or exit rules.

This illustrates why the denominator can matter more than the small difference between a 30% and 33.33% threshold.

What does this mean for investors?

A Shariah-compliant label does not necessarily mean that every Islamic investment fund uses identical screening rules.

When examining a fund or index, it is useful to understand which methodology it follows, which financial ratios it applies and how often its holdings are reassessed.

Financial screening is also only one part of Shariah compliance. Business activity screening, purification and Shariah governance remain important.

This article is for general educational purposes and does not constitute financial advice or a personal religious ruling.