Beyond Binary Screens: A Continuous Shariah Compliance Index for Asset Pricing and Portfolio Design

Abdulrahman Qadi, Akash Sharma and Francesca Medda

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Abstract: Binary Shariah screens vary across standards and apply hard thresholds that create discontinuous classifications. We construct a Continuous Shariah Compliance Index (CSCI) in $[0,1]$ by mapping standard screening ratios to smooth scores between conservative ``comfort'' bounds and permissive outer bounds, and aggregating them conservatively with a sectoral activity factor. Using CRSP/Compustat U.S. equities (1999-2024) with lagged accounting inputs and monthly rebalancing, we find that CSCI-based long-only portfolios have historical risk-adjusted performance similar to an emulated binary Islamic benchmark. Tightening the minimum compliance threshold reduces the investable universe and diversification and is associated with lower Sharpe ratios. The framework yields a practical compliance gradient that supports portfolio construction, constraint design, and cross-standard comparisons without reliance on pass/fail screening.

Date: 2025-12
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