Last week, we established the core thesis: your halal portfolio is not a filtered version of the conventional market. It is a structurally different system.
This week, we go one level deeper. Because the structural differences you see in your portfolio — the tech overweight, the missing financials, the quality tilt — don’t just happen. They are produced by specific rules. And those rules are not as stable, consistent, or straightforward as most investors assume.
If Issue 1 was about what your halal portfolio looks like, this one is about why it looks that way — and what changes when the rules change.
How Screening Actually Works
Most Muslim investors know the basics: Shariah screening removes companies involved in prohibited industries (alcohol, gambling, conventional banking, pork, weapons, tobacco) and then applies financial ratio tests to everything that remains.
But the details of those financial tests matter enormously — and they vary depending on who is doing the screening.
Here is what the major index providers actually check:
The Dow Jones Islamic Market Index (DJIM) measures total debt against the company’s trailing 24-month average market capitalisation. Before September 2023, it also tested cash-plus-interest-bearing-securities and accounts receivable against that same denominator, each capped at 33%. After September 2023, DJIM dropped the cash and receivables screens entirely — keeping only the debt ratio and the 5% non-permissible revenue threshold.
FTSE Russell’s Shariah Index takes a different approach. It uses total assets as the denominator (not market cap), and tests three ratios: debt below 33.33% of total assets, cash and interest-bearing items below 33.33%, and a combined cash-plus-receivables limit of 50%.
MSCI’s Islamic Index also uses total assets, but with tighter limits on some ratios: 33.33% for debt and cash individually, and either 33.33% or 70% for combined receivables-plus-cash depending on the series.
AAOIFI, the standard most commonly referenced by Shariah boards globally, caps interest-bearing debt and interest-bearing deposits each at 30% of market capitalisation, with 5% non-permissible income.
If your eyes glazed over reading that — that is precisely the point. These are not the same rules. They use different numbers, measured against different denominators, checked at different frequencies. And they produce different portfolios.
Same Company, Different Verdict
This is where screening gets interesting for you as an investor.
A company with total debt at 32% of its market capitalisation but 35% of its total assets would pass the DJIM screen but fail FTSE and MSCI. A company with low debt but very high accounts receivable would have failed DJIM before September 2023 — but passes it now, since that screen was removed. That same company might still fail MSCI’s tighter receivables threshold.
This means the halal ETF you own does not hold “all Shariah-compliant stocks.” It holds stocks that are compliant under a specific methodology. Change the methodology, and you change the portfolio.
This is not hypothetical. It happened at scale in September 2023.
The DJIM Reset: A Case Study in Screening Power
In September 2023, S&P Dow Jones and the DJIM simultaneously dropped two of their three financial screens — the cash-and-interest-bearing-securities ratio and the accounts receivable ratio. They retained only the debt-to-market-cap ratio (capped at 33%) and the 5% non-permissible revenue test.
Overnight, companies that had been excluded for holding too much cash or having high receivables became eligible. The investable universe expanded. Sector compositions shifted.
Think about what this means practically. If you owned a halal ETF tracking a DJIM-based index in August 2023, your portfolio held one set of companies. By October, without you making any decision, that portfolio held a different set — because the compliance criteria changed, not because the companies changed.
This is screening power in action. The rules did not just filter your portfolio. They reshaped it.
And here is the part that rarely gets discussed: the DJIM simplification brought it closer to AAOIFI’s approach (which never had a receivables screen after Standard 59 removed it). But it moved it further from FTSE and MSCI, which still test multiple ratios against total assets. The global “Shariah-compliant universe” is now more fragmented than it was before the change, not less.
The Denominator Problem
The most consequential technical difference across methodologies is not the threshold percentage — it is the denominator.
DJIM and S&P use market capitalisation (averaged over 24 or 36 months). FTSE, MSCI, and others use total assets. AAOIFI uses market capitalisation.
This matters more than it sounds. Market capitalisation moves with the stock price. Total assets are reported quarterly on the balance sheet and move slowly. During a market rally, a company’s debt-to-market-cap ratio falls even if the company has not paid down a single dollar of debt — because the denominator got bigger. During a selloff, the same company’s ratio rises, potentially pushing it above the 33% threshold and out of the Shariah-compliant universe.
This creates a procyclical screening effect. In bull markets, more companies pass the market-cap-based screen (even if their balance sheets have not improved). In bear markets, companies get screened out of Islamic indices at exactly the moment their stock prices are falling — which means the index sells into weakness.
Asset-based screens (FTSE, MSCI) do not have this problem to the same degree. Total assets change slowly, so the compliance verdict is more stable. But they miss the market’s real-time assessment of a company’s value, which has its own drawbacks.
Neither approach is wrong. But they produce portfolios that behave differently during market cycles — and most investors in halal ETFs have no idea which denominator their fund uses, let alone what it means for their returns during a downturn.
The Purification Problem You Are Not Thinking About
There is one more screening effect that flows directly into your wallet: income purification.
Every Shariah screening methodology allows a small amount of non-permissible income — typically up to 5% of total revenue. Companies earning, say, 3% of revenue from interest or other impermissible sources can still be included in an Islamic index. But that 3% needs to be “purified” — donated to charity by the investor, proportional to their holding.
S&P and DJIM only require purification of dividends. You take the impure income percentage and remove that percentage from the dividends you receive. AAOIFI requires purification regardless of whether income comes as dividends or capital gains.
For a long-term buy-and-hold investor, this difference is material. If your halal ETF tracks a DJIM-based index and you only receive dividends, your purification obligation is straightforward. But if you are an active investor or if you hold funds with significant capital gains distributions, the purification methodology your fund follows affects your actual after-purification return.
Most fund fact sheets tell you the purification ratio. Very few explain what it covers.
What This Means for Your Portfolio
Here is the practical takeaway from all of this.
Your halal portfolio is not shaped by “Shariah compliance” in the abstract. It is shaped by a specific set of rules — which ratios are tested, what denominators are used, what thresholds are applied, and how frequently the screens run. Those rules are not universal. They differ across providers, they change over time, and they produce measurably different portfolios.
As an investor, you do not need to memorise every threshold. But you should know three things:
First, which screening standard your ETF or fund follows. This is usually stated in the prospectus or fact sheet. SPUS uses Ratings Intelligence (aligned with S&P methodology). HLAL uses a methodology advised by its own Shariah board. These are not the same.
Second, whether your fund uses market-cap-based or asset-based screening. This tells you how your portfolio will behave during sharp market moves — market-cap-based screens are more volatile in their compliance decisions.
Third, what your purification obligation actually covers. Dividends only, or total returns? This affects your effective after-purification performance.
These are not academic questions. They are portfolio construction questions — and they sit upstream of every other investment decision you make.
What Comes Next
Issue 1 showed you that Islamic capital markets are architecturally distinct. This issue showed you that the architecture is built by specific, varying, and sometimes changing rules.
Next week, we examine a structural consequence of those rules that plays out on the largest stage: why Islamic finance’s built-in leverage constraints may offer genuine resilience during the next debt crisis — and whether that resilience is as reliable as it looks.
The architecture is different. The rules are specific. And they matter more than most investors realise.
Global3I Intelligence is published every Tuesday.
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