Researchers release paper on divergence in Islamic finance screening rules
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Abdulrahman Qadi, Akash Sharma and Francesca Medda published a paper applying 7 sets of Islamic finance screening rules to a monthly sample of 1.34 million US stock securities from 1999 to 2024, with backtests compared on a unified threshold-anchored scale. The results show that the divergence among the sets of rules across all compliant industry observations reaches 35.9%, and the divergence in financial ratio screening alone reaches 47.3%. Under AAOIFI's rule using spot market value as the denominator, changes in market value alone are sufficient to explain 65.6% of violations, half of which are denominator-driven and reverse within 3 months. The paper also notes that, with thresholds and samples fixed, using a 24-month average denominator can reduce the monthly transition rate for debt screening from 2.51% to 1.03%, while raising the threshold has little effect. Under the constraint of enforcing a single rule, the benefits of these adjustments are relatively limited.
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- arXiv q-finA Study Based on a Sample of U.S. Stocks from 1999 to 2024: Disagreement and Compliance Classification Dynamics Across Different Islamic Finance Screening Rules
This arXiv paper applies 7 sets of Islamic finance screening rules to a sample of 1.34 million monthly observations of U.S. securities from 1999 to 2024, and backtests and compares them on a unified threshold-anchored scale. The results show that the disagreement across the sets of rules reaches 35.9% across all compliant industry observations, and the disagreement in financial ratio screening alone reaches 47.3%. Under AAOIFI's market value denominator rule, changes in market value alone are sufficient to explain 65.6% of non-compliance events, and half of the denominator-driven non-compliances reverse within 3 months.
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