An ETF is halal when every holding inside it passes two screens: a business-activity screen that asks what each company does, and a financial-ratio screen that asks how each company is financed. Under AAOIFI standards a company must keep interest-bearing debt below 30% of market capitalization, interest-bearing securities and deposits below 30% of market capitalization, and non-compliant income below 5% of total revenue. Whatever non-compliant income remains after screening is handled through purification.

The ETF wrapper itself is neutral. An exchange-traded fund is a pooled vehicle that holds a basket of securities and trades on an exchange, and nothing about that structure is problematic. Compliance is entirely a question of what is in the basket and how it got there.

Key facts

Element	What it tests	Standard applied
Business-activity screen	What the company sells or does	Binary exclusion list
Debt ratio	Interest-bearing debt to market capitalization	Below 30%
Liquidity ratio	Interest-bearing securities and deposits to market capitalization	Below 30%
Income ratio	Non-compliant income to total revenue	Below 5%
Purification	Investor’s share of residual non-compliant income	Calculated and donated
Oversight	Methodology review and edge cases	Shariah supervisory board

Screen one: what the business does

Screen one is binary, and it runs first. A company is excluded outright when a meaningful share of its revenue comes from any of the following:

• Conventional banking, lending, and interest-based financial services
• Insurance
• Alcohol
• Tobacco
• Gambling and casinos
• Pork and non-halal food production
• Adult entertainment
• Weapons and defense

A company that fails this screen does not proceed to the financial tests. No balance sheet is attractive enough to rehabilitate a business line that is excluded on its face.

Two details matter in practice. Revenue is the measure, not headlines: a diversified conglomerate is judged on the share of revenue coming from a prohibited line, not on whether it has any presence there at all. And the screen applies to the operating business, which means a technology company that sells payment software to conventional banks is analyzed on what it sells, not on who buys it. Edge cases like that are where a Shariah supervisory board earns its keep.

Screen two: how the business is financed

A company can sell an entirely permissible product and still fail, because Shariah screening looks at the balance sheet as well as the income statement. A retailer funded almost entirely with interest-bearing debt is participating in riba on the financing side regardless of what sits on its shelves.

The AAOIFI standards apply three ratio tests:

Test	AAOIFI threshold
Interest-bearing debt to market capitalization	Below 30%
Interest-bearing securities and deposits to market capitalization	Below 30%
Income from non-compliant sources to total revenue	Below 5%

Thresholds exist at all because a zero-tolerance rule would leave almost nothing investable in a modern economy where nearly every large company holds cash in interest-bearing accounts. The standards accept a bounded amount of incidental exposure and pair that acceptance with an obligation to purify the resulting income. The tolerance is not permission to keep the income. It is permission to own the company.

A worked example

Here is a hypothetical company, with invented numbers used only to show the arithmetic.

A software company we will call Hypothetical Systems has no prohibited business lines, so it clears screen one and moves to the ratios. Its financials, for illustration only:

• Market capitalization: $12 billion
• Interest-bearing debt: $2 billion
• Interest-bearing securities and deposits: $800 million
• Total revenue: $4 billion
• Interest income earned on corporate cash: $60 million

Debt test. $2B divided by $12B is 16.7%, below the 30% threshold. Pass.

Liquidity test. $800M divided by $12B is 6.7%, below the 30% threshold. Pass.

Income test. $60M divided by $4B is 1.5%, below the 5% threshold. Pass.

Hypothetical Systems is eligible to be held. Note what did not happen: the $60 million of interest income did not disappear. It is still sitting in the company’s revenue, and as a shareholder you would receive a proportional slice of it through dividends. That residue is what purification addresses.

Change one input and the result flips. Raise the debt to $4 billion against the same $12 billion market cap and the ratio is 33.3%, above the threshold, and the company fails despite selling exactly the same software. This is also why a share price decline can push a previously compliant company out of the eligible universe without anything changing at the company itself, since market capitalization is the denominator.

You can run the same tests on any company you are considering with our halal stock screener. The full sequence as applied to SP Funds portfolios will be documented on our screening methodology page once it publishes.

Why purification exists and how it is calculated

Screening reduces non-compliant income. It does not eliminate it, and any methodology claiming otherwise is either excluding almost every public company or not looking closely.

The calculation itself needs three inputs: the fund’s reported non-compliant income percentage for the period, the distributions you actually received during that period, and multiplication.

If a fund reports that 1.2% of income for the year came from non-compliant sources and you received $2,000 in distributions, the purifiable amount is $24. You donate it, without taking credit for it as charity in the sense that sadaqah is credited, since the purpose is to divest income rather than to give from your own wealth.

Practice varies on a few points. Scholars differ on whether purification applies to capital gains as well as dividends, and on the treatment of income reinvested inside a retirement account rather than paid out. Follow the position of a scholar you trust and apply it consistently. Stock purification explained covers the reasoning behind the differing views, and our purification calculator runs the numbers once you have chosen an approach.

Who verifies compliance

A screening standard is a document. Someone has to apply it, and someone has to decide what happens when the document does not cleanly resolve a case.

That role belongs to a Shariah supervisory board: a group of qualified scholars who review the methodology, rule on edge cases, and sign off on the compliance of the resulting portfolios. Their work is where questions like the payment-software example get settled, because no ratio table answers them.

For any fund you are evaluating, two things are checkable. Whether the issuer publishes the names, credentials, and institutional affiliations of the scholars on its board, and whether the board reviews holdings on an ongoing basis or signed off once at launch. SP Funds’ board will be listed on our screening methodology page at [SHARIAH ADVISORY BOARD NAMES AND CREDENTIALS].

Separately from Shariah oversight, US-listed ETFs are regulated by the Securities and Exchange Commission and their prospectuses are public filings. You can pull any fund’s prospectus and annual report from the SEC’s EDGAR database and read the strategy in the fund’s own controlling language rather than in marketing copy.

How often screening happens

Balance sheets change, and so do share prices, which means compliance is a moving target rather than a certification. A company that passes every ratio this quarter can breach the debt threshold next quarter by issuing debt, by watching its market capitalization fall, or by acquiring a business with a prohibited revenue line.

Holdings are therefore re-screened on a set cycle rather than once. SP Funds re-screens at [SCREENING FREQUENCY], and a company whose ratios drift above threshold between reviews is removed at the next screening cycle.

The gap between cycles is real and worth understanding. No process catches a breach the instant it occurs, which is one more reason purification exists as a backstop rather than as an afterthought.

What about the fund wrapper itself?

Screening the holdings is necessary and not quite sufficient. A fund does a few things that its holdings do not, and each raises its own question.

Cash management. A fund holds some cash for redemptions and settlement. Where that cash sits matters, because a conventional money market sweep earns interest. Compliant treatment means holding cash in a non-interest-bearing form or purifying any interest earned on it.

Securities lending. Many conventional ETFs lend their holdings to short sellers in exchange for a fee, which produces extra revenue for the fund. The practice raises questions about the lending arrangement itself and about facilitating short selling, and it is one of the specific items a Shariah supervisory board rules on. Check a fund’s prospectus for whether it engages in securities lending; the prospectus is required to say.

Derivatives. Futures, swaps, and options are used by some funds for exposure management. These instruments raise gharar and riba questions that scholars have addressed at length and not uniformly. A fund’s use of derivatives, if any, is disclosed in the prospectus.

Index licensing versus in-house screening. A fund that tracks a licensed Shariah index inherits that index provider’s methodology and rebalancing calendar. A fund that screens in-house sets both itself. Neither is inherently stronger, and both are checkable in the prospectus, which is the point.

ETF, mutual fund, or individual stock: what changes

The screens are the same. What changes is who applies them and how much work falls on you.

Individual stocks. You run both screens yourself, on every position, every time financials are updated. That means pulling the balance sheet for the debt and liquidity ratios and the income statement for the revenue test, and repeating it quarterly. You get complete control and complete responsibility, including the purification calculation for each holding.

ETFs. The manager runs the screens on the whole portfolio, rebalances when holdings fall out of compliance, and typically publishes the non-compliant income percentage you need for purification. You buy and sell on an exchange at intraday prices, and the minimum investment is one share.

Mutual funds. Screening works the same way as in an ETF; the wrapper differs. Mutual funds price once a day at net asset value, often carry an investment minimum, and behave differently in a taxable account than ETFs do because of how the two structures handle in-kind transactions.

A fourth option exists for retirement savers who would rather not choose an allocation at all. A Sharia-compliant target date fund holds screened equities and sukuk in a mix that shifts as your retirement year approaches. The vintages are on the halal target date fund hub, and whether target date funds are halal explains the structure. All of these carry risk, including possible loss of principal, and a screened universe is narrower than the broad market, which means returns can differ from unscreened benchmarks in either direction.

For a reader deciding among specific funds, how to evaluate halal ETFs sets out the five criteria that matter beyond the screening standard itself.