Cash and Interest-Bearing Securities: The 33% Liquidity Cap Decoded

Most investors who learn about Shariah stock screening hear about the debt ratio first. Debt-to-market-cap under 33%. Easy enough to remember. What they often don't realize is that the debt ratio has a twin brother, and it's arguably just as important. The liquidity ratio.

The liquidity ratio asks: how much of this company's market cap is sitting in cash, money market funds, treasury bills, or other interest-earning instruments? If the answer is more than 33% (or 30% under AAOIFI), the company fails.

This trips up people constantly. A company can be debt-free and still fail Shariah screening because it's holding too much cash. Apple has come close. Microsoft has been asked about it. Berkshire Hathaway is a chronic fail on this metric alone.

Let me break down why the rule exists and how it plays out in real portfolios.

The rule in plain English

Every major Shariah screening methodology has a version of this ratio:

DJIM: Cash plus interest-bearing securities, divided by trailing 24-month average market cap, must be less than 33%.

S&P Shariah: Same numerator, 36-month average market cap denominator, 33% threshold.

FTSE Yasaar: Same numerator, total assets denominator, 33.33% threshold.

MSCI Islamic: Same numerator, total assets denominator, 33.33% threshold.

AAOIFI: Same numerator, total assets denominator (strict interpretation), 30% threshold.

The logic is symmetrical to the debt ratio. If a company has too much of its value tied up in interest-earning assets, owning a share of that company means owning a share of an interest-generating portfolio. That moves the equity closer to being a fixed-income instrument, which is exactly what Shariah investors are trying to avoid.

What counts as "interest-bearing" for the numerator

This is where companies and screeners have genuine disagreements. The items that clearly count:

• Bank deposits earning interest
• Money market funds
• Commercial paper
• Treasury bills and government bonds
• Corporate bonds held as marketable securities
• Short-term interest-earning investments
• Interest-bearing receivables (in some methodologies)

Items that are generally excluded from the numerator:

• Physical cash in the till (not in a bank account)
• Equity securities held for investment
• Real estate held as investment
• Commodity holdings like gold or oil inventories

The gray area: what about cash parked in a non-interest-bearing checking account? Most scholars say that cash sitting in a zero-interest account is still "liquid cash" but doesn't generate non-compliant income, so it should be excluded from the numerator. Other scholars say any cash in a conventional bank is implicitly being used by that bank to finance interest-based lending, so it should count. This is an unresolved debate.

FaithScreener follows the more common convention: we count cash in bank accounts as part of the interest-bearing numerator when the company reports it as "cash and equivalents" because that line item almost always includes interest-generating money market funds and short-term bills.

The Berkshire Hathaway problem

Warren Buffett's Berkshire Hathaway is a chronic fail on the liquidity ratio. The reason is simple: Buffett sits on enormous cash piles waiting for acquisition opportunities. At various points in 2023 and 2024, Berkshire held over 150 billion dollars in cash and treasury bills while waiting for better investment opportunities.

Against Berkshire's market cap of roughly 900 billion, that's about 16-17% in cash. Comfortable on the surface. But the issue is that a lot of Berkshire's cash is held in treasury bills earning 5%+. Under strict Shariah interpretation, those treasury bill holdings are non-compliant instruments. The income they generate is riba.

And then you layer in the fact that Berkshire's insurance operations are entirely conventional. Berkshire owns Geico, General Re, and numerous reinsurance businesses that run on conventional insurance models. Even if the cash ratio passed, the business activity screen would kill Berkshire on the insurance exposure alone.

Berkshire is non-compliant under every mainstream methodology. It's the canonical example of how the liquidity screen and business activity screen reinforce each other.

Apple, Microsoft, and the late-2010s debate

Apple has historically been close to the line on cash. During 2017-2018, Apple held over 285 billion in cash and marketable securities. Its market cap was around 850 billion. Liquidity ratio: 33.5%. Just barely over.

A lot of Islamic scholars did math during that period. Apple was technically failing the liquidity ratio under strict DJIM calculation. Some Shariah boards flagged it. Others didn't, arguing that the ratio was marginal and Apple's overall business was clean. Dow Jones itself quietly kept Apple in the index during this period, which caused some scholarly grumbling.

The situation resolved itself when Apple began aggressively returning cash to shareholders through buybacks and debt issuance (paying for buybacks with borrowed money rather than cash, which is an accounting move that changes the ratios). By 2020, Apple's cash pile had dropped below 200 billion even as its market cap climbed above 2 trillion. The ratio dropped to the single digits, and Apple has been comfortably inside every Shariah screen since.

Microsoft has never had quite the same problem. Microsoft's cash holdings have grown over the years but so has its market cap, and the ratio has stayed in the 3-5% range throughout. Microsoft passes easily.

Why technology companies are uniquely vulnerable

There's a pattern here that's worth naming. Tech companies with fat profit margins generate enormous free cash flow and don't have easy uses for it in their core business. They build cash hoards because they don't want to do acquisitions at dumb valuations. Those cash hoards push the liquidity ratio up.

Meta Platforms (the parent of Facebook, Instagram, and WhatsApp) has faced this question. Alphabet (Google's parent) has faced it. At various points, each has held cash approaching double-digit percentages of market cap.

The liquidity ratio turns out to be the most binding constraint on many mega-cap tech stocks, not the debt ratio. Their debt is often tiny. Their cash is often huge. The debt screen passes and the cash screen squeezes.

The Saudi Aramco exception

Saudi Aramco (2222.SR) is a fascinating case because it's the one mega-cap that has essentially no liquidity ratio problem. Aramco's cash holdings are modest relative to its market cap (usually 30-60 billion against a market cap of 1.8-2.2 trillion). The ratio is in the low single digits.

Why? Because Aramco pays out massive dividends to the Saudi government. The company doesn't accumulate cash piles because cash gets distributed quickly. Counterintuitively, high dividend payouts can be Shariah-friendly because they prevent the liquidity ratio from blowing out.

This is one of the quiet reasons Aramco passes every mainstream methodology effortlessly. It's not just that the business is (after some debate) considered permissible. It's that the balance sheet structure doesn't create collateral problems.

Nestlé under the liquidity screen

Nestlé (NESN.SW) is a consumer staples giant that carries a reasonable cash position. At typical Nestlé balance sheet levels:

• Cash and cash equivalents: approximately 6 billion CHF
• Short-term investments: approximately 2 billion CHF
• Market cap: approximately 260 billion CHF

Liquidity ratio: 8 / 260 = 3.1%. Passes easily.

• Total assets: 135 billion CHF
• Liquidity ratio (total assets denominator): 8 / 135 = 5.9%. Passes easily.

Nestlé is clean on liquidity. Its Shariah-compliance debate is entirely about the debt ratio (where the total-assets denominator can push it over the line) and the business activity screen (where Nestlé's infant formula controversies occasionally prompt ethical debates separate from Shariah rulings).

Toyota's liquidity picture

Toyota is interesting because Toyota holds a lot of cash relative to many Japanese industrials.

• Cash and short-term investments: approximately 9 trillion yen
• Market cap: approximately 40 trillion yen
• Liquidity ratio (market cap): 22.5%. Passes.
• Total assets: 74 trillion yen
• Liquidity ratio (total assets): 12.2%. Passes.

Toyota actually passes the liquidity screen under every methodology. The problem with Toyota is the debt ratio, not the liquidity ratio. Toyota borrows a lot because Toyota Financial Services runs an enormous consumer loan book.

The liquidity screen is a non-issue for Toyota. The debt screen is fatal.

Reliance Industries: the growth-cycle pressure

Reliance (RELIANCE.NS) runs capital-intensive businesses, oil refining, petrochemicals, telecom, retail. When Reliance is in a major capex cycle, it holds lots of cash from recent debt issuances and equity raises, waiting to deploy it on project construction. This can push the liquidity ratio up temporarily.

In 2019-2020, during the Jio Platforms fundraising and the Aramco deal negotiations, Reliance's cash position swelled to over 2.5 lakh crore rupees. That was close to 20% of market cap. Still inside the 33% threshold but noticeable. By the time construction finished and cash was deployed, the ratio dropped to single digits.

This kind of flip is typical for project-finance-heavy companies. The ratio is less a measure of underlying Shariah virtue and more a measure of where the company is in its investment cycle.

How this interacts with the 5% non-permissible income rule

The liquidity screen and the non-permissible income screen often both fire on the same stock. If a company holds a lot of cash, it's probably also earning a lot of interest income on that cash, and interest income is non-permissible income.

A company with 30% of its market cap in interest-bearing securities earning 5% interest is generating substantial riba income. Even if the liquidity ratio barely passes at 32%, the interest income might push the non-permissible income percentage over 5%, failing the other screen.

For investors holding stocks with meaningful cash positions, both screens need to be watched. And the purification calculation needs to account for the interest income so you're donating the right amount.

FaithScreener's display

On every stock detail page, we show the liquidity ratio computed under all five methodologies. You see the numerator (cash plus interest-bearing securities), the denominator (market cap or total assets depending on methodology), and the ratio. If any one methodology fails the screen, we highlight it in red.

We also show the trailing four quarters of the ratio so you can see whether a stock is approaching the threshold or moving away from it. Stocks drifting upward toward the limit are worth watching because they could flip on the next rebalance.

Takeaway

The liquidity ratio is the unsung hero of Shariah screening. Most investors focus on the debt ratio and forget that cash can be a problem too. If you're holding a tech giant with a mountain of cash, or a cyclical industrial mid-cycle, or a company that just raised capital, check the liquidity ratio. It might be closer to the edge than you think.

Being debt-free isn't enough. Being cash-poor matters too, at least for Shariah compliance. Which is counterintuitive in a world where strong balance sheets are usually seen as an unambiguous positive.