The first test a sharia scholar or fund manager applies when considering whether a company is sharia-compliant focuses on the company’s core business. If the company’s business centers on prohibited activities, the company is out — period; it doesn’t even make it to the financial round.
Prohibited industries and activities per sharia include the following:
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Conventional financial services that feature transactions based on interest, speculation, and/or gambling: This criterion means that conventional banks, investment companies, insurance companies, and other financial institutions are considered noncompliant.
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Certain food and beverage industry sectors: Companies whose core businesses involve alcohol, pork products, or other meat that’s not slaughtered according to sharia law aren’t considered compliant.
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The tobacco industry and activity related to illegal drugs: In the past, tobacco use was a source of some controversy and confusion in the Muslim community. Now, however, most sharia scholars agree that the use of tobacco and investing in the tobacco industry are prohibited. And of course, illegal drugs (and any illegal activities, for that matter) are off limits.
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Gambling: This prohibition means that an Islamic fund can’t invest in casinos, online lotteries, lotto draws, and betting transactions.
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The production of weapons of mass destruction (WMDs): What the West refers to as collateral damage is considered the killing of innocents per Islam, and it’s forbidden. Therefore, sharia forbids the production of WMDs.
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Certain sectors of the entertainment industry: Sharia prohibitions apply to adult entertainment products, including magazines, videos, audio recordings, websites, and all methods of distributing pornography. The same prohibition applies to erotic arts. In addition, certain types of non-Islamic music and cinema are prohibited.
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Cloning: This example demonstrates a crucial point: Islamic scholars must continually make decisions about the compliance status of new technologies and industries. Obviously, the prohibition against cloning activity is a fairly recent decision, and the prohibition of cloning could possibly change depending on future circumstances.
Groups of companies with subsidiaries that engage in activities prohibited by sharia also are excluded from Islamic investment funds. For example, consider a hotel (owned by a large corporation) that derives a substantial amount of its income from a nightclub or casino that is prohibited per sharia.
Because the profits from this nightclub or casino impact the overall profit of the corporate group, an Islamic fund can’t invest in the group as a whole.
Few companies pass the screening process related to the industry of their core business with a perfect score. In the case of a corporate group with scores of subsidiaries, you can bet that somewhere along the line, one or more of those subsidiaries engages in prohibited activities.
For this reason, sharia scholars and fund managers must establish and use benchmarks for determining whether a specific corporation or group crosses the line into noncompliance.