What is Shariah-compliant investing?

The basic idea

Shariah-compliant investing aims to align investment activity with Islamic principles. In practice, this usually means avoiding businesses whose main activities are prohibited and checking whether a company's finances meet the rules of the chosen Shariah methodology.

How screening works

Most Shariah equity methodologies use two broad tests. The first is a business activity screen, which looks at what a company does and where its revenue comes from. The second is a financial screen, which considers measures such as debt and interest-related assets or income.

The exact thresholds and calculation methods are not identical across providers. A company can therefore pass one recognised Shariah methodology and fail another.

Purification and ongoing review

Some methodologies permit a small amount of incidental non-compliant income. Where this happens, a purification process may be used to calculate an amount to be donated to charity. Shariah status can also change over time as a company's activities, finances or the methodology itself changes.

What Shariah-compliant does not mean

A Shariah screen does not remove normal investment risk. The value of investments can still rise or fall, and investors still need to understand diversification, costs, liquidity and the assets they own.

This guide is general education, not personal financial advice.