A new model for screening Shariah-compliant firms

Abstract

In this paper, a new quantitative measure is developed to assess how well a firm complies with Shariah compared to other firms in a particular region. Investors can customize this measure according to their goals, constraints, and beliefs. The following two reasons make the use of this measure preferable to the existing use of ratio thresholds. First, it provides the Shariah-compliant investor with a clear understanding of the relative compliance status of each company he wishes to invest in. Second, it can be incorporated into any portfolio optimization model to ensure Shariah-compliance without compromising investment returns. Finally, the paper makes use of a sample of US publicly traded companies to demonstrate its illustrative results.