AAOIFI Stock Screening Methodology
The global standard for determining whether a stock is Shariah-compliant. PureInvest applies this methodology to every stock we screen, giving you clear, consistent, and trustworthy compliance verdicts.
What Is the AAOIFI?
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an international body that sets Shariah standards for Islamic financial institutions worldwide, covering banking, insurance, and capital markets.
With standards adopted by central banks and regulatory authorities across the globe, AAOIFI provides the most widely recognized framework for Islamic finance compliance. Its standards ensure that financial products and investment activities align with the principles of Shariah law.
- 1991
- Established
- Bahrain
- Based in
- 45+
- Shariah standards
The Two-Tier Screening Process
AAOIFI's Shariah Standard No. 21 governs investment in shares. It defines a two-tier screening process that every stock must pass to be considered Shariah-compliant.
Business activity screen
Excludes companies whose core business is impermissible.
Financial ratio screens
Checks debt, interest-earning assets, and impure income against fixed thresholds.
Tier 1: Business Activity Screen
The first screen examines what a company does. Companies whose core business involves impermissible activities are excluded entirely. Impermissible activities include:
- Alcohol production or distribution
- Gambling and gaming operations
- Conventional finance and interest-based lending
- Pork and pork-related products
- Tobacco manufacturing
- Weapons and defense manufacturing
- Adult entertainment
If more than 5% of a company's revenue comes from impermissible sources, the stock is classified as Non-Compliant.
Tier 2: Financial Ratio Screen
Even if a company's core business is permissible, it must also meet strict financial thresholds to ensure its balance sheet does not rely excessively on interest-based instruments.
Interest-bearing debt
Share of market capitalization
below 30%
Interest-earning assets
Deposits and bonds, share of market capitalization
below 30%
Impure income
From non-compliant activities, share of total revenue
below 5%
Understanding Compliance Statuses
After running both screens, each stock receives one of three compliance statuses.
Compliant
Passes both screens. Impure income is below 5% of total revenue. The stock is suitable for Shariah-conscious investors.
Needs Review
Passes the business activity screen, but impure income falls between 5% and 33%. Requires detailed analysis before an investment decision.
Non-Compliant
Fails one or both screens. The stock should be avoided by Shariah-conscious investors.
Dividend Purification
Even compliant stocks may generate a small percentage of impure income, typically between 0.5% and 4% of total revenue. This happens because most large companies earn minor amounts from interest on cash deposits or other non-compliant sources.
The purification formula is straightforward:
Purification formula
Worked example: 2.1% impure revenue on $1,200 of dividends
$25.20
This donation amount may qualify as a charitable tax deduction in the United States and Canada. Confirm with your tax advisor. Purification restores the spiritual integrity of your investment returns and channels funds back into communities through charitable giving.
Why PureInvest Uses AAOIFI
We chose the AAOIFI methodology because it is the most widely adopted Shariah screening standard globally. Here is why it matters.
Global adoption
Recognized by Islamic financial institutions across 45+ countries.
Quantitative thresholds
Clear, numerical benchmarks (30% debt, 5% impure income) eliminate subjectivity.
Consistency
The same stock receives the same compliance verdict regardless of who performs the screening.
Institutional trust
Central banks and regulatory authorities reference AAOIFI standards in their frameworks.
Disclaimer: PureInvest provides screening and informational tools based on established Shariah standards. It is not a financial advisor. All investment decisions should be made with the consultation of a qualified professional.