Halal Investment Guide: Shariah-Compliant Stocks and Funds

Introduction: The Growing Demand for Halal Investment

The global Muslim population exceeds 1.9 billion people, and a growing proportion are seeking investment options that align with their religious values. Halal investing — allocating capital in ways that comply with Islamic Shariah law — is no longer a niche practice. It encompasses a multi-trillion-dollar ecosystem of screened equities, Islamic mutual funds, exchange-traded funds (ETFs), sukuk, real estate, and private equity, supported by dedicated index providers, fund managers, and a robust body of scholarly guidance.

For Muslim investors, the challenge is practical: how do you build a diversified, growth-oriented portfolio while avoiding the sectors, financial structures, and income sources that Shariah law prohibits? This guide provides a practical framework for halal investing, covering the screening criteria, major index providers, fund options, and implementation strategies that Muslim investors need to make informed decisions.

What Makes an Investment Halal?

An investment is considered halal (permissible) when it avoids the categories of economic activity and financial structuring that Islamic law prohibits. The two primary screens are qualitative (what the company does) and quantitative (how the company is financed and what income it earns).

Qualitative Screening: Business Activity

The first layer of Shariah screening examines the company's core business activity. Companies whose primary revenue comes from the following activities are excluded:

• Riba-based financial services: Conventional banks, insurance companies, mortgage lenders, and other financial institutions whose core business involves interest-based lending and borrowing.
• Alcohol: Producers, distributors, and retailers of alcoholic beverages.
• Pork and non-halal food: Companies involved in the production or sale of pork products or other non-halal food.
• Gambling: Casino operators, online gambling platforms, lottery companies, and gaming equipment manufacturers.
• Tobacco: Tobacco manufacturers and distributors. Some scholars and screening methodologies also include cannabis companies.
• Adult entertainment: Companies involved in pornography or related content.
• Weapons and defence: This is an area of scholarly disagreement. Some screening methodologies exclude all weapons manufacturers; others exclude only manufacturers of weapons of mass destruction or those whose primary business is weapons (as opposed to diversified defence/aerospace companies).
• Entertainment: Some stricter screening methodologies exclude companies involved in conventional music, cinema, or media considered incompatible with Islamic values. This criterion varies significantly between screening providers.

If a company's core business is permissible but it derives a small percentage of revenue from impermissible activities (for example, a hotel chain that earns some revenue from alcohol sales in its restaurants), it may still pass screening if the impermissible revenue falls below a threshold — typically 5% of total revenue. The investor is then required to "purify" their dividend income by donating the proportion attributable to the impermissible revenue to charity.

Quantitative Screening: Financial Ratios

Even if a company's business activity is permissible, its financial structure must also comply with Shariah principles. The quantitative screens examine three main ratios:

Debt Ratio

Companies that rely heavily on interest-bearing debt are excluded. The standard threshold, used by most major Shariah index providers, is that total interest-bearing debt must not exceed 33% of the company's total market capitalisation (or total assets, depending on the methodology). This threshold is derived from a hadith in which the Prophet Muhammad (peace be upon him) stated that "one-third is a lot" in the context of bequests, which scholars have generalised as a tolerance threshold for impure elements.

Interest Income Ratio

Interest income and other non-permissible income (from investments in conventional financial instruments) must not exceed a specified threshold of total revenue. The AAOIFI standard sets this at 3.5% of total revenue; other providers use 5%.

Cash and Interest-Bearing Securities Ratio

Cash and interest-bearing deposits and securities must not exceed 33% of total market capitalisation (or total assets). This prevents investing in companies that are essentially holding companies for interest-bearing instruments.

Major Shariah Index Providers and Their Methodologies

Several major index providers maintain Shariah-compliant equity indices. While their approaches share the same foundations, there are meaningful differences in how they apply the screens:

Provider	Key Indices	Debt Threshold	Interest Income Threshold	Denominator
S&P Dow Jones (DJIM)	Dow Jones Islamic Market Index	< 33%	< 5%	Market capitalisation (trailing 24-month avg)
FTSE Russell	FTSE Shariah Index Series	< 33%	< 5%	Total assets
MSCI	MSCI Islamic Index Series	< 33.33%	< 5%	Total assets
AAOIFI	Standards (not an index provider)	< 30%	< 3.5%	Market capitalisation
Securities Commission Malaysia	SC Shariah-Compliant Securities List	< 33%	< 5% (core), < 20% (mixed)	Total assets / revenue (two-tier)

The choice of denominator matters significantly. Market capitalisation-based screens (DJIM, AAOIFI) tend to be more volatile — a sharp drop in a company's share price can push its debt ratio above the threshold, causing it to be excluded from the index at the next rebalancing, even if its actual borrowing has not changed. Total assets-based screens (FTSE, MSCI) are more stable but can be more permissive for companies with large balance sheets relative to their borrowing.

Shariah-Compliant Investment Vehicles

Islamic Equity Funds and ETFs

Islamic equity funds invest in portfolios of Shariah-screened stocks. These are available as actively managed mutual funds and as passively managed ETFs that track Shariah indices. Key options include:

• iShares MSCI World Islamic UCITS ETF: Tracks the MSCI World Islamic Index, providing broad exposure to Shariah-compliant large- and mid-cap stocks across developed markets.
• SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS): Tracks an S&P 500 Shariah-compliant index, providing exposure to the US large-cap market.
• Wahed FTSE USA Shariah ETF (HLAL): Tracks a FTSE Shariah index of US-listed equities.
• Saturna Capital (Amana Funds): One of the longest-running families of Islamic mutual funds in the United States, with the Amana Growth Fund and Amana Income Fund available to retail investors since the 1980s.

Malaysian investors have access to a particularly wide range of Islamic unit trust funds, reflecting Malaysia's position as the world's most developed Islamic capital market. The Securities Commission Malaysia regularly publishes an updated list of Shariah-compliant securities on Bursa Malaysia.

Sukuk Funds

For investors seeking fixed-income exposure without interest-bearing bonds, sukuk funds invest in portfolios of sukuk (Islamic financial certificates). These provide more stable returns than equity funds and serve a similar role to conventional bond funds in a diversified portfolio. Global sukuk funds are offered by managers including Franklin Templeton, Aberdeen, and specialist Islamic asset managers.

Islamic REITs

Real estate investment trusts (REITs) structured under Shariah guidelines invest in property portfolios that comply with Islamic principles. This means the properties must not be leased to tenants engaged in prohibited activities (e.g., bars, casinos, conventional banks), and financing must be Shariah-compliant. Malaysia's Al-'Aqar Healthcare REIT and Al-Salam REIT are examples, and the FTSE EPRA Nareit Global Islamic Index tracks Shariah-compliant REITs worldwide.

Halal Robo-Advisors and Fintech Platforms

A new generation of halal fintech platforms is making Shariah-compliant investing accessible to retail investors. Platforms such as Wahed Invest, Sarwa (Shariah portfolios), and Ethis offer automated portfolio construction using Shariah-screened ETFs and sukuk, with lower minimum investments than traditional Islamic fund managers.

Building a Halal Investment Portfolio

Asset Allocation Framework

The principles of diversified asset allocation apply equally to halal portfolios. A typical framework might include:

• Shariah-compliant equities (50-70%): Broad market exposure through Islamic index ETFs, supplemented with individual Shariah-screened stocks for those who want more control.
• Sukuk (15-30%): Fixed-income equivalent allocation for stability and income. A mix of short-term and medium-term sukuk provides a balance between yield and liquidity.
• Islamic REITs (5-15%): Real estate exposure for diversification and income.
• Gold and commodities (5-10%): Physical gold and Shariah-compliant gold products serve as a portfolio hedge. Gold ownership is permissible in Islam, though leveraged gold trading and certain gold ETF structures may raise Shariah concerns.
• Cash equivalents: Islamic money market funds and commodity murabahah deposits provide liquidity without interest.

Purification of Income

Even Shariah-screened companies may earn a small amount of income from impermissible sources (within the tolerance thresholds). Islamic scholars require investors to "purify" their dividend and capital gains income by calculating the proportion attributable to impermissible revenue and donating that amount to charity. Most Islamic fund managers handle this calculation automatically and publish purification ratios for their funds.

For individual stock investors, the purification calculation requires dividing the company's non-permissible income by its total income, then applying that ratio to the dividends received. This amount should be given as charity (sadaqah), not as zakat.

Zakat on Investments

Muslim investors are obligated to pay zakat on their investment assets. The standard zakat rate is 2.5% of the market value of zakatable assets held for one lunar year. For equity investments, the calculation methodology varies by scholarly opinion — some scholars apply zakat to the full market value of shares, while others apply it only to the company's zakatable assets proportional to the investor's shareholding. Consulting with a knowledgeable scholar or using a reputable zakat calculator is advisable.

Common Questions About Halal Investing

Is It Permissible to Invest in Companies With Some Debt?

Yes, within the tolerance thresholds established by Shariah scholars. The 33% debt-to-market-capitalisation threshold (or debt-to-total-assets, depending on methodology) represents a scholarly consensus that a minority element of impermissible financing does not render the entire investment impermissible, provided the core business is halal and the investor purifies their income. Operating in a modern economy without any exposure to interest-bearing structures is practically impossible, and Shariah scholars have acknowledged this reality.

Can I Invest in Conventional Index Funds or the S&P 500 Directly?

No, a conventional index fund like a standard S&P 500 ETF includes companies that fail Shariah screening — conventional banks, alcohol producers, gambling companies, and others. However, Shariah-compliant versions of major indices exist (as listed above), which track the same market while excluding non-compliant companies.

What About Cryptocurrency?

The permissibility of cryptocurrency investment under Shariah law is a complex and actively debated topic. For a detailed analysis of scholarly positions, see our article on whether cryptocurrency is halal.

Conclusion: Making Halal Investment Work

Halal investing is practical, accessible, and does not require sacrificing portfolio performance. Research has consistently shown that Shariah-screened equity indices perform comparably to their conventional counterparts over the long term — the exclusion of highly leveraged financial companies, for instance, provided a measure of protection during the 2008 financial crisis.

The key steps for any Muslim investor are: understand the screening criteria, choose investment vehicles from reputable providers with credible Shariah governance, diversify across asset classes using the halal alternatives available, purify income as required, and pay zakat on investment wealth. The growing range of halal fintech platforms and Islamic fund options makes this more achievable today than at any point in history.

For businesses in the halal economy looking for Shariah-compliant financing or investment partners, the HalalExpo business directory connects you with Islamic financial institutions, fund managers, and fintech providers serving the global halal market.

Shariah-compliant stocks, sukuk, and fund holdings are zakatable each lunar year — how to calculate zakat on investments covers the rates, the nisab thresholds, and the most common scenarios for portfolio investors.