There are five main methodologies for shariah screening: Dow Jones, FTSE, S&P, MSCI, and AAOIFI
At InvestSky in regards to our Shariah screener, we partnered with Musaffa, and we use the AAOIFI methodology.
All methodologies have two main screening methods: Sector-based screening (first) and accounting-based screening (second).
AAOIFI methodology goes by the following parameters:
1- Sector based screens:
Revenue generated by non-permissible activities should not exceed 5% of total revenue.
And the non-permissible activities here are:
Gambling or game of chance
Alcohol
Tobacco
Pork related activities
Advertising and entertainment
Pornography
2- Accounting based screen:
Debt generating interest should not exceed 30% of the company's market capitalization.
Financial securities including interests or equivalents should not exceed 30% of the company's market capitalization.
This methodology uses the 36-month average market capitalization for its computation.
For your reference, we are also providing how other methodologies calculator:
Dow Jones methodology goes by the following parameters:
1- Sector based screens:
Revenue generated by non-permissible activities should not exceed 5% of total revenue.
And the non-permissible activities here are:
liquor (alcohol)
Tobacco
Pork-related products (food products, food retailers & wholesalers, hotels, restaurants & bars)
Conventional financial services (banking, insurance, investment services, insurance brokers, mortgage finance, etc.)
Entertainment
Pornography
Manufacturing weapons and defense equipment and technology
2- Accounting based screen:
All the following must be less than 33% of market capitalization:
Total debt should not exceed 33% of the company's market capitalization.
Cash amount and financial securities involving interests should not exceed 33% of the company's market capitalization.
Liquidity level that refers to cash, cash equivalent, and accounts receivables should not exceed 33% of the company's market capitalization.
This methodology uses the 24-month average market capitalization for its computation.
S&P Shariah methodology goes by the following parameters:
1- Sector based screens:
Revenue generated by non-permissible activities should not exceed 5% of total revenue.
And the non-permissible activities are:
Gambling or game of chance
Alcohol
Tobacco
Pork related activities
Advertising and entertainment
Pornography
2- Accounting based screen:
Total debt should not exceed 33 % of company's market capitalization.
Cash amount and financial securities including interests should not exceed 33 % of company's market capitalization.
Liquidity level in this methodology refers to accounts receivables should not exceed 49% of company market capitalization.
This methodology uses the 36-month average market capitalization for its computation.
MSCI index Islamic methodology goes by the following parameters:
1- Sector based screens:
Revenue generated from non-permissible activities should not exceed 5% of the total revenue.
And the non-permissible activities are:
Alcohol
Tobacco
Pork-related products (food products, food retailers & wholesalers, hotels, restaurants & bars)
Conventional financial services (banking, insurance, investment services, insurance brokers, mortgage finance, etc.)
Gambling or game of chance
Entertainment
Pornography
Manufacturing weapons and defence equipment and technology
2- Accounting based screen:
Total debt should not exceed 33.33% of total assets (not market capitalization).
Cash amount and financial securities involving interest or equivalents should not exceed 33.33% of total assets (not market capitalization).
Liquidity level that refers to cash, cash equivalent, and accounts receivables generated from credit sales should not exceed 33.33% of total assets (not market capitalization).
FTSE Russell methodology goes by the following parameters:
1- Sector based screens:
Revenue generated by non-permissible activities should not exceed 5% of total revenue.
And the non-permissible activities are:
conventional finance
Alcohol
pork-related products
Tobacco
Weapons
Entertainment
2- Accounting based screen:
All the following must be less than 33%:
The total debt should not exceed 33% of total assets (not market capitalization).
Cash amount and financial securities involving interests should not exceed 33.33 % of the company’s total assets (not market capitalization).
Liquidity level that refers to cash, cash equivalent, and accounts receivables generated from credit sales should not exceed 50% of total assets (not market capitalization).