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Shariah refers to Islamic law derived from the Quran and the teachings of Prophet Muhammad. In finance, it provides the ethical and legal framework that determines which investments and business activities are permissible.

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Beginner

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What It Means

Shariah (also spelled Sharia) is the body of Islamic religious law. For investors, it defines which companies and financial instruments are permissible (halal) and which are prohibited (haram) based on their business activities and financial structure.

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Practical Example

A Shariah-compliant portfolio might include Apple (technology), Johnson & Johnson (healthcare), and Toyota (manufacturing)—companies whose core businesses don’t conflict with Islamic principles. It would exclude Anheuser-Busch (alcohol), Las Vegas Sands (gambling), and conventional banks (interest-based lending).

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Why It Matters

For Muslim investors, aligning investments with Shariah is a religious obligation. Shariah compliance ensures that:
  • Investments don’t profit from prohibited activities
  • Financial structures avoid interest (riba)
  • Risk and reward are shared fairly between parties
  • Business dealings are transparent and ethical

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Advanced

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Sources of Shariah Law

Shariah principles derive from a hierarchy of sources:
SourceDescription
QuranPrimary source—direct revelation
Sunnah/HadithTeachings and practices of Prophet Muhammad
IjmaScholarly consensus
QiyasAnalogical reasoning for new situations

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Shariah Boards

Investment products claiming Shariah compliance are typically overseen by a Shariah Supervisory Board—a panel of qualified Islamic scholars who:
  • Approve investment universes and methodologies
  • Rule on ambiguous cases
  • Conduct periodic audits
  • Issue formal certification (fatwa)

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Key Prohibitions in Islamic Finance

Core Prohibitions:
├── Riba (interest/usury)
├── Gharar (excessive uncertainty/speculation)
├── Maysir (gambling)
└── Haram activities:
    ├── Alcohol production/distribution
    ├── Pork-related products
    ├── Conventional financial services
    ├── Gambling/gaming
    ├── Adult entertainment
    ├── Tobacco
    └── Weapons manufacturing

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Schools of Jurisprudence

Different schools (madhabs) may interpret Shariah principles differently. The major schools include:
  • Hanafi: Common in South Asia, Turkey
  • Maliki: Common in North/West Africa
  • Shafi’i: Common in Southeast Asia, East Africa
  • Hanbali: Common in Saudi Arabia, Gulf states
Conservative Shariah screening applies standards acceptable across schools to ensure broad compliance.

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AAOIFI Standards

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) provides standardized Shariah guidelines used by Islamic financial institutions globally. These standards cover screening criteria, purification calculations, and governance requirements.
Shariah compliance is not binary for edge cases. Qualified scholars may differ on specific situations, which is why institutional oversight through Shariah boards is essential.

Riba

Prohibition on interest

Halal Investing

Permissible investments

Purification

Cleansing non-compliant income