KembaraXtra-Islamic Finance–Islamic Capital Market – Qualitative and Quantitative Screening Criteria & Comparison of Shari’ah Screening Methodology


Screening Criteria (Shari’ah Screening)

• Shari’ah screening methods are approved by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
• AAOIFI is a standard-setting body in:
– accounting
– auditing
– governance
– Shari’ah standards
for Islamic financial institutions


• Shari’ah screening methods provide formal procedures to:
– examine listed companies
– identify non-compliance with Shari’ah principles


• The screening criteria are designed to eliminate companies that:
– engage in non-Shari’ah-compliant business activities
– rely on prohibited financial practices


• Companies are excluded if their:
– financing norms
– financial structures
do not meet the lowest acceptable Shari’ah thresholds


• The objective is to ensure that:
– prohibited elements are not dominant
– only minimally acceptable levels (as per Shari’ah standards) are tolerated

Types of Shari’ah Screening (AAOIFI Perspective)

• According to AAOIFI, Shari’ah screening consists of two main types:
– Business sector screening
– Financial ratio screening (quantitative screening)

Comparison of Shari’ah Screening Methodology

S&P Dow Jones Methodology

• Stocks or securities are first screened by:
– sector-wise (industry activity) screening
• This is followed by:
– stock-based financial ratio screening
• Ensures that both:
– the nature of business
– the financial structure
comply with Shari’ah requirements

FTSE Methodology

• Screening begins with:
– industry activity screening
• Followed by:
– financial ratio screening
• Emphasises sequential filtering:
– business permissibility first
– financial compliance second


Summary Comparison (Note Form)

• S&P Dow Jones
– Sector-wise screening first
– Then stock-level financial ratio screening


• FTSE
– Industry activity screening first
– Followed by financial ratio screening


• AAOIFI Framework
– Business sector screening
– Financial (quantitative) ratio screening

Key Exam Takeaway

Shari’ah screening criteria approved by AAOIFI eliminate companies that fail to meet minimum acceptable Shari’ah standards, while global index providers such as S&P Dow Jones and FTSE apply sector-based business screening followed by financial ratio screening to identify Shari’ah-compliant stocks.