Quora Answer: How Do You Structure a Shari’ah-Compliant, Halal, Investment Portfolio?

The following is my answer to a Quora question: “How do you structure a shari’ah-compliant, halal investment portfolio?”

This is a tricky question, and most answers to it are wrong for the same reason.  They start from a modern invention, the claim that all interest is automatically riba’, usury, and build an entire investment philosophy on top of a premise that classical fiqh, jurisprudence, never settled.  We need to address the underlying contentions before we talk about building any such portfolio.

The Definition of Riba’ is Not Settled

The Qur’an explicitly prohibits riba’.  What riba’ means has been argued since the earliest generations of Islamic jurisprudence, and the classical schools did not converge on a single answer.  Riba’ al-fadhl, the prohibition on unequal exchange of the same commodity, is applied specifically to six named items in ahadits, prophetic narrations: gold, silver, wheat, barley, dates, and salt.  Riba’ an-nasiyyah, the deferred-payment form, is the one modern discourse collapses into “all interest,” but classical jurists tied its prohibition to a specific mechanism: a debt that compounds as a penalty for late payment, extracting more from a debtor because he could not pay on time.  That is usury.  Usury requires an element of zhulm, oppression, a lender exploiting a debtor’s need or misfortune to extract wealth disproportionate to any service rendered.  Mere interest at the outset of a commercial arrangement between two consenting parties of roughly equal bargaining power is the cost of doing business, not exploitation.

Shaykh Nur ad-Din Abu ‘Ubadah ‘Ali ibn Juma’ah, Grand Mufti of Egypt from 2003 to 2013, argued that the four a’immah – Imam Abu ‘Abdullah Malik ibn Anas, Imam Abu Hanifah Nu’man ibn Tsabit, Imam Abu ‘Abdullah Muhammad ibn Idris ash-Shafi’i, and Imam Ahmad ibn Muhammad ibn Hanbal – restricted usury to the ribawi commodities, principally gold and silver as the recognised monetary metals of their era.  Banks deal in fiat currency, a different category of asset under this classical framework.  He argued the relationship between a depositor and a bank is financing and investment, not a straightforward loan between two individuals of unequal power.  This is not a fringe modernist improvisation invented to make Western finance palatable.  It is a contention grounded in the same classical texts the anti-interest position claims sole ownership of.  Shaykh ‘Ali ibn Juma’ah’s jurisprudential training was from the Shafi'i school.

al-Azhar’s Islamic Research Institute issued a formal fatwa in December 2002, under Grand Imam Shaykh Muhammad Sayyid Thanthawy, addressing bank interest on savings certificates.  The fatwa, and the furious rebuttal from the Islamic Jurisprudence Academy that followed, remains one of the most documented institutional disputes in modern Islamic finance, because it exposed that even Al-Azhar’s scholars could not agree among themselves.

The Shafi’i School Never Developed the Jurisprudential Machinery for This

Hanafi jurisprudence developed during the Abbasid Caliphate, then reached its administrative maturity across the Ottoman Empire, an institution running commerce, taxation, and finance across three continents for six centuries.  Maliki jurisprudence did the same across the Maghreb and West Africa, embedded in states that had to answer commercial questions at scale.  This produced schools with developed positions on contracts, partnership structures, and commercial necessity, because the empires applying them needed working answers, not merely correct ones.

Shafi’i jurisprudence never had this laboratory.  It found scholarly prestige and demographic reach; it remains dominant across the Malay Archipelago, including Singapore’s Malay Muslim population, but it was never the settled law of a single dominant polity administering commerce and finance at imperial scale over centuries.  This is a school of law refined primarily through scholarly transmission rather than sustained state administration, so it developed differently from one tested daily against the demands of running an empire’s treasury.  The modern Shafi’i-influenced fatwa councils inherit that inadequacy.

Modern Islamic Finance’s Blind Spot on Time Value

Modern Islamic financial theory largely denies the time value of money as a legitimate concept.  Alongside this, inflation and capital gains are treated as suspect categories rather than economic facts.  This is not a minor theoretical quibble.  As long as demand outstrips supply, prices rise.  Some inflation signals a growing economy.  Money and the instruments transferring it will vary in value across time regardless of any jurist’s ruling on the matter, and treating that natural variance as inherently riba’ conflates a real economic phenomenon with a specific, exploitative lending practice mentioned in the Qur’an.  Jurists disregarding infrastructure cost and opportunity cost when declaring all borrowing interest haram have not produced a more pious economics.  They have produced an economics divorced from how value moves through time, forcing “halal” product designers into the tortuous semantic workarounds, murabahah cost-plus sales dressed as trade rather than lending.  They are engaging in all this nonsense to satisfy a label while replicating the same economic substance these labels claim to avoid.  That is hypocrisy.

The Shari’ah Advisory Board System is a Rating Scam

A portfolio is not made shari’ah-compliant because a board stamped it so.  Most shari’ah advisory boards are employed by the financial institutions whose products they assess, a conflict of interest that would disqualify an auditor in any other regulated industry.  The vast majority of shari’ah-labelled funds underperform broader benchmarks, driven by a lack of diversification and the double compliance cost, conventional regulatory overhead stacked on top of shari’ah board fees, passed straight to the investor.  Muslims paying a premium for underperformance in the name of piety would achieve more religious benefit by giving that same premium as zakat or swadaqah.

The Focus Should be Ethical Screening, Not a Label

A properly structured portfolio requires no third-party halal certification at all.  It requires screening on values that already exist across classical jurisprudence: no investment in explicitly haram products, pork, alcohol, and intoxicants.  Beyond that, I extend the screen to harm: no defence contractors profiting from weapons deployed against civilians, no industrial polluters externalising cost onto communities with no say in the matter, no operations built on animal cruelty, no predatory lenders extracting wealth from people with no real alternative.  This screen excludes a considerable share of companies on conduct and business model, not merely on which sector code they are classified under, and it requires no certifying board to validate it, only a fund manager willing to read what a company does.

Shari’ah compliance begins with niyyah, intent, a principle routinely neglected once the conversation moves to product structuring.  Wealth accumulated through ethical means and then hoarded, or spent purely on status, fails the spirit of the framework as thoroughly as wealth accumulated through a technically halal-labelled but ethically hollow investment vehicle.

Swukuk is Not a Substitute for a Rated Bond

Swukuk represents fractional ownership in an underlying asset or venture, generating returns from that asset’s performance rather than a fixed coupon on borrowed principal.  This structure carries value where the underlying asset is real and productive.  It is not, however, a functional replacement for a diversified, credit-rated bond allocation.  Swukuk markets remain shallower, less liquid, and more concentrated by issuer and jurisdiction than the global bond market.  A blanket exclusion of conventional fixed income, based on a reinterpretation of riba’ leaves a portfolio structurally overweight on equity risk.  A correct reinterpretation of riba’ along the lines of Shaykh ‘Ali ibn Juma’ah and the classical commodity-specific reading of usury supports open conventional, transparently priced fixed income as part of a properly constructed shari’ah-conscious portfolio.  This corrects an imbalance that has cost swukuk-only investors measurable diversification for decades.

MUIS and PERGAS’s Position Falls Short

Singapore’s Islamic Religious Council, MUIS, and the Singapore Islamic Scholars and Religious Teachers Association, PERGAS, both issue guidance operating within this same underdeveloped framework, inherited through Shafi’i channels given Singapore’s Malay Muslim demographic base.  The deeper problem is not which school they draw from.  It is that fatwa committees staffed predominantly by scholars trained in classical jurisprudence and theology, without formal grounding in finance, economics, or portfolio theory, are answering a technical financial question using purely doctrinal reasoning.  A jurist who has never modelled duration risk, credit spread, or the actual mechanics of a murabahah versus a conventional term loan is poorly positioned to rule on whether that structure differs in economic substance, only in form.  Ideological caution substituting for financial literacy produces a rating system that certifies form, penalises substance, and leaves ordinary Muslim investors paying a compliance premium for portfolios that underperform, all in service of a definition of riba’ that the classical schools themselves never fully agreed on to begin with.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code