When Values-Based Screens Disagree: Continuous Shariah Compliance and Classification Dynamics

Abstract

Does the design of a values-based screening rule generate eligibility changes when reported accounting inputs remain unchanged but market valuations move? We apply seven Shariah financial-screening rulebooks to 1.34 million U.S. security-months from 1999 to 2024 on a common, threshold-anchored scale. Applied retrospectively, the full emulations disagree on 35.9% of complete permissible-sector observations (38.8% from 2015, when all were in force), and the financial-ratio screens alone on 47.3%. Under AAOIFI's spot market-capitalisation denominator, market-capitalisation movement alone is sufficient for 65.6% of breaches, and half of denominator-driven breaches reverse within three months; numerator movement dominates under asset-based rules. Holding the threshold and sample fixed, a 24-month average denominator cuts debt-screen transitions from 2.51% to 1.03% a month, whereas raising the threshold barely matters. Among breaches of similar severity the reversal gap narrows but persists. Portfolio and fund-holdings evidence qualifies these findings: benefits are modest under a binding single-rule mandate.

arXiv comment30 pages, 7 figures, 19 tables