Abstract
This paper develops a new quantitative measure that reflects the extent to which a firm complies with Shariah relative to the other firms located in a certain region at a certain time. This measure can be customized to be consistent with each investor’s objectives, constraints, and beliefs. I argue that the use of this measure is preferable to the existing use of ratio thresholds for the following two reasons. First, it is more Shariah-appropriate because it provides the Shariah-compliant investor with a clear understanding of the relative compliance status of each firm he wishes to invest in. Second, it can be incorporated into any portfolio optimization model to create a balance between improving Shariah compliance and not compromising investment returns. In conclusion, the paper provides illustrative results using a sample of all publicly traded US firms over the period from 2010 to 2016.
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