Shariah Compliant Investing : The Intersection of Ethics and Financial Gains.
What is investing in the lens of religion?
Investing is generally a financially and socially productive idea. Markets however, favour returns, even when there are moral implications. Although financial gains are a primary focus of investing, it doesn’t have to be the only factor. Investing can be done in a way that wider social utility is not only considered, but prioritised. An ethical approach to investing.
This can be achieved via Shariah compliant investing. It aims to achieve this via 2 methods.
An Industry Screen – Screens out unethical and potentially harmful industries
A Financial Screen – Screens out equities in companies that are too heavily financed via debt.
Shariah compliant investing’s importance is often underestimated. It is not only important from an ethical perspective (and not just by theological moral standards). It also increases market participation from a population that severely lacks it.
Why does this matter?
Well participation in the markets (generally speaking) is a good thing. Investment spurs production and growth, and helps create jobs and fiscal growth, which in turn drives economic prosperity (oversimplification of what happens but the point still stands).
Participation however is limited in certain communities such as the Muslim population in the UK. This is broadly due to the fact that:
a) they don’t fully understand the concept of investing and /or don’t see it as permissible, or;
b) they understand investing but aren’t aware of the Shariah compliant alternatives available to them.
This article aims to help clarify both, by explaining what Islamic/Shariah investing actually means. But firstly:
Is investing permissible?
A common statement you may hear in muslim communities is that investing is forbidden as it’s akin to gambling. This is a core misunderstanding of investment and risk. In Islamic contracts, profit has to come with some form of liability or risk.
For example, for you to profit off of a physical good, you must own that good and thus be exposed to the physical risks associated with those assets. Islam neither encourages nor forbids risk. It simply imposes balance between risk and return.
Investing fits within this framework as you research a business (or an asset/investment manager does this on your behalf) and invest with expectations they can use that funding to be productive and achieve economic growth and returns, which you then can in turn benefit from.
Increased returns aren’t simply achieved via luck. They are determined based on things such as the performance of the company and its underlying products/services, operational factors, demand/supply, macro economic factors etc. You are investing in real-world assets, which warrants risk, and therefore you are entitled to reward on the upside, but are also exposed to the downside.
You can also tactically mitigate risks by diversifying which asset classes, industries, companies you choose to invest in.
Gambling on the other hand is speculative, where outcomes are heavily dependent on chance. They are zero sum games that are unproductive, and simply result in a transfer of wealth.
Statistically speaking, the expected value of investing in markets is positive. Over time you will likely generate returns on your investment.
The expected value of gambling is negative. “The house always wins”. The longer you play, the higher your chance is to lose.
Now that I have covered how investing as a concept reconciles with Islam, I will now dive into what it means for investing to be Shariah compliant.
The Qualitative Screen
When investing is performed in a Shariah compliant manner, it is first filtered via an industry screen. This screen excludes any investments from certain industries that are considered forbidden (Haram) in the eyes of Islamic morality.
This is fairly easy to filter out if investing is done at the individual stock level, as you can divest/not invest in the companies you know are within these industries. It is harder to do in diversified ETFs and mutual funds which pool investments across various industries, often tracking indexes like the S&P 500, (the 500 largest publicly listed US companies), that everyone tells you to invest in.
In this case, new products have to be created, which similarly tracks an index, but layers over the industry screening to carve the companies that are within said forbidden industries. More on this later on.
The key industries that would be excluded are as follows:
Conventional Banking and Insurance - due to association with Riba (Interest)
Gambling – due to association with Gharar (excessive risk)
Alcohol
Non-compliant Food Production (e.g. Pork)
Adult Entertainment
Tobacco
Weapons and arms manufacturing (with the nuance that defensive is generally considered permissible whilst offensive is not)
Although these industries are generally screened out from Shariah compliant investments, and that there is the preference to completely exclude these sectors, there are still defined thresholds to allow some involvement, where companies generate turnover from multiple sources.
This is as given the increasing entanglement of business operations as a result of globalisation and diversification efforts, allowance is made for an immaterial amount of turnover from these aforementioned industries. Say for example a gaming company that had a small share of its group revenue from a gambling subsidiary. If that revenue was less than the set threshold, it would still be considered Shariah compliant to invest in this company.
What this threshold is, depends on the Shariah supervisory boards governing this, however it is most commonly set at 5% of total turnover from a business’s operations.
The Quantitative Screen
Where the qualitative screen looks at the specific industries and operations of a company, the quantitative screen looks at how the company is financed. As discussed in previous articles, interest (Riba) is forbidden according to Islamic law as it is the charge of money for the borrowing of money, as it is simply a medium of exchange and not a product asset itself, and due to the negative social and economic implications exponential debt accumulation can have.
A business generates funding in 2 main ways. Firstly capital injection with the return of equity in the venture, and secondly via interest based debt.
Given how deep-rooted interest is in the current economic infrastructure, Islam understands and appreciates that it is practically impossible to invest in a company that has no debt financing. The quantitative screen therefore is a screen to ensure the companies that are being invested in, are not too heavily debt financed.
What is too heavily debt financed?
This again varies based on the Shariah governing board , but is generally based on the principle that a company can carry some debt, just not be built on it. Examples include:
Total Debt / 24 Month (trailing) Average Market Capitalisation < 33%
Debt / Total Assets < 33.33%
(Cash + Accounts Receivable) / Total Assets < 50%
Total interest + non-compliant activities < 5% of Total Revenue
This therefore acts as a practical overlay on the financials of a company to invest in, to ensure that they aren’t overly involved in Riba based transactions.
How do invest like this?
So how does one actually go about investing in a Shariah compliant manner? Well there are a number different ways to do so, each with pros and cons of their own;
Route 1 - Create your own portfolio entirely yourself.
As discussed before, you can research individual company stocks to determine if they pass both the industry and financial screening criteria, and build out your own portfolio this way. This however is severely time consuming, and involves going through various companies financial statements to calculate the financial ratios and determine their operations and whether enough of it is considered permissible.
This also has to be continuously monitored to determine whether these companies remain permissible to invest in, and whether certain portions of gains have to be “purified” (impermissible portions of profits have to be given away to charity and cannot be maintained).
There is also a requirement of fundamental understanding of how to accurately interpret the financial statements. Items such as total debt are broad terms and can cover various liability items and debt like instruments, and so there needs to be a baseline understanding of finance and accounting.
The major pro however of this method is the flexibility to create your own unique portfolio, which if executed correctly can net you returns that significantly outperform the market and other pre-designed products.
For the vast majority of people I would however not recommend this method as mentioned before, requires in-depth understanding of finance and accounting and extensive research into the markets. This requires a large time investment, especially in the beginning, but also throughout. For individuals who still want that flexibility, the next route may however be a less intensive option.
Route 2 - Create your own portfolio, outsource the screening.
Similarly you can create your own bespoke portfolio by choosing the stocks you want to invest in. You can however use a variety of paid services such as Zoya, Wahed and Islamicly to do the screening process for you. These subscription based tools include a directory where it labels each individual stock as either permissible, questionable or impermissible based on the Shariah compliant criteria. In regards to questionable stocks however, they don’t usually govern how much of the profit has to be cleansed in this regard, so if you choose to invest in these, there is still a need to do some investigation in this manner.
Again this benefits from creating a more personalised portfolio that can potentially generate significant returns. I still would not recommend this to the majority of people as there would still be a significant amount of research time to companies and the market to determine which companies to actually invest in from a returns perspective. This can be a daunting task to many investors, especially first time investors and will likely deter people from investing in the first place. There is a real demand for convenience here.
Route 3 - Invest in Islamic ETFs and Mutual Funds.
The route I would recommend to most people looking to invest in general, is to invest in pre-formulated mutual funds/ETFs created by asset and investment managers, those that have the infrastructure, resourcing and wealth of knowledge of markets. This is especially the case when considering the additional complexity of Shariah compliant investing.
These products are diversified offerings that invest in a variety of industries to allow the average investor to tap into global markets and invest in hundreds of companies via just one channel. The screening process is already done for you, and in some cases, if any portion of the profits needs to be purified, this is done automatically by the fund. These often just track indexes like the S&P 500 or the FTSE 250, to allow you to capture a significant portion of the current stock market.
Of course the associated fees for a product like this would be higher but these products still perform well on average to justify these fees, with the Shariah compliant products often matching or actually outperforming its conventional peers.
As of the time of writing this article (June 2026), one of the more prominent Shariah compliant funds, the HSBC Islamic Global Equity Index Fund is up by 36.73% over the past year. Similarly the Emerging markets ETF (HSBC MSCI Emerging Markets Islamic Screened UCITS ETF) has also seen strong FY 25 performance with an uptick of 43%. Many of these funds are strong performers and highlights that these funds can stack up against the conventional funds, and even in some cases outperform them.
Some of the most popular current Islamic equity funds are as follows:
HSBC Islamic Global Equity Index Fund
HSBC MSCI Emerging Markets Islamic Screened UCITS ETF
iShares MSCI World Islamic UCITS ETF
iShares MSCI EM Islamic UCITS ETF
Wahed S&P 500 Shariah UCITS ETF
Wahed FTSE USA Shariah ETF (HLAL)
and many more…
You can find most of these to invest in via various brokerage platforms such as Trading212, Hargreaves Lansdown, AJ Bell and Fidelity, and a lot of these funds are compatible with Stocks and Shares ISAs, so you can invest in them tax efficiently.
As a starting point, I would always recommend investing in one or a handful of these products, but if you gain market insights and knowledge later down the line, you can branch out and pursue more tailored investing strategies.
Closing
Market participation matters, and bringing in a historically underserved part of the population is a goal that should concern more than just Muslims. Shariah compliant entry points into investing are key for this and encourage a more socially positive outlook to markets and economic growth.
What has been currently defined as Shariah compliant is however due an honest critique. There are scholarly debates on what the standards should be and the quantitative thresholds also seem somewhat arbitrary.
Shariah screening is however a multifaceted and meaningful improvement over no screening, and Islam is a practical religion and so scholars appreciate that the current financial system is too heavily intertwined with un-Islamic practices. I believe striving for products and investment methods that are more closely aligned to Islamic principles is still a step in the right direction.
From a practical perspective, the recommendation is to invest in Shariah compliant funds currently available on the market , but there is the option to create your own personalised portfolios, as long as the necessary screening and due diligence is performed.
Shariah compliant investing can be favourable to non-muslims as well. For those that resonate with the ethical prioritisation that may align with your own beliefs but also from a performance perspective. Shariah compliant funds have historically performed competitively with their conventional counterparts, closely tracking broad market returns despite the screening. The screening shifts a portfolio’s sector mix, which helps in some years and hurts in others, but over time the performance is broadly comparable and can outperform in some instances, so there is still reason to invest here, even if not for religious obligations.
A final note I wanted to add is that you may have noticed that when referring to investments I have specifically referred to equity investing. There are other products such as Sukuks (Islamic Bonds) and Real Estate instruments that I will cover separately in another article, as these are different asset classes entirely, and when most people talk about investing, they are colloquially referring to the stock market.
Disclaimer
Aqila Finance is an educational publication and does not provide regulated financial advice. The information here is for general informational purposes only and should not be relied upon for individual financial decisions. For advice tailored to your circumstances, please consult an FCA-authorised financial adviser. Aqila Finance is not authorised or regulated by the Financial Conduct Authority.