Shariah-compliant stocks are publicly traded equities that meet the criteria set by Islamic finance screening standards. A stock is considered compliant when both its business activities and financial structure align with Shariah principles.
Business screening evaluates whether a company's primary revenue comes from permissible activities. Companies primarily engaged in alcohol, gambling, conventional banking, tobacco, weapons, or adult entertainment are typically excluded. Financial screening examines key ratios: total debt relative to market capitalization, interest-bearing cash and securities, and non-permissible income as a percentage of total revenue. Under the AAOIFI standard, each of these ratios must typically remain below 30-33% for a stock to be considered compliant.
It's important to note that compliance is not permanent — a stock may be compliant in one quarter and non-compliant the next as financial data changes. Regular rescreening is essential for maintaining a Shariah-compliant portfolio.