AAOIFI Ratio Explained
The 30% debt rule and how to screen stocks for Shariah compliance
📊 Quick Summary
AAOIFI Shariah Standard No. 21 sets three financial ratios that a company must pass to be considered halal. These thresholds ensure the company doesn't rely heavily on interest-based financing or earn significant income from prohibited activities.
Why 30%? The Islamic Finance Rationale
AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) set the 30% threshold because:
- Above 30% debt: Company relies heavily on riba (interest-based) financing
- Above 30% cash: Company is essentially a cash-holding entity (like a bank)
- Above 5% impure revenue: Significant income from prohibited activities
The thresholds represent a tolerable level of impurity that can be purified through charitable donation.
The Three AAOIFI Screens
Debt Ratio ≤ 30%
Interest-bearing debt ÷ Market capitalization
Cash Ratio ≤ 30%
Cash + interest-bearing securities ÷ Market capitalization
Impure Revenue ≤ 5%
Non-permissible income ÷ Total revenue
Step-by-Step Example: Apple (AAPL)
Step 1: Find the Data
Go to Yahoo Finance → AAPL → Statistics and note:
- Total Debt: $112 billion
- Market Cap: $2.8 trillion
- Cash & Short-term Investments: $62 billion
Step 2: Calculate the Ratios
Debt Ratio: $112B ÷ $2,800B = 0.04 = 4% ✅
Cash Ratio: $62B ÷ $2,800B = 0.022 = 2.2% ✅
Impure Revenue: ~$7B (services) ÷ $383B = 1.9% ✅
Step 3: Verdict
| Ratio | Apple | Threshold | Pass? |
|---|---|---|---|
| Debt / Market Cap | 4% | < 30% | ✅ |
| Cash / Market Cap | 2.2% | < 30% | ✅ |
| Impure Revenue | 1.9% | < 5% | ✅ |
✅ Result: Apple is Halal
Apple passes all three AAOIFI screens. However, the 1.9% impure revenue (from Apple Card interest) means you should purify that percentage of your dividends.
More Examples: Halal vs Haram Stocks
| Company | Debt | Cash | Impure | Status | Note |
|---|---|---|---|---|---|
| Apple (AAPL) | 14% | 15% | 1.9% | Halal | Impure from Apple Card interest |
| Microsoft (MSFT) | 12% | 18% | 0.8% | Halal | Minimal impure revenue |
| NVIDIA (NVDA) | 15% | 20% | 1.2% | Halal | Interest on cash holdings |
| Tesla (TSLA) | 11% | 19% | 1.1% | Halal | Regulatory credits debated |
| JPMorgan (JPM) | 85% | N/A | 90%+ | Haram | Core business is conventional banking |
| AT&T (T) | 48% | 5% | 3% | Haram | Debt ratio exceeds 30% |
Common Pitfalls to Avoid
- ❌ Using total assets instead of market cap: AAOIFI specifically uses market capitalization
- ❌ Ignoring operating leases: These should be included in debt under IFRS 16
- ❌ Not checking quarterly: Ratios change with each earnings report
- ❌ Forgetting business screening: Even if ratios pass, the core business must be halal
Frequently Asked Questions
Why is the threshold 30% and not 33%?
Some screening methodologies (like MSCI) use 33.33% (one-third), while AAOIFI uses 30%. Both are acceptable interpretations. HalalSignalz uses 30% for stricter compliance.
What counts as "impure revenue"?
Interest income, gambling revenue, alcohol sales, tobacco, weapons, adult entertainment, conventional insurance premiums, and conventional banking income are all considered impure.
What if a stock passes ratios but is in a haram industry?
Business screening comes first. A casino or alcohol company is haram regardless of its financial ratios. The ratios only apply to companies with permissible core businesses.
How often should I recheck ratios?
At minimum, quarterly after each earnings report. Debt levels, cash positions, and revenue mix can change significantly. HalalSignalz revalidates all stocks every quarter.
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