Limitations of Shariah screening for investments

The crises of 2023-2026 are born in the Middle East – and they are far more complex in their implications for Shariah compliant investors.

The Gaza conflict, beginning in October 2023, has done something profound to the Islamic investment community: it has forced a reckoning with the gap between what Shariah screening was designed to do and what it actually does in practice today.

Research has revealed that several prominent Islamic funds held over US$1.73 billion in shares of companies with documented links to defense operations - including technology giants whose cloud and AI infrastructure serves defense purposes.

This is not simply an ethical scandal. It is a structural problem. Traditional Shariah screens – built around the prohibition of Riba, Gharar, Maysir and Haram sectors – were never designed to screen for geopolitical complicity.

They were designed for a world where financial sin was largely definitional: you either charged interest or you did not, your revenue came from alcohol or it did not.

The modern technology economy has created a new category of harm: infrastructural complicity – where a Halal company, by its very nature of providing cloud services or surveillance tools, becomes a participant in activities deeply at odds with Islamic values.

The AAOIFI has been petitioned to add a "support for defense/surveillance at larger scale" criterion to Shariah screening methodology. That process is slow. But its very existence signals that the industry knows its current framework is insufficient.

From a Shariah compliant investment perspective, the current Iran conflict creates several compounding pressures:

First, sovereign Sukuk pipelines are at risk. GCC governments managing fiscal stress from the conflict will face pressure on their capacity to issue new Sukuk, potentially tightening the supply of the highest-quality Shariah compliant fixed income instruments available to global investors.

Second, energy price spikes create an ethical paradox. Oil and gas companies – many of which are permissible under traditional Shariah screens – stand to benefit significantly from the energy price surge caused by the conflict. This places Shariah compliant energy-linked portfolios in the uncomfortable position of profiting from a conflict, even if indirectly.

Third, defense and aerospace companies – systematically excluded by Shariah screens – are the biggest beneficiaries of the conflict. This creates an involuntary divergence: conventional investors can rotate into conflict-economy stocks; Islamic investors cannot. Depending on how long the conflict persists, this could create meaningful performance divergence between Shariah compliant and conventional portfolios in the short- to medium-term.

The post-October 2023 surge in Halal investment demand shows that Muslim investors – particularly younger ones – are increasingly sophisticated, values-driven, and willing to vote with their capital. Fund managers who treat this as sentiment rather than structural demand do so at their own risk.

There is something quietly powerful about an investment framework built not on the maximization of return, but on the avoidance of harm. In a world that seems, increasingly, to be generating harm on an industrial scale, that framework is not a constraint – it is a compass.

Dr Areeba Khan is founder of Taqwa Invest – a fintech for retail investing in Islamic stocks, Commodities, Sukuk and SRIs. She is a former business development head of a Shariah Advisory entity.