The Three Financial Ratios

After a company passes business activity screening, three financial ratios determine whether its financial structure is acceptable.

1. Debt Ratio

Total interest-bearing debt divided by market capitalization (or total assets, depending on the standard). Under AAOIFI, this must be below 30%. This ensures the company is not excessively financed through interest-based borrowing.

2. Cash and Interest-Bearing Securities

Cash held in interest-bearing accounts plus interest-bearing investments, divided by market capitalization. Also must be below 30% under AAOIFI. This checks whether the company is earning significant income from interest.

3. Impermissible Revenue

Revenue from non-permissible activities divided by total revenue. Must be below 5% under most standards. This captures companies with mostly halal operations but some peripheral haram income.

Why Thresholds Exist

Very few public companies operate with zero exposure to conventional finance. Screening bodies established these thresholds to distinguish companies with minor, incidental exposure from those deeply embedded in interest-based systems. The exact percentages vary by standard.