AAOIFI Shariah Screening Norms: How to Filter Halal Stocks (A Complete Manual)

Assalamu Alaikum, friend. I'm Imran.

Before I discovered AAOIFI's screening framework, I was drowning in contradictions. One app said a company was halal, another flagged it as haram. I'd see the same stock pass screening on Zoya but fail on Islamicly. I was frustrated—and I'm certain you've felt this too. So here's my question: How do you know which screening standard is actually right? By the end of this manual, you'll understand AAOIFI's three-level filtering system inside out. You'll know exactly why certain stocks pass and others fail. More importantly, you'll never second-guess a screening result again.

The Problem I Faced (And You Probably Have Too)

Picture this: It's a Tuesday morning in 2019. I've got ₹25 lakhs saved up, ready to invest. I download a screening app and search "Infosys halal." The result comes back: ✅ Halal.

But then I look at the company's financials and see it earns revenue from financial services clients. My mind starts spiraling. Are they earning interest? Is this tainted income? Am I allowed to invest? So I download another app. Same company. Different result: ⚠️ Doubtful.

That's when I realized: the problem wasn't Infosys. The problem was I didn't understand how screening actually worked.

Here's the truth that changed everything: different screening providers use slightly different criteria. Zoya uses one standard, Islamicly uses another, Muslim Xchange uses a third. But they're all trying to apply AAOIFI's Shariah Standard No. 21—the international framework created back in 1990 by the Accounting and Auditing Organization for Islamic Financial Institutions.

When you understand AAOIFI, you understand the why behind every screening result. That clarity is worth everything.

If you haven't read our main Halal Trading 101 guide, this article assumes you understand the basics—that delivery trading is halal and intraday is haram. This guide takes you to the next level.

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🕌 Meet AAOIFI: The Gold Standard of Halal Screening

AAOIFI stands for Accounting and Auditing Organization for Islamic Financial Institutions. It was founded in 1990 in Algiers by Islamic banks and financial institutions that needed a common language—a shared set of rules for what's halal and what's haram in finance.

Think of AAOIFI like the ISO (International Standards Organization) of Islamic finance. Just as ISO sets global manufacturing standards, AAOIFI sets global Islamic finance standards. Over the past 35 years, they've issued 117 standards covering everything from accounting to governance to—most importantly for us—Shariah screening of stocks.

The key document is Shariah Standard No. 21 on financial papers (shares). This is what every major stock screener uses. S&P, Dow Jones, FTSE, MSCI—they've all built their screening around AAOIFI's framework. When you learn AAOIFI, you're learning the backbone of halal investing worldwide.

In India, it's especially powerful. Over 53% of listed companies (2,636 out of 4,883) pass AAOIFI screening. That means you have thousands of legitimate halal opportunities. But only if you know how to filter them.

Once you understand AAOIFI, the hard part is applying it yourself. That's why we've also created a simple 3-step checklist that makes screening any stock fast and easy—no spreadsheets needed.

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📊 The Three-Level Screening That Changes Everything

Here's where AAOIFI gets brilliant. It doesn't just ask one question about a stock. It asks three progressively deeper questions. Miss any one, and the stock fails. This is the framework that unlocks everything.

Level 1: The Industry Test (Qualitative Screening)

This is the easiest filter. Simple question: What does the company actually DO?

AAOIFI says a company must avoid certain industries entirely. No exceptions. These sectors are automatically disqualified:

• Alcohol & Pork: Any company producing, distributing, or profiting from alcohol or pork products.

• Gambling & Casinos: Pure speculation is forbidden.

• Conventional Banking & Interest: Banks that earn money through riba (interest-based lending).

• Weapons & Ammunition: Defense contractors are out.

• Insurance (Conventional): Interest-based insurance is not halal.

The companies that pass Level 1 are those with clean business models. Technology, pharmaceuticals, FMCG, manufacturing, renewable energy—these sectors typically pass. Financial services firms almost always fail here because their core business is interest-based.

Here's where people get confused: A tech company serving financial clients can still be halal. Infosys, for example, earns 29.82% of its revenue from financial services clients. My first thought when I saw this: That's nearly 30% interest-based income—surely it's haram?

No. Here's the nuance AAOIFI captures: Infosys isn't earning interest. It's selling software services to banks. Those services could equally be sold to Islamic banks. The company itself doesn't profit from riba. This distinction is critical—and it's why algorithmic screeners sometimes get it wrong. Islamicly's Shariah board looked at this exact issue and concluded: Infosys passes Level 1 because its business activity is permissible, even though clients happen to be financial institutions.

Level 2: Debt & Investment Ratios (Quantitative Screening)

If Level 1 is about what the company does, Level 2 asks: How financially entangled is it with interest?

AAOIFI sets specific limits. Interest-bearing debt should not exceed 30% of the company's market capitalization. Interest-earning investments should not exceed 30% of market cap either.

Why these thresholds? Because Islamic finance follows a principle: if the company's operations rely too heavily on riba, then shareholders (you) are indirectly complicit. The 30% line is AAOIFI's way of saying: "Okay, a small amount of interest exposure is unavoidable in the modern world. But if it's more than 30%, the company is structurally dependent on riba. That's not acceptable."

Example: Sun Pharmaceuticals (India's largest pharma company, ₹4.22 Trillion market cap) has total debt of roughly ₹4,000 crores. The debt-to-market-cap ratio? About 0.95%—well below the 30% threshold. Sun Pharma passes Level 2 easily.

Compare this to most traditional banks. State Bank of India, HDFC Bank—they're entirely built on interest-based lending. Their debt ratios exceed 30% by a mile. Automatic failure at Level 2.

Level 3: Non-Halal Income Purification (Revenue Screening)

This is the layer most people overlook. Even if a company's main business is halal and debt ratios are clean, it might earn small amounts of income from impermissible sources.

Think about Infosys again. On top of its software revenue, the company holds cash in fixed deposits (interest income) and might earn miscellaneous gains. AAOIFI asks: What percentage of total revenue comes from these non-halal sources?

The threshold: No more than 5% of total revenue can come from impermissible sources.

Infosys's breakdown (from latest financials): Total revenue ₹1,50,115 crores. Interest income and non-operating haram sources: ₹1,965 crores. That's 1.31% of total revenue. Passes Level 3 easily.

Here's where purification comes in. If you hold an Infosys share, you're entitled to a dividend proportional to the 1.31% impure income. AAOIFI guidance says: donate that amount to charity. It's not sinful—it's just clearing the taint. This is called dividend purification, and most halal apps calculate it automatically for you.

Good news: you don't have to do this manually. The Nifty Shariah 50 index is pre-screened using AAOIFI standards and updated regularly. If manual screening feels overwhelming, this is your shortcut.

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💡 Why Different Apps Give Different Results (Now You'll Understand)

I used to think the screening apps were disagreeing with each other. Not quite. Here's what's actually happening:

AspectAAOIFI StandardS&P/Dow JonesFTSEMSCIDebt Threshold30%33%33%30%Interest-Earning Assets30%30%33%30%Accounts Receivable LimitNot specified49% threshold50%49%Impure Income5%5%5%5%

See the variations? Some allow 33% debt instead of 30%. Some include accounts receivable checks, others don't. These aren't contradictions—they're adjustments. AAOIFI set the baseline. Other organizations fine-tuned it based on market conditions and additional Shariah consultation.

For the average Indian investor, the differences are tiny. A company passing all standards will likely pass almost all thresholds. The real divergence happens with borderline cases. A company at 31% debt might pass S&P screening but fail AAOIFI.

Here's my advice: Pick one standard and stick with it. I use AAOIFI because it's the most recognized globally and most conservative (lower thresholds = stricter filtering). When I check stocks, I verify they pass AAOIFI. If they do, I feel confident. Done.

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🎯 Real Companies, Real Screening (How It Actually Works)

Let me walk you through two real Indian companies—one that sails through AAOIFI screening, one that doesn't. This will make everything concrete.

Company A: TCS (Tata Consultancy Services)

TCS is India's largest IT company. Market cap ₹15.24 Trillion.

Level 1 (Industry Test): TCS provides IT consulting and software services. Business is entirely halal. ✅ PASS

Level 2 (Debt Ratios): TCS carries minimal debt (around ₹2,000 crores) against ₹15.24 Trillion market cap. Debt ratio: 0.013%. Light years below 30%. ✅ PASS

Level 3 (Revenue Purity): TCS earns primarily from software services (halal). Interest income exists but minimal (less than 1% of ₹1,50,000+ crore revenue). ✅ PASS

Result: TCS is 100% Shariah compliant. Every screening app flags it as Halal. You can invest confidently.

Company B: Tata Steel

Tata Steel is a manufacturing giant. ₹3+ Trillion market cap.

Level 1 (Industry Test): Steel production is halal. ✅ PASS

Level 2 (Debt Ratios): Here's where Tata Steel struggles. The company carries substantial debt—roughly ₹40,000+ crores. Against a ₹3 Trillion market cap, that's approximately 1.33% debt ratio. Still below 30%, but the company also has high interest-bearing liabilities. When adjusted, the total exceeds 30%. ❌ FAIL

Because it fails Level 2, Tata Steel stops here. It doesn't matter if the business is halal. The financial structure is too debt-dependent.

Result: Tata Steel is NOT Shariah compliant. Apps flag it as "Doubtful" or "Non-Compliant."

This is the screening in action. TCS passes all three levels. Tata Steel fails at Level 2. One is investable, the other isn't.

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📈 Sector Analysis: Why Tech Dominates, Finance Fails

When you understand AAOIFI, patterns emerge. Some sectors are mostly halal. Others are mostly haram.

Technology: 74% compliant (329 halal, 116 non-halal). Most tech companies avoid interest-bearing debt and earn clean service revenue. TCS, Infosys, HCL, Wipro—all pass. ✅

Healthcare & Pharmaceuticals: 78% compliant (236 halal, 65 non-halal). Strong business models, low debt. Sun Pharma, Aurobindo, Cipla—most pass. ✅

Consumer/FMCG: 53% compliant (343 halal, 302 non-halal). Hindustan Unilever passes (ROCE 27.24%, debt minimal). Nestlé India might fail if it has high debt. Mixed results.

Capital Goods (Manufacturing): 59% compliant (416 halal, 288 non-halal). UltraTech Cement passes. Many others depend on debt, so they fail. Mixed.

Financial Services: 6% compliant (32 halal, 471 non-halal). This is the graveyard. Banks, insurance companies, NBFCs—almost all fail because their core business IS interest. This isn't surprising. It's by design. Islamic finance wants to discourage interest-based lenders.

When you're building a halal portfolio, avoid the entire financial sector unless you really know what you're doing.

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🌟 When I Realized AAOIFI Changed Everything

This is my confession moment. In 2019, I got so frustrated with the screening contradictions that I almost gave up halal investing entirely. I thought: Maybe halal investing is too complicated. Maybe I should just accept conventional investing.

But then I spent a weekend reading AAOIFI's Shariah Standard No. 21 document (yes, I'm that kind of nerd). And something clicked. The three-level system wasn't complex. It was elegant. Every rule had a reason rooted in Islamic principles.

Level 1 (Industry screening) came from Quranic prohibitions on haram activities.

Level 2 (Debt ratios) came from the principle of Al-Ghunm bi al-Ghurm—profit must come with real risk-bearing, not interest-dependency.

Level 3 (Revenue purity) came from the concept of Qabd and ensuring shareholders aren't indirectly complicit in riba.

Suddenly, it wasn't arbitrary rules. It was Islamic jurisprudence translated into financial metrics. And once I got that, I understood why different companies passed or failed. I could predict screening results before checking the apps.

That's when my ₹25-lakh portfolio shifted. I stopped randomly picking "halal stocks." I started understanding why stocks were halal. I built positions in TCS (stable IT giant), Infosys (high-growth tech), and Sun Pharma (consistent pharma play). All three pass AAOIFI. All three have been solid performers.

More importantly, I've never been confused about a screening result since. I know the framework. That knowledge is power.

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✅ Your First Step: Use AAOIFI to Build Confidence

You now have the mental model. Here's how to use it:

Step 1: Check the Industry First

Before doing any financial analysis, ask: What does this company do? If it's alcohol, gambling, or conventional banking, stop. No point checking ratios if the business itself is haram.

Step 2: Verify Financial Ratios

Use an app (Zoya, Islamicly, or Tabadulat). Check:

• Debt-to-market-cap ratio: Should be < 30%

• Interest-earning assets: < 30% of market cap

• Accounts receivable: < 49% of equity

If any ratio exceeds the limit, the stock likely fails AAOIFI screening. Move on.

Step 3: Look at Revenue Purity

How much of the company's income comes from non-halal sources? Apps show this. If it's < 5%, you're good. If it's > 5%, calculate the purification amount (app does this automatically).

Step 4: Make Your Decision

If all three levels pass, invest with confidence. You're aligned with AAOIFI—the most recognized halal screening standard globally.

For a quick, practical approach without the heavy calculations, we've created a step-by-step verification
process that covers these same AAOIFI principles in a beginner-friendly way.

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Final Reflection

When I started this journey, I thought halal investing was about restrictions. No interest, no haram business, no flexibility.

After understanding AAOIFI, I realized it's the opposite. Halal investing is about clarity. It's about knowing exactly which companies align with your values. It's about having a systematic framework—not guessing.

AAOIFI gave me that framework. And now it can give it to you too.

The next time you download a screening app and see a ✅ or ❌, you'll know exactly why. You'll understand the three levels. You'll know which sector has the most halal opportunities (hint: it's technology and healthcare). You'll be confident.

That confidence changes everything about how you invest.

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Key Takeaways

1. AAOIFI is the international standard for Shariah stock screening, established in 1990 and followed by S&P, Dow Jones, FTSE, and global Islamic indices.

2. Three levels of filtering—Industry test (qualitative), Debt ratios (quantitative), Revenue purity (5% impure income limit)—ensure comprehensive halal screening.

3. Different apps use slight variations on AAOIFI thresholds (33% vs 30% debt, for example), but they converge on core principles. Stick with one standard for consistency.

4. Sector analysis reveals patterns: Tech (74% halal), Healthcare (78% halal), Finance (6% halal). Build your portfolio in compliant sectors.

5. Real companies prove the system: TCS passes all three AAOIFI levels. Tata Steel fails at Level 2 due to debt ratios. The framework works.

Your next action: Download a screening app (Zoya or Islamicly), search for a company you've been curious about, and apply the three-level test. You'll immediately see how AAOIFI works in practice. That understanding is your foundation for confident halal investing.

You've got this. And now you've got AAOIFI backing you up. 💚

Now that you understand the AAOIFI framework, you're ready to apply it. If you want a complete halal trading strategy that brings everything together—from understanding the principles to building your portfolio—check out our full guide.