AAOIFI Standard 21
The most widely cited Shariah methodology in Islamic finance.
AAOIFI Standard 21 sets the gold-standard rules for Shariah-compliant equity investing. It uses trailing market cap as the denominator and caps three financial ratios at 30%, with non-permissible income capped at 5% of revenue.
What it is
The Auditing and Accounting Organisation for Islamic Financial Institutions (AAOIFI) is a Bahrain-based standard-setter for Islamic finance. Standard 21 is its rulebook for stock screening.
How the screen works
First, a business activity screen excludes companies materially involved in alcohol, gambling, conventional banking and insurance, pork, weapons, and other prohibited industries. Then four financial ratios are computed against trailing market capitalization. A stock is compliant only if it passes both screens.
Who uses it
Most Gulf-region Shariah boards. Default reference for AAOIFI-certified funds. Commonly cited by Mufti Taqi Usmani and Sheikh Yusuf DeLorenzo.
Why it matters
If you only follow one Shariah methodology, this is usually the one your scholar references. It's the most conservative on liquidity ratios and the one most often used to issue formal Halal certifications.
Financial ratios
- Interest-bearing debt / Market cap< 30%
- Cash and interest-bearing securities / Market cap< 30%
- Accounts receivable / Market cap< 30%
- Non-permissible income / Total revenue< 5%
Who uses it
- Most Gulf Cooperation Council (GCC) funds
- AAOIFI-certified Shariah supervisory boards
- Many global Halal mutual funds
Sources
- AAOIFI Shariah Standard No. 21
- Shariah Standards for Islamic Financial Institutions (2017 edition)
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