AAOIFI Shariah Standard No. 21 in plain language

You'll often see "this stock is halal under AAOIFI". So what is AAOIFI, what exactly does it require, and why do different apps rate the same stock differently? Here it is in plain language.

What is AAOIFI?

AAOIFI is the Accounting and Auditing Organization for Islamic Financial Institutions. Founded in 1991 and headquartered in Bahrain, it writes the Shariah standards that Islamic banks and investment funds follow.

The rules for shares are in Standard No. 21, "Financial Papers (Shares and Bonds)". It is one of the most widely recognised benchmarks in Islamic finance — many halal screening services, including ours, are built on it.

Step one: what does the company do?

The business itself comes first. A company whose core activity is one of the following is rejected regardless of its financials:

• interest-based finance — banks, lending, mortgages;
• conventional insurance;
• gambling and casinos;
• alcohol, tobacco, pork;
• weapons and adult content.

There is no tolerance at this step. The full list: blocked categories.

Step two: three financial ratios

A company with clean activity then faces three ratios. All three must be under the limit:

1. Interest-bearing debt ÷ market capitalisation — under 30%. How much the company is financed by riba-based debt.
2. Interest-bearing assets ÷ market capitalisation — under 30%. Cash and interest-earning securities. Is this a real business, or a pile of cash collecting interest?
3. Non-permissible income ÷ total revenue — under 5%. Mostly interest on cash in the bank. Investors must purify this part.

Why not zero? In today's economy there is almost no large company that never touches the banking system. The standard tolerates this as a "general necessity" up to a small limit — but it draws that limit precisely.

Why do different apps give different answers?

There is no single method for halal screening. The main differences are the threshold and the denominator:

• AAOIFI — 30%, denominator is market capitalisation.
• S&P Shariah and Dow Jones Islamic — roughly one third (33%), denominator is a multi-year average market capitalisation.
• FTSE Shariah and MSCI Islamic — roughly one third, but the denominator is total assets, not market price.

With market price as the denominator, the debt ratio "improves" by itself when the stock rallies. Total assets are steadier but ignore market value. So the same company can pass one method and fail another — not an error, a difference in approach.

Where we are stricter than AAOIFI

We take AAOIFI as the base but are more cautious in a few places:

• Average capitalisation. We use the average over the last 12 quarters, not today's price (as S&P does) — a one-day price jump must not make a company halal.
• Long-term bonds count too. The "12 months" line is an accounting convention; riba in month 13 is still riba.
• All cash is counted. Interest-bearing and non-interest cash can't be separated, so we treat all of it as interest-bearing.
• Disputed activities — film, music streaming, the concert business — are marked "doubtful" and kept off the list.
• Fail-closed. If data is missing or the filing is stale — "undetermined", never "halal".

Bottom line

The AAOIFI standard answers two questions: what does the company do? and how dependent are its finances on riba? Even a stock that passes both isn't entirely "clean" — the small impermissible income must be purified.

Ratios and their sources for every stock: halal stocks list. Our full methodology: how we screen for halal.

This article is for information only and is not a fatwa. Consult your own scholar for a final religious ruling. Not investment advice either.