Equity Investing — The Sharia Way

Introduction: Can Stock Investing Be Halal?

For many investors, equities (stocks) are the cornerstone of wealth building. They offer long-term growth, dividends, and exposure to the global economy. But for Muslim investors, and increasingly for non-Muslims seeking ethical options, the key question is:

Can stock investing be halal?

The answer is yes — but with conditions. Sharia-compliant equity investing follows a strict screening process that filters out companies engaged in prohibited (haram) industries, as well as those with excessive debt or interest-based practices. The result is a portfolio of businesses that are more ethically aligned and financially disciplined.

In this article, we’ll explore:

• The principles of Sharia-compliant equity investing

• How the screening process works in practice

• Examples of Sharia-compliant equity funds

• Case studies of investors who benefited

• How Sharia equities compare with conventional benchmarks

• The role of equities in a diversified, halal portfolio

By the end, you’ll see how Sharia-compliant equities are not only possible — they may also deliver competitive performance with ethical peace of mind.

Sharia-Compliant Equity Investing Process

Core Principles of Sharia-Compliant Equity Investing

Sharia equity investing rests on two layers of principles:

1. Business Activity Screening (Sector Exclusion): Companies involved in industries like alcohol, tobacco, gambling, adult entertainment, pork processing, weapons manufacturing, and conventional banking/insurance are excluded.

2. Financial Ratio Screening: Even if a company’s core business is halal, its financials are analyzed to ensure limited exposure to interest (riba) or excessive debt. Common Sharia thresholds include:

   • Debt-to-assets ratio below 33%

   • Non-compliant income (e.g., interest) less than 5%

   • Liquidity and receivables within set Sharia-approved limits

Companies that pass both screens are deemed Sharia-compliant.

The Screening Process: From Theory to Application

Sharia compliance screening is performed by specialized Sharia boards or advisory councils. These boards regularly review listed companies and update their compliance status.

Example: MSCI World Islamic Index

This index applies both business activity and financial ratio screens to over 1,600 global companies, narrowing it down to about 300–400 Sharia-compliant firms.

How It Works in Practice:

• Step 1: Exclude companies in haram industries (e.g., casinos, breweries, banks).

• Step 2: Apply financial ratio screens (debt, interest, receivables).

• Step 3: Monitor and re-screen quarterly to ensure ongoing compliance.

Investors can access these companies via ETFs, mutual funds, or managed portfolios.

Examples of Sharia-Compliant Equity Funds

1. iShares MSCI World Islamic UCITS ETF

   • Exposure to 20+ developed markets.

   • Excludes financials and haram industries.

   • Provides broad diversification for global investors.

2. HSBC Islamic Global Equity Index Fund

   • Tracks Sharia-compliant companies across global markets.

   • Backed by HSBC’s Islamic finance expertise.

3. Amana Growth Fund (USA)

   • Focused on long-term capital growth.

   • Managed according to Islamic principles.

   • One of the oldest Sharia-compliant equity funds in North America.

Examples of Sharia-Compliant Equity Funds

Historical Performance: How Do Sharia Equities Compare?

One of the most common myths is that Sharia-compliant equities underperform conventional stocks due to restrictions. The reality often proves otherwise.

• S&P 500 Shariah Index (2013–2023): Averaged ~16% annual return.

• Conventional S&P 500 (same period): Averaged ~15.3% annual return.

Why the outperformance?

• Sharia screening excludes highly leveraged companies, reducing financial risk.

• Focus on asset-backed, real-economy businesses aligns with long-term stability.

This shows that Sharia investing is not just “ethical” but also financially competitive.

Case Study: Building Wealth the Sharia Way

Background: Fatima and Omar, a Canadian expat couple in Dubai, wanted to grow wealth for retirement but were wary of haram exposure.

Solution: They invested in a diversified portfolio of Sharia-compliant equity funds, including iShares MSCI World Islamic ETF and HSBC Islamic Global Equity.

Outcome:

• Achieved an average annual return of 14.8% over 8 years.

• Zero exposure to prohibited industries.

• Peace of mind knowing their portfolio aligned with their values.

Fatima later remarked: “For us, it’s not just about returns. It’s about building wealth with integrity.”

Benefits of Sharia Equity Investing

• Ethical Alignment: No exposure to industries conflicting with values.

• Financial Discipline: Low leverage, strong asset backing.

• Competitive Returns: Historical data shows comparable, sometimes superior, performance.

• Global Diversification: Access to leading companies across technology, healthcare, energy, and consumer goods.

Risks and Considerations

• Sector Concentration: Excluding financials reduces diversification in some markets.

• Reclassification Risk: Companies may lose Sharia-compliance status after quarterly reviews.

• Volatility: Equities, Sharia-compliant or not, remain subject to market ups and downs.

That’s why many advisors recommend blending equities with Sukuk and real assets to create a balanced, compliant portfolio.

Equities in a Sharia-Compliant Portfolio

In a traditional portfolio, equities provide growth while bonds provide stability. In a Sharia portfolio, equities serve the growth engine, while Sukuk take the role of fixed income.

A well-structured Sharia portfolio might look like:

• 60% Equities (Sharia-screened global funds)

• 30% Sukuk (income stability)

• 10% Real Assets (e.g., REITs, infrastructure)

This balance provides growth, income, and diversification — all while staying halal.

Equities in a Sharia-Compliant Portfolio

The Bigger Picture: Ethical Investing for Everyone

Interestingly, Sharia equity investing is gaining traction beyond Muslim investors. Non-Muslims seeking ethical and sustainable investments are drawn to Sharia funds because they naturally avoid industries like gambling, alcohol, and weapons while promoting financial prudence.

This crossover appeal has fueled demand in Europe, the U.S., and Asia, making Sharia-compliant equities part of the mainstream responsible investing movement.

Conclusion: A Path to Halal Wealth Creation

Sharia-compliant equity investing answers the critical question: Can Muslims and ethically conscious investors participate in the stock market? The answer is a clear yes.

By applying strict business and financial filters, Sharia equity funds provide exposure to global growth while maintaining compliance with faith and values. With strong historical performance and growing global demand, they are a powerful tool for long-term wealth creation.

✅ Next Step: Book a consultation with Bassem Fawzy to explore Sharia-compliant equity funds tailored to your goals. Save your seat in our upcoming webinar