Research
The Requirements of True Halal Investing
Most investors think halal investing means picking halal stocks.
But this is only the first gate that must be passed. A company can pass a halal screen and still be held in a way that breaks Shari’ah rules.
So a fully halal engine cannot simply produce a list of approved stocks but rather must also control the entire life of the investment: what may enter, how it is bought, how it is held, what must be purified, and whether the requirements are maintained.
This makes it difficult to keep track of all the conditions for every investment, and continuously. Missing just one can change the Shari’ah outcome.
NQ1 is StratQ’s rules-based halal investment system, designed to translate these screening and trading requirements into the way investments are selected and managed.
This article is a checklist of the requirements of true halal investing, as well as how it’s embedded into the NQ1 Halal Engine. If one gate is not passed, the trades are not halal.
What is AAOIFI?
AAOIFI stands for the Accounting and Auditing Organisation for Islamic Financial Institutions. It is an international, autonomous, not-for-profit standard-setting organisation for Islamic finance, which develops standards for Shari’ah, accounting, auditing, governance and ethics.
What AAOIFI does
Turns Shari’ah principles for financial transactions into structured standards that institutions, regulators, scholars and auditors can apply consistently.
What Standard 21 does
SS21 is the AAOIFI standard used here for shares and conventional bonds. It addresses the company, the share, financial limits, trading method, purification and continuing compliance.
What StratQ does with it
AAOIFI provides the Shari’ah rulebook. StratQ’s NQ1 investment system translates the relevant rules into screening, trading and monitoring controls.
Glossary
- Screening The process of checking whether a company and its shares meet the Shari’ah requirements before they can be considered for investment.
- Market capitalisation The total market value of a company’s shares: share price × shares outstanding. AAOIFI's financial screening uses it in two of the key ratios, so a changing share price can affect the result.
- Ownership Actually owning a share means holding a proportional interest in the company and taking on the rights and risks that come with it. This is important, as some trading methods create exposure without genuine ownership.
- Purification Removing the investor’s share of impermissible income that may remain inside an otherwise qualifying investment.
- Securities lending An arrangement where shares are lent to another party, often through a broker. It should be noted, that certain stock-lending arrangements are not permitted under the rules applied here.
- Interest-bearing debt Borrowing on which interest is owed. It is one of the financial exposures measured in the AAOIFI screen.
- SS21 AAOIFI Shari’ah Standard No. 21 is a Financial Paper (Shares and Bonds) which sets the Shari’ah rules for investing in and trading company shares, including which companies may be owned, the financial limits they must meet, how shares may be traded and held, how prohibited income must be purified, and the treatment of conventional bonds.
Overview of the process (The 5 Stages)
- 01 What may enter? Permissible business, genuine share, eligible share class, special tradability cases.
- 02 Financial limits 30% interest-bearing debt, 30% interest-taking deposits, 5% prohibited income.
- 03 How may it trade? Cash-funded, owned shares. No impermissible lending, derivatives or interest-bearing margin.
- 04 What remains? Calculate, and actually eliminate, the prohibited residue that survives a pass.
- 05 Still compliant? Re-screen, date the verdict, and exit or escalate when the conditions stop holding.
The five questions behind true halal investing
The 30/30/5 screen is crucial, but a fully halal engine, according to the SS21, also needs valid ownership, valid transactions, tradability checks, purification and continuing compliance.
The full process can therefore be understood through five practical questions:
1. What are you buying?
2. Does it pass the financial checks?
3. How is it bought and held?
4. What needs purification?
5. What happens when conditions change?
1 · What are you buying?
Before anything, the investment system needs first to know what kind of good or service it is buying. SS21 covers far more than a final “halal / not halal” label.
The first requirement is that the corporate objectives must be permissible. Companies whose stated purpose or core business is Shari’ah-impermissible do not pass this first gate.
The share must also represent genuine ownership. A share is an undivided ownership interest in the company and its assets and rights.
Two shares issued by the same company do not necessarily carry the same rights. One may, for example, represent ordinary proportional ownership, while another may give its holder priority over other shareholders in profits, repayment or liquidation.
AAOIFI therefore looks at the company behind the share, as well as at how that share was created, what rights it gives its owner, and how it was issued.
The investment system must consequently verify that the instrument itself represents an acceptable form of ownership before the usual business-activity and financial-ratio tests.
Most of the more detailed share-issuance rules concern unusual share classes, new share issues and primary-market transactions rather than ordinary secondary-market purchases. These specialist requirements are covered in the appendix.
What a company owns is also relevant
AAOIFI also requires consideration of what the company itself actually owns.
The Shari’ah treatment can change if a company’s assets are almost entirely cash, entirely debt, or made up of a particular mix of cash, debts and operating assets. Buying such shares may therefore be representative of trading money or debt rather than buying into a normal operating business.
The investment system must consequently also detect the character of the company’s underlying assets.
Considering conventional bonds
Not every financial instrument can be made halal by applying the same screening ratios.
Conventional bonds are a clear example of this. AAOIFI treats these differently from company shares due to their structure being built around lending money in return for repayment plus an agreed excess.
This leads to the distinction between conventional bonds and sukuk.
AAOIFI prohibits conventional interest-bearing bonds, while recognising sukuk as a Shari’ah-compliant alternative when they are properly structured around ownership in an asset, project or investment rather than an interest-bearing loan.
For a halal investment system, conventional bonds are therefore kept outside the investable universe altogether.
2 · Does it pass the financial checks?
A business built around a prohibited activity fails the requirements immediately.
The slightly more complicated case is when a company whose core business is halal still has some exposure to interest or other impermissible income through other prohibited income sources.
For such cases, SS21 creates a tightly defined exception: the company may still be investable only if its prohibited financial exposure stays within three limits, which are the 30 / 30 / 5 tests:
Debt test
interest-bearing borrowing ÷ market capitalisation ≤ 30%
Deposit / investment test
interest-taking deposits or investments ÷ market capitalisation ≤ 30%
Income test
prohibited income ÷ total income ≤ 5%
These tests measure and limit the amount of interest-bearing debt the company uses, its assets sitting in interest-taking deposits or similar instruments, and its income from prohibited sources.
Note that this is an exception. The interest or prohibited income does not become halal below a certain percentage. The three thresholds are the conditions under which an investor may still hold an otherwise permissible company despite limited prohibited elements.
The prohibited-income calculation is also broader than interest alone. It can include prohibited activity, ownership of a prohibited asset, or another prohibited source.
Where the source is not properly disclosed, the Standard calls for greater effort and caution. Missing data cannot silently become a pass.
The latest budget or verified financial position must also be used, meaning every decision should retain the period end and data source on which it was based.
Example · How a financial checks works
Suppose a company has:
Interest-bearing debt: $240 million
Market capitalisation: $1 billion
The calculation is:
$240 million ÷ $1 billion = 24%
The company therefore passes the debt test because 24% is below the 30% limit.
However, this does not mean the company has passed the full halal screen. The other two financial ratios, its core business and the remaining requirements still need to be satisfied.
The market-capitalisation denominator also means that the result can change.
If the same company still had $240 million of debt, but its market capitalisation fell to $750 million:
$240 million ÷ $750 million = 32%
With no change in the debt amount, the ratio has now moved above the 30% limit due to the change in market value.
This becomes particularly important when considering whether an investment remains compliant after it has already entered the portfolio.
3 · How is it bought and held?
Once the company and the share itself are permissible, the next step is deciding whether the investor may actually buy, hold and trade that share in the ordinary market.
AAOIFI allows shares of permissible companies to be bought for both long-term investment and shorter-term trading. What matters here is how ownership is acquired and transferred.
The transaction must represent a genuine purchase of the share, with the rights, risks and liabilities of ownership passing to the buyer correctly.
This is why SS21 distinguishes ordinary share trading from structures where the investor is only gaining synthetic exposure, selling something they do not yet own, or relying on an impermissible financing arrangement.
Even after passing the screening process, an investment may therefore become non-compliant through the way the trade is executed, or the position is held.
The position itself must be monitored for how the purchase is financed, whether the investor genuinely owns the shares being sold, whether the shares are lent or rented, whether derivatives are used, and what kinds of pledging or collateral arrangements sit around the holding.
No interest-bearing margin
A permissible share should not be bought using an interest-bearing loan.
The transaction therefore needs to use a permissible funding structure rather than introducing riba through the way the investment is financed.
No short selling
Short selling is not permitted as it involves selling shares you do not own.
Ownership still matters after the trade
Unfinished settlement should not automatically be confused with lack of ownership.
The key question here, is when ownership, the associated rights and risks, and responsibility for the share have effectively transferred to the buyer.
Account and broker settings
It should be noted, that conventional lending of shares can also create a problem.
Stock-loan or securities-lending programs must be considered alongside the investment itself rather than assuming that a passing stock makes every account setting permissible.
SS21 also contains rules covering pledging, salam, futures, options, swaps, renting and limited iʿārah arrangements. (see appendix)
Ultimately, a halal stock held through a prohibited transaction method does not become compliant just because its company passed the screen.
4 · What needs purification?
Note that passing below the 5% prohibited income tolerance does not make the residue halal.
AAOIFI allows an otherwise permissible company to remain investable even when a limited amount of prohibited income exists within it. However, that tolerance comes with a condition:
The investor’s share of that impermissible income must be removed.
This is the purification stage.
Purification is the process of identifying the prohibited portion that remains after a company has passed, calculating the amount attributable to the investor, and ensuring that amount is actually given away without personal benefit.
Under the Standard’s stated method, the attributable prohibited income is not limited merely to dividends.
The per-share calculation is: company prohibited income ÷ shares outstanding, which is then multiplied by the number of shares owned.
Example · How purification works
Suppose a company reports:
Prohibited income: $20 million
Shares outstanding: 500 million
The prohibited amount attributable to each share is:
$20 million ÷ 500 million shares = $0.04 per share
If an investor owns 500 shares:
$0.04 × 500 = $20
The attributable purification amount is therefore $20.
This prohibited amount cannot be retained for the investor’s personal benefit.
The important distinction here is between calculating purification and completing purification.
A calculated number displayed to the investor has not itself purified anything until the required amount is actually discharged.
5 · What happens when conditions change?
It’s important to note that passing the full screen does not necessarily guarantee the permanent Shari’ah-compliance of a company.
This is due to constant possible changes in financial positions, business activities, and the dependency of some screening ratios on market value.
AAOIFI therefore treats compliance as an ongoing responsibility, requiring continuous monitoring of the relevant conditions for as long as the investment is held, whether the investor acts directly or through a broker, manager, adviser or other intermediary.
For a halal investment system, this means every holding must regularly be verified against the evidence supporting its original pass.
When those conditions are no longer met, the investment system must identify the change and apply the appropriate response.
Continuous monitoring of the company state is therefore crucial, as passing the requirements may not necessarily be permanent.
What this means in StratQ
NQ1 is StratQ’s rules-based halal investment system, which integrates these screening and trading requirements to the portfolio management methodology.
Rather than treating halal compliance as a label applied once to a stock, NQ1 applies the relevant rules across the investment process through continuous screening, trading and monitoring controls.
This can result in 3 outcomes:
A company passes
A company which satisfies the relevant business, financial and investment requirements may remain inside the eligible investment universe.
Note that this result should be derived from the requirements being tested rather than simply from the company being placed on a pre-approved halal list.
A company is filtered out
When a company fails one of the required gates, eligibility is lost.
Strong financial ratios cannot rescue a company whose core activity is prohibited.
Even a halal business can still fail the screening if it does not meet the financial limits.
A company that already passed can still change
A PASS may not be permanent.
The company’s financial position, business activities and market value can all change over time, which may affect its screening results.
This is why Shari’ah compliance must be continuously monitored throughout the investment process rather than assumed to remain valid.
Screening Example on 1 July 2026:
NQ1 example · A company that passes
NVIDIA
Core business: semiconductors, permissible
Interest-bearing debt: $11.0bn against a $4,846.4bn market capitalisation = 0.2%, limit 30%
Interest-taking deposits / investments: $62.6bn against the same market capitalisation = 1.3%, limit 30%
Prohibited income: below the 5% limit
NQ1 result: eligible
NVIDIA stays investable as it clears every gate. It designs and sells chips, which is a permissible activity. It carries almost no interest-bearing borrowing against what the market says it is worth. The cash and securities on its balance sheet are a small fraction of the same figure.
Note the shape of the prohibited-income line. The test is fail-closed, meaning a company that cannot be shown to pass is rejected rather than assumed compliant, so a holding that is eligible has already cleared it. Missing data never becomes a quiet pass.
NQ1 example · A company that is filtered out
Pfizer
Failed requirement: interest-bearing debt ÷ market capitalisation
Measured result: $64.0bn against a $137.2bn market capitalisation = 46.6%
Required limit: 30%
NQ1 result: filtered out
Pfizer is the more instructive example, because pharmaceuticals is one of the areas NQ1 invests in. It is not filtered out for what it sells, and it is not filtered out on the second financial ratio either: its interest-taking deposits and investments come to 9.9%, comfortably inside the same 30% limit.
It is however excluded because $64bn of interest-bearing borrowing sits against $137bn of market value, and the limit is 30%.
Final Notes
True halal investing is not as simple as finding a company that passes a screen, but also monitoring the share itself, the financial position, the way the investment is bought and held, the purification of any impermissible income, and the conditions that continue to apply after purchase.
The system must therefore apply the relevant rules throughout the investment process and continuously monitor its compliance to the requirements.
In practice, doing all of this manually means checking far more than whether a company appears on a halal stock list. The investor would need to verify the business, financial ratios, ownership structure, transaction method, purification requirements and any changes that could affect compliance, for every investment, and continuously over time.
That's a lot to keep track of, and overlooking just one part can change the Shari’ah outcome.
This is precisely why NQ1 exists: to turn a long list of individual checks into a structured investment system that applies them throughout the investment process.
With so many conditions determining whether an investment remains halal, the real risk here is missing one. That is exactly what NQ1 is built to prevent.
Appendix: Technical AAOIFI / NQ1 control checklist
Before signing off a “fully halal” claim, every line below should have an owner, evidence and a current status.
01 · Business-purpose screen is documented.
Prohibited categories, segment rules and policy overlays are explicit.
SCREEN
02 · Eligible share classes are explicitly controlled.
Preference/tamattu’ structures do not enter merely because the ticker looks like equity.
INSTRUMENT
03 · Cash-only, debt-only and mixed-asset tradability is covered.
3/17–3/20 are not omitted from the engine’s eligibility/tradability logic.
TRADABILITY
04 · 30 / 30 / 5 formulas use approved definitions.
Numerators, denominator, market-cap convention and data vintage are all reproducible.
SCREEN
05 · Missing prohibited-income data triggers caution, not a silent pass.
Investigation and conservative handling are written into the methodology.
DATA
06 · No margin and no shorting.
Enforced by strategy architecture and confirmed at account level.
TRANSACTION
07 · No prohibited share lending/renting, salam, futures, options or swaps.
Broker defaults and synthetic wrappers are included in the check.
TRANSACTION
08 · Ownership/liability-transfer rule is documented.
The product knows when resale becomes permissible under its execution mechanics.
SETTLEMENT
09 · Purification uses an approved, versioned method.
AAOIFI’s stated method and any stricter engine extension are clearly distinguished.
PURIFICATION
10 · Actual elimination responsibility is assigned.
Manager/institution vs intermediary/client responsibility is reflected in operations and client terms.
OPS
11 · Continuous monitoring and exit/escalation exist.
New filings and any price-driven ratio changes are handled at an approved frequency.
MONITOR
12 · Every additional asset class has its own standard.
Sukuk, gold and other instruments are not “inherited” into compliance from the equity screen.
CROSS-STANDARD
Research references
Primary AAOIFI sources are the controlling research layer. Implementation-provider material is secondary and should not be presented as the Standard itself.
- AAOIFI — About AAOIFI · official organisation profile · source for AAOIFI’s full name, role, 1991 establishment and Bahrain headquarters.
- AAOIFI — Shari’ah Standard No. 21: Financial Paper (Shares and Bonds) · official SS21 page
- AAOIFI — Shari’ah Standards portal · standards portal · e-standards
- AAOIFI — official compiled standards download · compiled standards
- AAOIFI — Draft English Translation of Standards 1–61 (2026) · AAOIFI announcement. AAOIFI identifies this translation as unofficial.
- AAOIFI — standards under review · current progress page
- AAOIFI — SS17 Investment Sukuk · SS17
- AAOIFI — SS18 Possession (Qabd) · SS18
- AAOIFI — SS57 Gold and Its Trading Parameters · SS57
- AAOIFI — Draft SS62 Sukuk status clarification · AAOIFI release
- halal.sh — AAOIFI Standard 21 screening methodology · implementation reference
- World Gold Council — AAOIFI SS57 application to investment gold · secondary implementation explanation
StratQ research note. This page is a technical/compliance map of AAOIFI Shari’ah Standard No. 21, not an independent fatwa. Final product-level claims should be reviewed by a qualified Shari’ah adviser or supervisory board. StratQ is pre-launch and holds no live record.