Shari’a Screening

Abstract

This entry elucidates the fundamental principles underlying the Shari’a screening process, which facilitates the evaluation of investment alternatives within Islamic finance. The fundamental tenet of the sector dictates that activities/transactions that are in violation of Islamic law are prohibited. Hence, the Shari’a screening procedure holds significant meaning, particularly in the context of investment in financial instruments like mutual funds and stocks. The procedure has been developed to build a comprehensive framework of criteria and standards that facilitate Muslims in accessing financial investment opportunities in a manner that aligns with halal codes. The examination of the Shari’a screening procedure is conducted through two primary categories: Business Screening Criteria, which involves qualitative analysis, and Financial Ratio Criteria, which involves quantitative analysis. The qualitative screening criteria serve the purpose of identifying the many areas of activity in which organizations engage, while also effectively filtering out earnings generated from industries that are deemed haram. In contrast, quantitative screening criteria involve the examination of organizations’ financial structures and the establishment of thresholds for specific financial measures. The Shari’a screening procedure has faced criticism because of the divergent qualitative and quantitative criteria employed by different global index providers. The consideration of issues surrounding the process and the subsequent standardization of the sector hold significant importance in the context of expanding the range of Islamic investment possibilities.