Dynamic Shariah Compliance: An Eight-Quarter Trajectory Study of the S&P 500 (Q1 2024 – Q4 2025)

Halal Terminal Research — Piece 1 of 3

---

⚠️ IMPORTANT LEGAL NOTICE — Click to expand

This document is general educational research. It is provided for informational purposes only and does not constitute investment advice, portfolio management, a solicitation, or any inducement to transact in any financial instrument.

No personalization. The analysis does not take into account any individual's financial situation, objectives, or risk profile.

Not a fatwa. Shariah compliance trajectories are computed from public financial disclosures under a specific methodology disclosed in §3. Results are not a religious ruling and should not substitute for guidance from a qualified Islamic scholar or Shariah advisor.

Data and scope. Figures are derived from SEC EDGAR XBRL filings and public market data as of the quarter-ends listed in §3. Historical compliance trajectories are descriptive and do not imply future compliance status of the same names.

Regulatory positioning. This text is intended to qualify as non-advisory research / educational analysis under Swiss regulatory expectations (FinSA / FINMA), with a focus on methodology, historical evidence, and limitations.

For complete disclaimers, see Legal Disclaimers.

---

1. Executive Summary

The global Islamic finance industry held USD 5.98 trillion in assets at end-2024 and a projected USD 9.7 trillion by 2029, implying a roughly 10% compound annual growth rate.¹ Almost all of that growth depends on a binary screen: compliant or non-compliant, attached to a name at a single point in time, refreshed annually or quarterly by an index provider. The screen is treated as a property of the company. It is not. It is a property of the company at a date, and the date matters.

This study walks the S&P 500 through eight consecutive quarter-ends (Q1 2024 through Q4 2025), applying AAOIFI Shariah Standard No. 21 by the book — interest-bearing debt below 30% of total assets, interest-bearing cash and securities below 30% of total assets, non-permissible income below 5% of revenue, and a permissible core business — to each name, each quarter. The continuous universe is 472 constituents that stayed in the index for the full window.

Three headline findings.

First, only 133 of 472 names (28.2%) were compliant in all eight quarters. A further 228 (48.3%) were non-compliant in all eight. The remaining 111 names (23.5%) either oscillated, improved, deteriorated, or fell into a 54-name unclassified bucket where XBRL coverage was incomplete. The aggregate non-compliance rate under classical AAOIFI is materially higher than the rate any market-cap-denominated screen would produce — a structural feature of AAOIFI's text, not a contingent feature of this window.

Second, Apple is non-compliant under AAOIFI in every quarter of the window. Apple's debt/assets ratio runs 23.3% to 30.4% (passes the debt test in seven of eight quarters); its cash-and-securities/assets ratio runs 36.9% to 48.1% (fails the cash test every quarter). NVIDIA, AVGO, BRK.B, Visa, JPMorgan, Mastercard, UnitedHealth, Home Depot — together USD 7 trillion in market cap — are all stable non-compliant. Cash-rich large-cap tech and the entire Financials sector dominate the SN bucket. This is the result a Shariah board reading the classical text should expect and the result a DJIM-replicating ETF screen quietly obscures by using a market-cap denominator that floats those names over the line.

Third, debt is still the dominant transition driver but cash is more important than under any market-cap-denominated screen. Of 73 compliant-to-non-compliant transitions, 57 were debt-only, 11 cash-only, and 5 combined debt+cash. Of 75 non-compliant-to-compliant transitions, 55 were debt-driven, 18 cash-driven, and 2 combined. Cash-ratio events are roughly 16% of total transitions under AAOIFI versus ~8% under a DJIM-style MC denominator — direct evidence that AAOIFI's Total Assets denominator binds harder on the cash side of the balance sheet.

Sector tilt is severe and persistent. Financials are 68 of 68 stable non-compliant — disqualified by AAOIFI's business-permissibility screen regardless of any ratio. Utilities are 27 of 30 stable non-compliant on capital structure. At the opposite pole, Information Technology posts a 44.4% stable-compliant rate (28 of 63) and Industrials 45.9% (34 of 74), with Materials at the highest sector rate (61.1% SC, 11 of 18). The aggregate sector picture is not a contingent feature of this window — it is structural.

Implications follow. A Shariah ETF that screens annually misses transitions inside the year: 73 names cross from C to N inside this universe over eight quarters, and the names doing the crossing are concentrated where capital-intensive businesses meet active balance-sheet decisions — debt-funded M&A, capacity build, share buybacks against shrinking cash. Purification calculations that assume a name's compliance status over a holding period are mis-specified when that name spent part of the period non-compliant. And screening platforms that surface only a current binary verdict are hiding the variable their users most need to plan around.

The mean S&P 500 name was compliant for 3.12 of the 8 quarters. The median was 3. Compliance is not a constant.

2. Why Compliance Is Dynamic

Two mechanisms drive verdict changes under AAOIFI.

The first is balance-sheet motion. AAOIFI's ratios divide interest-bearing debt and interest-bearing cash and securities by total assets. Companies move all three numerators as a normal consequence of running the business. They issue debt to fund acquisitions; they retire debt with free cash flow; they let cash accumulate ahead of share-repurchase windows; they draw cash down to fund capacity. Each of these moves changes the numerator without necessarily changing the asset base by the same proportion, and the ratio crosses thresholds.

The clearest illustration in the dataset is Welltower (WELL), one of the larger US-listed healthcare REITs. Welltower entered the window non-compliant on the debt ratio: debt/assets sat at 31.9% (Q1 2024) and 30.4–32.2% across all of 2024. Total assets grew steadily from USD 45 billion (Q1 2024) to USD 67 billion (Q4 2025) as the senior-housing portfolio expanded; absolute debt grew too, from USD 14.2 billion to USD 19.2 billion, but more slowly. The debt ratio fell to 28.5% at Q4 2025 and the verdict flipped from N to C at Q1 2025. This is not a denominator effect — total assets grew because Welltower built the balance sheet through equity-funded acquisitions. The verdict change is recording a real shift in capital structure, slowly, in the direction of compliance.

The second is the asset side. As companies grow, the asset base grows too — and the asset base is what AAOIFI's ratios divide by. A capex cycle that builds plant and inventory expands the denominator. A divestiture compresses it. An acquisition consolidates the target's assets and the parent's funding of the deal onto the consolidated balance sheet. None of these movements are price-driven; they are operating decisions, and they push the verdict around.

Both mechanisms compound. A capex cycle funded with new debt may grow the asset base in lockstep with debt — the ratio holds. A cash buildup ahead of a buyback can push cash/assets through 30% while every other metric is unchanged. AAOIFI's denominator is sticky enough that single-quarter blips are rare; trajectory under AAOIFI tends to record durable balance-sheet shifts, not market-driven noise. The point-in-time problem is not a curiosity. It is a structural feature of any ratio screen with a balance-sheet denominator and a moving balance sheet.

3. Methodology

Universe. S&P 500 constituents as of 31 December 2025, intersected with constituents at each of the seven prior calendar quarter-ends back to 31 March 2024. The intersection contains 472 names. The 31 constituents that joined or left the index during the window are out of scope; the membership reconstruction uses the public S&P 500 component-change record. The continuity filter eliminates survivorship questions about index addition/removal effects on compliance.

Thresholds. AAOIFI Shariah Standard No. 21 sets the thresholds applied here, by the classical text:

• →Interest-bearing debt / total assets < 30%
• →Interest-bearing cash and securities / total assets < 30%
• →Non-permissible income / TTM revenue < 5%
• →Core business permissible (qualitative)

The 30% threshold and the Total Assets denominator are both from the AAOIFI text. The major index providers' screens differ: the S&P Dow Jones Islamic Market Index applies a 33.33% threshold on a trailing 24-month average market-cap denominator;² MSCI's main Islamic Index Series applies 33.33% on Total Assets, while its parallel M-Series uses a 36-month market-cap denominator;³ FTSE Yasaar applies 33.33% on Total Assets with a 50% accounts-receivable cap.⁴ This study applies AAOIFI's stricter threshold and denominator combination throughout. Piece 2 of this series will run the same universe under each index provider's specific methodology and quantify the names that flip verdict between the screens.

Standard 59. AAOIFI Shariah Standard No. 59 (Sale of Debt) is widely read as having superseded the historic illiquid-assets / accounts-receivable cap that some pre-2018 screens applied alongside the leverage and cash ratios.⁵ This study omits that cap accordingly: ratios are computed without an accounts-receivable / total-assets gate. Methodology currency matters; published screening papers from before 2018 that include the illiquid-assets test should be read against the post-S59 framing.

Financial inputs come from SEC EDGAR XBRL companyfacts extractions, cached locally and mapped to calendar quarter-ends with a 95-day reporting-period grace. Debt extraction prioritises LongTermDebt and its capital-lease-inclusive variants, falling back to the sum of LongTermDebtNoncurrent and LongTermDebtCurrent when needed. Total assets uses Assets directly. Cash and interest-bearing securities sums cash and cash equivalents, short-term investments, and long-term investments where each is interest-bearing.

Non-permissible income (NPI) is approximated by interest income (InvestmentIncomeInterest / InterestAndDividendIncomeOperating / InterestIncomeOperating) divided by TTM revenue. This is a proxy, not a full segment decomposition. A complete NPI computation would parse 10-K segment disclosures for income from impermissible activities (alcohol distribution, conventional insurance reserves, riba-bearing instruments) — and would catch cases the proxy misses, such as BNPL or merchant-financing operators where interest spreads run through the operating revenue line rather than a standalone interest-income line, or insurance-adjacent businesses where float yield is buried in net investment income. At universe scale we use the proxy that the production screening engine uses and flag it explicitly; for the five named examples in §5 we cross-checked the proxy against the relevant 10-K. NPI binds on fewer than 10% of S&P 500 names in any quarter of this window — debt and cash are the dominant failure drivers — but the proxy limitation is real and is repeated in §8.

Trajectory taxonomy.

• →Stable-Compliant (SC): compliant in all 8 quarters
• →Stable-Non-Compliant (SN): non-compliant in all 8 quarters
• →Improving (IM): ≤2 compliant in Q1–Q4, ≥3 compliant in Q5–Q8, both Q7 and Q8 compliant
• →Deteriorating (DT): ≥3 compliant in Q1–Q4, ≤1 compliant in Q5–Q8, both Q7 and Q8 non-compliant
• →Oscillating (OS): ≥2 verdict switches, not satisfying IM or DT
• →Unclassified (UC): XBRL coverage incomplete in one or more quarters

Coverage. Of the 472 continuous constituents, 418 received a deterministic trajectory classification (SC/SN/IM/DT/OS) and 54 were UC. The UC bucket breaks down as: business-screen-disqualified names where ratio data was incomplete (financials, healthcare plans, casinos), plus a residual of roughly 20 names where issuer-specific XBRL tagging did not match the standard debt or asset concept tree. We did not impute their verdicts.

Limitations stated upfront. US-only universe; 8 quarters is a short window for trajectory inference; NPI is a proxy; the methodology is single-provider (AAOIFI) and Piece 2 will compare against DJIM, MSCI, and FTSE Yasaar. Section 8 returns to each.

4. Headline Results

The trajectory distribution across 472 continuously listed S&P 500 names is sharply bimodal.

Stable-Compliant accounts for 133 names (28.2%). Stable-Non-Compliant accounts for 228 names (48.3%). The two stable categories together cover 76.5% of the universe. The remaining 23.5% splits between Unclassified (54, 11.4%), Oscillating (42, 8.9%), Improving (9, 1.9%), and Deteriorating (6, 1.3%). Net, more names improved than deteriorated over the window (9 vs 6), but the stronger framing is that 57 of the 418 classifiable names changed verdict at least once during the window — 13.6%. That is materially more transition activity than the headline SC/SN split suggests.

The 13.6% in-window transition rate matters for ETF construction. Roughly 28% of the index is a low-maintenance compliant bucket. Roughly 48% is a permanently-excluded bucket. The active turnover happens in the IM/DT/OS bucket — 57 names that change verdict during the eight quarters. That is the trajectory product this paper exists to surface.

Sector tilt is the next-order story.

Eleven GICS sectors, eight-quarter window, six trajectory states. Three patterns dominate.

Financials zero out. All 68 Financials names are Stable-Non-Compliant. Banks, insurers, asset managers, payment networks, and the consumer-finance issuers are sector-disqualified by AAOIFI Standard 21 — the business model depends on interest spreads, conventional underwriting, or fees on interest-bearing products. The threshold screen is the wrong tool here; the business-permissibility screen is binding.

Utilities round-trip to the same place. 27 of 30 Utilities names are SN. Capital-intensive infrastructure businesses run high absolute debt loads, and electric and gas utilities have not historically built around equity-funded balance sheets. The three Utilities exceptions are sector outliers, not a class.

Information Technology and Industrials dominate the compliant bucket — but at materially lower rates than a DJIM screen would suggest. IT posts a 44.4% SC rate (28 of 63), Industrials 45.9% (34 of 74), Materials the highest at 61.1% (11 of 18). The gap between AAOIFI's 28% universe-wide SC rate and DJIM's typical 45–50% pass rate sits almost entirely in the cash-rich tech and consumer names that fail AAOIFI's cash-ratio test. Apple, NVDA, AVGO, ORCL: large positions on cash on a comparatively smaller asset base, which the Total Assets denominator catches.

Real Estate and Health Care sit low. Real Estate is 19 of 31 SN — REITs carry capital-structure debt and most fail the 30% debt-to-assets test. Health Care is 29 of 65 SN (44.6%) — driven by the AAOIFI-disqualified managed-care plans (UnitedHealth, Elevance, Cigna, Humana, Centene, Molina) and biotechs with concentrated cash positions.

The implication for index construction is direct. An AAOIFI-aligned S&P 500 product, even before any rebalancing logic, is a sector-tilted product: Financials and Utilities almost entirely dropped, IT and Industrials retained but at sub-half SC rates, Materials punching above its sector weight. The choice is what to do with the 57 classifiable names that move between compliant and non-compliant during a holding period.

5. Trajectory Deep Dives

5.1 Stable-Compliant — MSFT

Microsoft is the unremarkable case made remarkable by scale. Across all eight quarters, debt/assets ranged from 6.1% to 9.3% and cash/assets ranged from 16.3% to 19.6%. Both ratios sit comfortably below half of the 30% threshold for the entire window. Absolute debt held in the USD 40.3–45.1 billion range while total assets grew from USD 484 billion (Q1 2024) to USD 665 billion (Q4 2025) as the AI capex cycle expanded the balance sheet. Cash and interest-bearing securities ranged USD 87.1–113.5 billion. None of these movements approach a 30% breach. Core business is permissible. NPI is immaterial.

For Shariah portfolios, Microsoft is a passive holding. The compliance verdict is robust to plausible movements in either numerator (debt, cash) or denominator (total assets) over the window — Microsoft's asset base would need to compress by ~70% before the debt ratio threatens 30%, and absolute cash would need to nearly double on the current asset base for the cash ratio to do the same. Neither is on any visible path; if anything, the AI capex cycle is growing the asset base, pushing both ratios further from threshold.

The takeaway from the SC bucket as a whole — 133 names — is that Microsoft's structural picture is typical: capital-light operating model relative to the asset base, debt at conservative levels, cash position appropriate for working-capital and treasury needs rather than a strategic war chest. This is what 28% of the S&P 500 looks like under classical AAOIFI.

5.2 Stable-Non-Compliant — AAPL (the cash-ratio headline)

Apple is the headline AAOIFI surprise. The business is permissible. Debt sits in a USD 88.5–102.6 billion range across the window — meaningful but typically inside threshold; debt/assets reads 30.4% only at Q1 2024 and runs 23.3–29.6% for the other seven quarters. The cash-and-interest-bearing-securities ratio, however, runs 36.9% to 48.1% every quarter, well above the 30% AAOIFI cash threshold.

The structural picture: Apple holds USD 130–162 billion in cash and marketable securities on a USD 331–379 billion asset base. The cash position is durable — it has been a defining feature of the balance sheet for fifteen years. Under AAOIFI's Total Assets denominator, that cash position trips the 30% cash ratio every quarter. A DJIM-style screen using a trailing 24-month market-cap denominator (Apple's MC is USD 2.6–3.4 trillion) would put the cash ratio at 4–6% — comfortably compliant. The same balance sheet, two different verdicts depending on the denominator chosen. AAOIFI's text says the cash ratio is the binding constraint; this study respects that text.

The lesson for SN names like Apple is that AAOIFI's denominator catches cash positions that a market-cap denominator hides. NVDA (USD 41–80 billion cash on USD 65–245 billion assets — cash ratio 33–62%), AVGO, ORCL, ABBV all sit in the same structural bucket: meaningful operating businesses with cash positions that exceed 30% of total assets. A Shariah board reading the AAOIFI text strictly cannot hold them. A Shariah board accepting a DJIM-style market-cap denominator can. The decision is doctrinal, not technical.

Boeing (BA) is the SN comparator on the debt side: all eight quarters non-compliant on debt/assets, which ran 32.0% to 41.7% — never inside threshold, never close. Absolute interest-bearing debt sat between USD 47.7 billion (Q1 2024) and USD 57.7 billion (Q2 2024) on an asset base of USD 134–168 billion. The business is permissible; the failure is purely capital-structure. Boeing's elevated debt traces to the 737 MAX programme, the pandemic cash burn, the Spirit AeroSystems acquisition, and supplier and labour disruption. The lesson for SN debt-failures is the same as for SN cash-failures: trajectory matters less than baseline. These names warrant exclusion lists, not quarterly re-screening.

5.3 Improving — WELL (Welltower)

Welltower is the cleanest example of a debt-side improving trajectory. The verdict string reads N-N-N-N-C-C-C-C. Q1–Q4 2024 verdicts are all N, all on the debt ratio (debt/assets 30.4–32.2%). Q1–Q4 2025 verdicts are all C (debt/assets 28.3–29.5%).

The drivers are visible directly in the asset and debt rows. Total assets grew from USD 45 billion (Q1 2024) to USD 67 billion (Q4 2025) — a 48% expansion driven by senior-housing portfolio acquisitions and selective new development. Absolute debt grew too, from USD 14.2 billion to USD 19.2 billion, but proportionally less — a 35% increase. The ratio mechanically fell from 31.9% to 28.5%. The Q1 2025 crossing was the first quarter the trailing 12-month operating activity, equity-funded acquisitions, and incremental debt issuance combined to push the ratio under 30%.

This is not a denominator artifact. The senior-housing demographic tailwind expanded Welltower's economic footprint; the company funded most of the expansion through equity issuance and asset-level joint ventures rather than debt. The improvement is real capital-structure improvement, captured by AAOIFI's Total Assets denominator exactly because the denominator is reflecting the operating reality. A market-cap denominator would have shown similar improvement but for very different reasons (the REIT sector re-rated through 2025 as rate expectations eased).

The takeaway for IM trajectories under AAOIFI is that they are slow and they reflect real corporate decisions. The 9 IM names in this universe — Welltower, Ross Stores, Howmet Aerospace, Halliburton, Smurfit Westrock, McCormick, United Airlines, EPAM, and one Real Estate name — share a pattern of asset-base expansion outpacing or matching debt growth, or of cash drawdown that brings the cash ratio back inside.

5.4 Deteriorating — UPS

United Parcel Service is the cleanest DT case in the universe. The verdict string reads C-C-C-N-C-N-N-N. Three quarters compliant, one breach at Q4 2024 (debt/assets 30.0%), brief recovery at Q1 2025 (28.5%), then permanent N through Q2-Q4 2025 (33.6%, 33.4%, 32.3%).

The mechanism is debt issuance against a roughly flat asset base. Total assets stayed in a USD 68–73 billion band across the entire window. Absolute debt grew from USD 18.8 billion (Q1 2024) to USD 23.8 billion (Q2 2025) — a USD 5 billion increase, which moved the ratio from 27.9% to 33.6%. The Q2 2025 jump (from USD 19.5 billion to USD 23.8 billion in a single quarter) is the inflection: UPS issued debt to fund operational restructuring and the small-package-network reorganisation announced through 2025. The asset base did not grow in lockstep.

This is the structural counterexample to Welltower. Welltower grew assets faster than debt; UPS grew debt against a flat asset base. The ratio crossed 30% mechanically. The verdict trajectory captures the consequence directly.

The lesson for DT names is that they often signal a strategic event in progress — an acquisition being funded, a capex cycle beginning, a restructuring being financed. The 6 DT names in this universe — UPS, PPG Industries, LyondellBasell, Zimmer Biomet, Ball Corporation, Avery Dennison — split between Industrials and Materials, both sectors where debt-funded capacity decisions and M&A drive multi-quarter balance-sheet shifts.

5.5 Oscillating — LLY

Eli Lilly is the highest-MC oscillating name and a clean example of how a fast-growing capex-heavy operator can run hot against the 30% debt/assets line. The verdict string reads C-C-N-N-N-C-N-N: two quarters compliant, then non-compliant through Q1 2025, briefly compliant at Q2 2025, then non-compliant for the back half.

The mechanism is the GLP-1 capacity build. Total assets grew from USD 64 billion (Q1 2024) to USD 112 billion (Q4 2025) — a 75% expansion in seven quarters, driven by manufacturing capacity additions for Mounjaro and Zepbound. Absolute debt grew faster: USD 19.1 billion (Q1 2024) → USD 31.1 billion (Q3 2024, after a large acquisition tranche) → USD 42.5 billion (Q3-Q4 2025). The ratio oscillates: 29.9% → 26.6% → 41.2% (Q3 2024 acquisition pushes debt up, asset base hasn't caught up) → 37.4% → 33.0% (asset base growing) → 29.2% at Q2 2025 (asset base finally catches up) → 37.0% (next debt issuance) → 37.8%.

The takeaway is that fast-growing capex operators with active M&A produce noisy debt ratios. Lilly's underlying capital structure may be sustainable on a forward-looking basis — earnings growth justifies the debt — but a static threshold cannot tell whether each ratio breach is durable or transient. The 42 OS names in this universe are concentrated in Health Care, Information Technology, Industrials, and Materials — the sectors where capex, M&A, and active treasury management produce frequent threshold crossings.

Oscillating names are the most operationally awkward for Shariah ETFs. They are not categorically excluded (SN) and they are not durably included (SC). A rules-based fund must either drop them on every breach quarter, accept a position that crosses the threshold mid-holding, or apply a trajectory-aware filter that holds them through transient breaches above some tolerance. The 42 OS names in this universe are where ETF methodology choice matters most.

6. Drivers of Transitions

Across the 418 classifiable names, 148 verdict transitions occurred in the window: 73 compliant-to-non-compliant (C → N) and 75 non-compliant-to-compliant (N → C).

The driver distribution is concentrated. Of the 73 C → N transitions, 57 were debt-only, 5 were combined debt+cash, and 11 were cash-only. Of the 75 N → C transitions, 55 were debt-driven (reversal of debt-only breaches), 18 were cash-driven, and 2 were combined. Net across all transitions: debt accounts for 119 of 148 driver flags (80%), cash for 31 (21%), and the small overlap reflects combined breaches.

What this rules in and out:

• →Debt-ratio breaches dominate. Either the issuer added net debt (UPS, the DT case) or grew assets faster than debt (Welltower, the IM case). Lilly is the textbook combined case — both numerator and denominator growing fast, with the ratio oscillating around 30% depending on which got ahead quarter-to-quarter.
• →Cash-ratio breaches are a structural feature under AAOIFI in a way they are not under DJIM. AAPL, NVDA, AVGO sit permanently outside; smaller cash-rich names (Synopsys, Cadence, EPAM) oscillate around the boundary. The transition contribution is 31 of 148 events — 21% — versus roughly 8% under a DJIM-style screen. The Total Assets denominator is what surfaces these. A Shariah board accepting a market-cap denominator effectively chooses not to surface them.
• →NPI-driven transitions do not appear. Across 148 transitions, zero are NPI-driven in the proxy applied here. NPI > 5% is sticky over an 8-quarter window because interest income is sticky, and S&P 500 large-caps are dominated by operating-company names where interest income does not approach 5% of revenue. Smaller-cap universes may show different patterns.
• →Business-activity transitions also do not appear. No S&P 500 name materially changed its core-business permissibility classification inside this window. M&A and divestitures occurred, but none flipped the qualitative business screen.
• →Asset-base growth is the silent driver. When a name's debt/assets ratio falls from above to below 30% with absolute debt unchanged, the driver tag still reads "Debt" in the data, because the ratio that breached was the debt ratio. But the cause was the denominator expanding. Welltower is the cleanest example of this. The case for surfacing total assets alongside debt and cash in any consumer-facing Shariah product is the same one we made for trailing MC: without the denominator visible, the user infers a debt-issuance event that may not have occurred.

The single most actionable finding for fund operators is that 80% of compliance transitions under AAOIFI are debt-driven, that cash-ratio events double in importance versus DJIM, and that the denominator's slow movement makes most AAOIFI transitions durable rather than transient. A trajectory-aware screen distinguishes the durable from the transient. A binary screen cannot.

The Q4 2025 cross-section of debt ratio against cash ratio, coloured by trajectory, gives the static picture against which the dynamic picture in this paper should be read.

SC names cluster in the bottom-left quadrant (both ratios well under 30%); SN names spread along the right edge and the top edge — the right edge for debt-failures (BA, GS-class names), the top edge for cash-failures (AAPL, NVDA, AVGO). OS, IM, and DT names populate the boundary corridor where transitions concentrate. A binary screen at Q4 2025 alone would classify every name in this chart correctly for Q4 2025. The trajectory data tells you which classifications will still be correct at Q1, Q2, or Q4 of 2026.

7. Implications

For Shariah ETF construction

The 13.6% in-window transition rate among classifiable names sets the order-of-magnitude turnover that a quarterly-rebalanced AAOIFI-screened product would absorb, but the asymmetry matters: the 73 C → N transitions are the outbound events. Spread across the seven quarter-transitions in the window, that is roughly ten names dropped per quarter from a held universe of ~150 current-compliant names (after excluding the SN bucket entirely), a 6–7% per-quarter outbound rate from compliance flips. The 75 N → C events are mostly re-entries from the SN bucket that a strict AAOIFI ETF will have excluded entirely; only the IM subset (9 names) is operationally relevant for inbound additions.

This is materially more turnover than a DJIM-style screen would impose on the same universe. AAOIFI binds harder. The trade-off: an AAOIFI-screened product holds fewer names (28% of the universe is SC, vs 43% under a DJIM 33.33%/MC screen) and rebalances more often, but the Shariah-board defence of the screen is straightforward and textual.

Sector tilt is structural, not cyclical. Underweight Financials and Utilities is permanent. The IT sector — the natural AAOIFI candidate pool — produces an SC rate of 44.4%, lower than many fund operators assume because the cash-rich tech segment (AAPL, NVDA, AVGO, ORCL) fails the cash-ratio test. A Shariah ETF marketed as "S&P 500-like" is, factually, a sector-tilted product: Financials and Utilities are dropped almost entirely, the cash-rich tech megacaps are dropped on the cash ratio, Materials punches above its weight, and the held universe is concentrated in a narrower set of capital-light operating businesses. Fund prospectuses should be explicit about this rather than presenting it as a contingent outcome of recent screens.

A trajectory-aware filter — for example, "exclude names with ≥3 N quarters in trailing 8" — would treat OS and DT names differently from SC and IM names without committing to a binary flip on every transient breach. The 42 OS and 9 IM names in this universe sit at exactly that boundary; the choice of how to handle them is a methodology choice with measurable turnover and tracking-error consequences.

For Shariah boards and purification

Standard purification practice computes the non-permissible share of dividend income (typically the NPI/revenue ratio applied to dividends received) and donates that fraction. The practice assumes a stable compliance state. When a holding spends part of the period non-compliant, the calculation is mis-specified — the dividend received during the non-compliant window arguably warrants different purification treatment than the dividend received during the compliant window.

There is no settled doctrinal answer to this within AAOIFI's published standards, partly because the standards themselves assume a binary state. A trajectory record — name X was N for Q1–Q4 2024, C for Q1–Q4 2025 — is the input a contemporary board would need to formulate a position. The data product introduced here is, in this sense, prior to the doctrinal question. The doctrinal question cannot be addressed without the data.

The Welltower case in §5.3 is the clearest illustration. An investor who held WELL since Q1 2024 received dividend income for four quarters of non-compliance and four quarters of compliance. Purifying the full holding at the current verdict's NPI rate under-purifies. Purifying as if the name were continuously N over-purifies. Trajectory data resolves the input; the doctrinal question of how to compute remains.

For screening platforms

Binary verdicts answer a different question than trajectory data answers. Binary asks "is this name halal today?" Trajectory asks "has this name been halal across my holding period, and what drove the answer?" Both are legitimate questions; only the first is currently served by mainstream Shariah screening providers.

Trajectory adds three product surfaces. The first is the verdict history itself — eight or sixteen or thirty-two quarters of C/N, dated to filing periods. The second is the driver decomposition — for each transition, debt or cash or NPI or business, with the underlying ratio chart and the balance-sheet item that drove it. The third is the trajectory classification — SC, SN, IM, DT, OS, UC — as a stable property of a name's recent screening behaviour.

A user shown only "compliant" for UPS at Q1 2025 cannot anticipate the Q2 2025 flip and the durable deterioration that followed. A user shown the full eight-quarter ratios with the trajectory tag "Deteriorating" can. The information cost of producing the second is the data work in this paper, repeated quarterly. The information value to a Shariah investor planning entry points, exit points, and purification accruals is the difference between a yes/no answer and a continuous picture.

This is the product gap. Halal Terminal's screening API and frontend will expose the trajectory layer alongside binary verdicts as a direct consequence of this study.

8. Limitations and What's Next

AAOIFI-only. This piece applies AAOIFI Standard 21 by the classical text — 30% threshold on a Total Assets denominator — and does not screen the same universe under DJIM, MSCI, or FTSE methodologies. Piece 2 will. The 3-percentage-point threshold gap (30% vs 33.33%) and the denominator split between Total Assets (AAOIFI / MSCI main / FTSE Yasaar) and trailing market cap (DJIM / MSCI M-Series) are the load-bearing variables we will quantify.

US-only. S&P 500 only. Global extension to FTSE 350, TOPIX, and emerging-market large-cap universes is straightforward in principle but requires non-EDGAR filing-system equivalents and harmonised XBRL concept maps. Out of scope here.

Eight quarters is short. The trajectory categories assume a long-enough window to distinguish stable trajectories from extended runs in either direction. A name that is C for ten quarters and N for the next three would read SC in our window if both periods straddle the boundary. A 16- or 24-quarter follow-up will sharpen the IM/DT/OS distinctions and is on the roadmap.

Slow-denominator effect on trajectory inference. Under AAOIFI's Total Assets denominator, IM and DT trajectories are rare (9 and 6 names respectively) because total assets is a slow-moving balance-sheet item. Most trajectory movement registers as OS (42 names) where the underlying balance sheet is genuinely choppy quarter-to-quarter. A 16-quarter window would likely shift the IM/DT/OS split toward IM and DT as multi-quarter directional moves get more room to express. This is itself a methodological finding: AAOIFI's classical denominator produces durable verdicts and discounts noise — a property that is desirable from a Shariah-board perspective but constrains the trajectory taxonomy's resolution.

The 54 UC names are a real coverage gap. Most are business-screen-disqualified (financials, healthcare plans, casinos, tobacco) where ratio data was incomplete but the activity screen is binding. The binding remainder is roughly 20 names where standard XBRL debt or asset concepts did not map to issuer-specific tagging — Ford, General Motors, several biotech names, and the cash-rich tech subset (ANET, MPWR, NOW). Custom XBRL element extraction for these names is a one-time engineering task and will close the gap in the next pass.

NPI is a proxy. Interest-income / TTM revenue is what the production screening engine uses at scale. For the five named examples we cross-checked against the 10-K. For the 472-name universe we did not — the proxy is the disclosed input. A full segment-level NPI parse from 10-K language is technically feasible but not done here.

Engagement with the December 2025 continuous-compliance paper. Qadi, Sharma, and Medda's "Beyond Binary Screens: A Continuous Shariah Compliance Index for Asset Pricing and Portfolio Design" (arXiv 2512.22858, v1 December 2025; revised March 2026) proposes a Continuous Shariah Compliance Index (CSCI) on a [0,1] scale that consolidates six screening standards — AAOIFI, DJIM, FTSE, MSCI, S&P Shariah, and the Securities Commission Malaysia — into a single transparent measurement, applied to US equities from 1999 through 2024.⁶ The CSCI maps each financial ratio into a smooth score that declines from 1 (comfort zone) through intermediate values to 0 (outer-bound breach), capturing how compliant a firm is rather than just whether it qualifies. The paper documents that roughly 74% of permissible-sector firm-months sit strictly between 0.01 and 0.99 — i.e. the binary verdict obscures substantial continuous variation that the CSCI exposes. The proposal is methodologically adjacent to what this study surfaces empirically — both are responses to the same point-in-time problem that motivates §2. The trajectory taxonomy here is coarser than a continuous index (six categories vs a [0,1] score) but is interpretable to a Shariah board in the language of the existing binary screen: SC and SN names map cleanly onto the existing compliant/non-compliant taxonomy, while IM, DT, and OS are new categories with operational meaning. Piece 3 of this series will reconcile the two approaches — the binary-with-trajectory framing developed here, and the continuous-score framing in the paper — on the same S&P 500 universe over the same window, and will identify cases where the two disagree.

The short version: the field is converging on the same problem statement from different directions. The product question is which framing a Shariah board, an ETF operator, and an end investor can each act on.

9. Appendix

9.1 Reproducibility

The methodology is documented end-to-end in §3 and the limitations section. The underlying data products — per-name quarter-end ratios, aggregate cross-tabs, sector-tagged universe, and the pre-publication verification log — are available on request for Shariah boards, index providers, and academic researchers. Contact Yassir at yassir@halalterminal.com.

9.2 Failure-reason coding

• →Debt — interest-bearing debt / total assets ≥ 30%
• →Cash — (cash + interest-bearing securities) / total assets ≥ 30%
• →NPI — interest income (proxy) / TTM revenue ≥ 5%
• →Business — core business not permissible under AAOIFI Standard 21
• →Combos — concatenation (e.g. "Debt+Cash") where multiple ratios breach in the same quarter

9.3 UC bucket

The 54 Unclassified names carry no deterministic trajectory. Roughly 34 are business-screen-disqualified financials, healthcare plans, casinos, and tobacco operators where ratio data was incomplete but the activity screen is binding. The residual ~20 are issuers (large auto OEMs, several biotechs, cash-rich tech) where issuer-specific XBRL tagging did not match the standard debt or asset concept tree used here. None were imputed into a deterministic verdict.

9.4 Universe constituents

The continuous 472-name universe, with sector, industry, eight-quarter verdict string, trajectory tag, and primary failure driver, is available on request alongside the data products in §9.1.

---

References

Additional standards referenced: AAOIFI Shari'ah Standard No. 21: Financial Papers (Shares and Bonds), 2004 edition.

Footnotes

1. →

   Islamic Corporation for the Development of the Private Sector (ICD) and LSEG, Islamic Finance Development Indicator Report 2025. Industry-asset figure verbatim from the report: "the industry has expanded its footprint to 140 countries by 2024 and reached a valuation of US$5.98 trillion, marking an impressive 21% growth in just one year"; projection verbatim: "If growth continues at current levels, a figure of US$9.7 trillion is forecast by 2029." ↩

2. →

   S&P Dow Jones Indices, Dow Jones Islamic Market Indices Methodology (current version, 2025). Debt and cash thresholds set at 33.33% on a trailing 24-month average market-cap denominator. ↩

3. →

   MSCI, MSCI Islamic Index Series Methodology, May 2025. The main MSCI Islamic Index Series applies 33.33% leverage and liquid-assets thresholds on a Total Assets denominator (with 30%/35% entry/exit buffers); the parallel MSCI Islamic M-Series Indexes apply the same 33.33% thresholds on a 36-month average market-cap denominator. ↩

4. →

   FTSE Russell and Yasaar Limited, FTSE Yasaar Global Equity Shariah Index Series Ground Rules, v4.6, February 2026. Applies a 33.333% threshold on debt/total-assets and cash-plus-interest-bearing-items/total-assets, with an accounts-receivable-plus-cash/total-assets cap of 50%. ↩

5. →

   Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Shari'ah Standard No. 59: Sale of Debt (Bahrain: AAOIFI). The standard's promulgation aligned the screening framework with the removal of the historic illiquid-assets test that earlier screens carried over from pre-2018 practice. ↩

6. →

   Abdulrahman Qadi, Akash Sharma, and Francesca Medda, "Beyond Binary Screens: A Continuous Shariah Compliance Index for Asset Pricing and Portfolio Design" (v1 28 December 2025; v2 11 March 2026 revised under the title "From Binary Screens to Continuous Compliance: A Shariah Screening Measure for Portfolio Design"), arXiv:2512.22858. ↩