Human + AI Approach: Our Shariah screening combines automated quantitative filters with deep qualitative research and human scholarly oversight. Machine learning helps prioritize and flag potential issues, but final compliance decisions are made by credentialed Islamic scholars on Guidance Financial’s Shariah Supervisory Board.Continuous Monitoring: Shariah compliance is not a one-time certification. We re-evaluate quantitative screens weekly, provide quarterly updates to our Shariah adviser, and conduct annual audits with formal certification.
Executive Summary
The Challenge: Traditional Shariah screening faces a fundamental constraint: human scholars can only review a limited number of securities. A top-down approach—where scholars manually evaluate each company—inevitably leaves thousands of potentially compliant investments unexamined. The result is an artificially constrained investable universe, forcing Muslim investors to choose from a smaller opportunity set than necessary. This creates a classification problem with obscured labels: a stock is either (1) certified compliant, (2) reviewed and deemed non-compliant, or (3) never reviewed at all. Category three represents lost opportunity. Our Solution: We invert the traditional approach. Instead of limiting the universe to what scholars can manually review, we use technology to expand what’s possible—systematically screening 30,000+ securities to surface candidates for scholarly review. This expands the investable universe while maintaining rigorous human oversight. Our multi-layer screening process combines:- Quantitative Filters - Automated financial ratio screens applied across 30,000+ securities
- Qualitative Analysis - Deep research into business activities, revenue sources, and corporate segments
- AI-Assisted Research - Machine learning and natural language processing to flag potential issues and prioritize review
- Human Scholarly Oversight - Final decisions by Guidance Financial’s Shariah Supervisory Board
Who This Is For
Muslim Investors
Individuals seeking investment portfolios aligned with their faith, with confidence that compliance is rigorously maintained.
Financial Advisors
RIAs and advisors serving Muslim clients who need documented compliance methodology for client files and regulatory purposes.
Institutions
Family offices, endowments, and institutional investors requiring audit trails, formal certification, and compliance reporting.
Multi-Layer Screening Framework
Our screening methodology is not straightforward—it requires significant manual effort, cross-referencing multiple data sources, and scholarly judgment. This deliberate complexity ensures robust compliance while making the process difficult to replicate superficially.Layer 1: Quantitative Screens (Automated)
The first layer applies clear, measurable financial thresholds. These screens run automatically across our entire universe weekly. Financial Ratio Thresholds:| Metric | Threshold | Rationale |
|---|---|---|
| Interest-bearing debt / Total assets | Less than 30% | Limits exposure to riba (interest) |
| Cash + equivalents + short-term investments / Total assets | Less than 30% | Restricts interest-generating holdings |
| Cash + equivalents + receivables / Total assets | Less than 45% | Ensures operational rather than financial business model |
| Interest income / Net income | Less than 5% | Caps non-compliant income sources |
- Conventional financial services (banking, insurance, brokerage)
- Alcohol production or distribution
- Gambling and gaming
- Tobacco products
- Adult entertainment
- Pork-related products
- Weapons manufacturing
- Conventional interest income
Apple Inc. (AAPL) typically passes quantitative screens with debt/assets around 15% and minimal direct non-compliant revenue. However, qualitative review examines Apple’s financial services (Apple Pay, Apple Card partnership with Goldman Sachs) to ensure financial services exposure remains below thresholds. Goldman Sachs (GS) fails at the quantitative stage—as a conventional bank, the majority of revenue derives from interest-bearing activities, exceeding all financial ratio thresholds. A mixed-revenue company like Amazon requires deeper analysis: AWS and e-commerce are compliant, but Amazon’s lending products and interest income require segment-level revenue decomposition to determine if non-compliant revenue stays below 5%.
Layer 2: Qualitative Deep Research
This is where the process becomes genuinely complex. Many companies require significant manual investigation that cannot be fully automated. Business Activity Analysis:- Review of company filings, annual reports, and regulatory disclosures
- Analysis of revenue breakdown by business segment
- Investigation of subsidiary activities and joint ventures
- Assessment of supply chain relationships
- Geographic segment reporting
- Product line revenue decomposition
- Subsidiary ownership structures
- Recent M&A activity that may change compliance status
- New product launches into prohibited categories
- Acquisitions of non-compliant businesses
- Strategic pivots affecting revenue composition
- Regulatory changes affecting business classification
Layer 3: AI-Assisted Synthesis
We use large language models, web search, and proprietary algorithms to support—not replace—human judgment. Machine Learning Applications:- Classification Models: Random forest algorithms trained on labeled compliance data predict likelihood of Shariah compliance (~80% accuracy), helping prioritize which securities need detailed human review
- Natural Language Processing: Automated analysis of business descriptions, earnings call transcripts, and news articles to flag potential issues
- Cross-Reference Validation: Systematic comparison across multiple data sources to identify inconsistencies
- Flags securities requiring additional scrutiny
- Identifies discrepancies between reported data and actual business activities
- Monitors news feeds for compliance-relevant events
- Prioritizes the queue of securities for human review
- Make final compliance determinations
- Override Shariah board decisions
- Replace scholarly interpretation of edge cases
Our AI models are trained to be conservative—they flag potential issues for human review rather than making autonomous compliance decisions. This human-in-the-loop approach ensures that scholarly judgment remains central to the process.
Layer 4: Scholarly Oversight
Final compliance decisions rest with Guidance Financial’s Shariah Supervisory Board, one of the most respected advisory bodies in Islamic finance.Guidance Financial: Our Shariah Advisory Partner
We partner with Guidance Investments Sdn Bhd for Shariah advisory services. Their Shariah Supervisory Board includes some of the most eminent scholars in Islamic finance globally.Shariah Supervisory Board Members
| Scholar | Role | Background |
|---|---|---|
| Justice (Ret.) Muhammad Taqi Usmani | Chairman | Former Judge, Supreme Court of Pakistan; former Vice President, Darul Uloom Karachi; author of foundational Islamic finance texts |
| Shaykh Nizam Yaquby | Member | One of the most influential Shariah scholars in banking and finance; serves on 80+ Shariah boards globally |
| Dr. Mohamed A. Elgari | Member | Professor of Islamic Economics, King Abdulaziz University; extensive work on Islamic capital markets |
| Dr. Mohd Daud Bakar | Member | Former Chairman, Shariah Advisory Council of Bank Negara Malaysia and Securities Commission Malaysia |
| Shaykh Yusuf Talal DeLorenzo | Member | Chief Shariah Officer and Board Member, Shariah Capital; translator and commentator on Islamic legal texts |
| Dr. Muhammad Imran Ashraf Usmani | Member | Shariah advisor to numerous Islamic financial institutions; specialist in Islamic investment funds |
Role of the Shariah Board
Pre-Investment Approval:- Reviews and approves the initial universe of investable securities
- Evaluates new securities proposed for inclusion
- Provides guidance on edge cases and ambiguous situations
- Receives quarterly updates on portfolio composition
- Reviews reclassification decisions when securities change compliance status
- Conducts annual Shariah audit with formal certification
- Provides definitive rulings on disputed cases
- Interprets how Islamic principles apply to novel financial instruments
- Ensures consistency with the most stringent scholarly standards
On Scholarly Interpretation: Different schools of Islamic jurisprudence may interpret certain principles differently. Our approach applies stringent standards that satisfy requirements across major schools, ensuring portfolios are broadly acceptable to Muslim investors regardless of their specific tradition.
Scholarly Standards & Governance
AAOIFI Compliance
Our methodology adheres to standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the leading international body for Islamic finance standards. AAOIFI standards are mandatory in Bahrain, Sudan, and Jordan, and are widely adopted as best practice across Islamic financial institutions globally.Two-Layer Certification Process
We implement a two-layer Shariah screening process:- Refinitiv Islamic Indices (First Layer): The Refinitiv Shariah screening methodology is a market-accepted mandate approved by prominent Shariah scholars. Over 30,000 publicly listed securities are screened monthly, providing a reliable baseline universe.
- Guidance Investments (Second Layer): Where methodologies differ, we apply Guidance Investments’ more stringent classification. This conservative approach ensures compliance across multiple interpretive frameworks.
Board Engagement
The Shariah Supervisory Board is actively engaged in oversight, not merely advisory:- Quarterly Reviews: Formal portfolio composition reports and reclassification decisions
- Annual Shariah Audit: Comprehensive review with formal certification letter issued
- Ad-Hoc Consultations: Edge cases and novel situations escalated for board ruling
- Methodology Updates: Board reviews and approves any changes to screening criteria
Accountability Structure
- All compliance decisions are logged with timestamps and rationale
- Reclassification events trigger documented divestment plans
- Annual audit report submitted to the Shariah board for review
- Certification letter available to investors upon request
Continuous Compliance Monitoring
Shariah compliance is dynamic—a compliant company today may become non-compliant tomorrow due to business changes, financing decisions, or market conditions.Monitoring Cadence
| Activity | Frequency | Description |
|---|---|---|
| Quantitative re-screening | Weekly | Automated check of financial ratios against thresholds |
| News and event monitoring | Daily | AI-assisted scanning for compliance-relevant developments |
| Qualitative review | Ongoing | Deep research triggered by quantitative flags or news events |
| Shariah adviser update | Quarterly | Formal report on portfolio status, changes, and reclassifications |
| Shariah audit | Annual | Comprehensive review with formal certification letter |
Reclassification Protocol
When a security is reclassified from compliant to non-compliant: If the position shows a gain:- Exit within 5 working days
- Any gains from time of reclassification are subject to purification
- May hold up to 3 months waiting for recovery to cost basis
- Must exit immediately if market value recovers to investment cost
- Extensions require special dispensation from the Shariah board
- Reclassification log maintained with rationale
- Divestment plan or proof of disposal furnished within 5 working days
- All purification amounts tracked and reported
Adding and Removing Securities
The investable universe is not static. Securities are: Added when:- New IPOs pass both quantitative and qualitative screens
- Previously non-compliant companies change their business model
- Improved data reveals a company was incorrectly classified
- The Shariah board approves specific inclusions
- Financial ratios breach thresholds
- Business activities shift into prohibited categories
- M&A activity changes the compliance profile
- News or filings reveal previously unknown non-compliant activities
Income Purification
Even compliant companies may generate small amounts of non-compliant income (typically from interest on cash holdings). This income must be “purified” through charitable donation.Purification Calculation
For dividend income:Purification Process
- Non-compliant income calculated and tracked throughout the year
- Charitable organizations proposed by fund manager for Shariah board approval
- Donations made on annual basis as part of Shariah audit
- Receipts obtained and retained for all purification payments
- Annual report detailing all purification submitted to Shariah board
Approved Charitable Recipients
Purification funds are donated to charities approved by the Shariah Supervisory Board. Approved recipients include organizations focused on:- Poverty alleviation and economic empowerment
- Education and skills development
- Healthcare access in underserved communities
- Humanitarian relief
Fund Operations Constraints
Shariah-compliant portfolios operate under specific constraints:| Activity | Permitted | Notes |
|---|---|---|
| Interest-based leverage | No | No margin trading or interest-bearing debt for share purchases |
| Short selling | No | Cannot sell securities before owning them |
| Interest-bearing borrowing | No | Fund cannot borrow at interest |
| Interest receipt | Purified | Any interest received must be donated to charity |
| Security types | Ordinary shares only | Other instruments require specific Shariah board approval |
Integration with Parallax Features
Stock Screener
Filter the universe using Shariah compliance as a primary criterion, then layer additional factor screens (Value, Quality, Momentum, Defensive, Size) on the compliant universe.AI Portfolio Builder
Build optimized portfolios constrained to Shariah-compliant securities, maintaining factor diversification within the compliant universe.Portfolio Analyzer
Upload existing portfolios to identify non-compliant holdings and calculate required purification amounts.Monitoring & Alerts
Receive notifications when held securities are flagged for potential reclassification, allowing proactive portfolio management.Institutional Considerations
Universe Characteristics
Our Shariah-compliant universe provides sufficient depth for institutional deployment:| Metric | Coverage |
|---|---|
| Securities screened | 30,000+ globally |
| Market cap coverage | Large, mid, and small cap |
| Geographic scope | Developed and emerging markets |
| Sector representation | All GICS sectors (varying compliance rates) |
- Technology, Healthcare, Industrials: Higher compliance rates
- Financials, Consumer Staples (alcohol/tobacco exposure): Lower compliance rates
- Energy, Materials: Varies by company capital structure
Suggested Benchmarks
For performance attribution and tracking:- MSCI World Islamic Index - Global developed markets
- S&P 500 Shariah Index - US large cap
- Dow Jones Islamic Market Index - Broad global coverage
- FTSE Shariah Index Series - Regional options available
Enterprise Integration
For institutional clients:- Data Feeds: Compliance status and purification ratios available via API
- Custom Reporting: White-labeled compliance reports for client distribution
- Audit Support: Documentation packages for internal and external auditors
- Bulk Screening: Screen custom universes against our methodology
Compliance Documentation
For advisors and institutions requiring formal documentation: Available Documentation:- Annual Shariah audit certification letter
- Quarterly compliance reports
- Purification calculation worksheets
- Reclassification logs with rationale
- Shariah board meeting minutes (summary)
Frequently Asked Questions
- General
- Methodology
- Practical
What makes a stock Shariah-compliant?
A stock must pass both quantitative screens (financial ratios below specified thresholds) and qualitative screens (business activities not in prohibited categories). Final determination requires Shariah board approval.Can I invest in technology companies?
Yes, most technology companies are Shariah-compliant. The key considerations are debt levels and whether any business segments involve prohibited activities.What about companies with small amounts of non-compliant revenue?
Companies with less than 5% of revenue from non-compliant sources may still be investable, but that portion of any dividends received must be purified through charitable donation.
Getting Started
For Individual Investors:- Go to parallax.chicago.global and create an account
- In the Stock Screener, enable Shariah compliance filter to view only compliant securities
- Use the AI Portfolio Builder with a prompt like: “Create a Shariah-compliant growth portfolio with $50,000”
- Review holdings in Portfolio Analyzer to see compliance status and purification requirements
Explore Further:
- Investment Methodology - Our systematic approach to quantitative investing
- Stock Screener Guide - How to use advanced screening features
- AI Portfolio Builder - Build Shariah-compliant portfolios using natural language
- Portfolio Analyzer - Analyze holdings for compliance status
- Islamic Finance Glossary - Definitions of Riba, Purification, and other Shariah terms