Shari’ah Compliance is Branding, Not Ethics

The HSBC Islamic Global Equity Index Fund — the United Kingdom’s largest “shari’ah-compliant” fund, in which most halal pension schemes in Britain are invested — purchased more than US$100 million worth of shares in companies linked to the Israeli military in the first half of 2026.  The Shari’ah Committee issued its compliance certificate.  Nobody objected.

What US$100 Million in Shari’ah-Compliant Investing Purchased

1.        US$38.3 million in Palantir Technologies — whose data analytics and surveillance systems operate under a partnership with the Israeli Ministry of Defence established in 2024.

2.        US$35.7 million in RTX — the world’s second-largest arms company, whose subsidiary Raytheon collaborates with Israeli arms giant Rafael on Iron Dome interceptors.

3.        US$17.6 million in Rolls-Royce — which produces engines for Merkava tanks deployed extensively in Gaza, and for Israeli naval vessels through its German subsidiary MTU.

4.        US$20.3 million in Analog Devices — which supplied critical components to Elbit Systems, Israel’s largest defence contractor.

5.        A further position in BAE Systems — Britain’s largest arms manufacturer, producing components for F-35 fighter jets used by the Israeli Air Force.

The Shari’ah Committee reviewed this portfolio.  It issued its annual compliance certificate.  The fund continued operating under its “Islamic investing” branding, promising to deliver “better outcomes for society as a whole.”  Allahu Akbar!  The society in question may have views on what “better outcomes” means.

What Shari’ah Screening Does

Shari’ah screening in its conventional form excludes specific categories of business activity: interest-bearing financial instruments, alcohol, pork, pornography, gambling, and weapons manufacturing — with “weapons” defined in the dominant screening methodologies as companies deriving more than 5 per cent of revenue from defence contracts.

The threshold is the problem.  RTX is the world’s second-largest arms company.  It clears the 5 per cent threshold in the sense that 5 per cent is its floor, not its ceiling.  Palantir is a technology company.  Its revenue from Israeli military contracts — divided against total revenue — may not trigger the screening threshold.  Analog Devices is a semiconductor company.  Its components reach Elbit Systems through supply chain relationships that the screening methodology does not trace.

The screening methodology asks: what does this company do primarily?  It does not ask: what does this company’s product do when it reaches its end user?  The Merkava tank engine is not excluded because Rolls-Royce earns more revenue from civilian aviation than from tank engines.  The surveillance system that identifies targets is not excluded because Palantir earns more revenue from commercial analytics than from military contracts.

This is the architecture of the compliance system.  It was designed to exclude industries.  It was not designed to trace consequences.  The whole system has the appearance of religiosity but not the values the religious supposedly espouse.

The Historical Precedent of Compliant Contradiction

This is not the first time the mechanics of shari’ah screening have produced results that Islamic ethics would not recognise.  In the years following the 2008 financial crisis, shari’ah-compliant funds held significant positions in major Western banks — institutions whose primary business involved interest-bearing lending at industrial scale — on the basis that non-interest revenue streams brought them below the exclusion threshold.  Goldman Sachs appeared in shari’ah-compliant indices.  The institution that packaged and sold the mortgage-backed securities that nearly collapsed the global financial system was compliant, because its trading revenue included enough non-interest income to clear the filter.

Muhammad Taqi al-‘Utsmani — one of the most authoritative voices in contemporary Islamic finance, who chairs or has chaired the shari’ah boards of numerous major Islamic financial institutions globally — stated publicly in 2007 that 85 per cent of swukuk structures being issued were not shari’ah-compliant.  He was making a legal argument about financial structures.  The HSBC fund raises a moral argument about consequences.  Both point to the same conclusion: the apparatus of shari’ah compliance, as industrialised by the global Islamic finance industry, has been decoupled from the ethical framework from which it derives its name.

The Performance Problem

The ethical failure compounds a financial one.  Shari’ah-compliant funds do not merely invest in ethically compromised companies.  They also, on average, underperform their conventional equivalents — and charge their investors more for the privilege of doing so.

The HSBC Islamic Global Equity Index Fund carries an ongoing charge of 0.40 per cent annually.  The HSBC MSCI World ETF — a conventional equivalent — carries an ongoing charge of 0.15 per cent.  The Muslim investor pays 0.25 percentage points more annually for the shari’ah-compliant version.  On a £50,000 pension pot, that is £125 per year in additional charges.  Over a 30-year accumulation horizon, compounded at 5 per cent, that is £8,600 in foregone retirement capital — paid for a compliance certificate that did not prevent US$100 million flowing into the Israeli military supply chain.

The performance picture is worse.  A 2020 study published in the Pacific-Basin Finance Journal, examining shari’ah-compliant funds across multiple markets over 15-year periods, found that they underperformed conventional benchmarks by an average of 0.7 to 1.2 percentage points annually after fees.  The underperformance is structural, not incidental.  Shari’ah screening excludes financial services companies — banks and insurers — which constitute 15 to 20 per cent of global equity indices by market capitalisation and have historically been among the strongest long-term compounders.  Screening also excludes tobacco — which, whatever its social costs, has produced some of the highest dividend-adjusted returns in equity market history.

The S&P 500 Shari’ah Index has underperformed the S&P 500 in most of the rolling 10-year periods since its inception.  The MSCI World Islamic Index has underperformed the MSCI World Index in most of the rolling 5-year periods since inception.  The screening that reduces the investable universe does not add return.  It removes it.

The technology sector partially compensates — shari’ah funds have benefited from their heavy technology weightings, since most technology companies pass screening criteria easily.  This effect has been pronounced since 2020, when technology dominated global equity returns.  It flatters the performance comparison during the period of technology outperformance and will reverse when the technology cycle turns — as my AI debt cliff analysis suggests it eventually will.

The Muslim investor who chose a halal pension is paying a higher fee for a smaller investment universe that has historically underperformed the market, with no guarantee of genuine ethical compliance, as demonstrated by US$100 million flowing into the Israeli military supply chain under a compliance certificate.  This is, by any objective measure, a poor financial product.

The Certification Industry

The shari’ah compliance industry is, at its core, a certification business.  Fiqh scholars sit on advisory boards.  They receive fees — sometimes substantial fees — for reviewing structures and issuing compliance opinions.  A 2019 study in the Journal of Islamic Accounting and Business Research found that the top twenty jurisprudence (fiqh) scholars globally held between them 621 board positions across Islamic financial institutions.  A single scholar —Nizham Muhammad Swalih al-Yaquby — held positions at more than 50 institutions simultaneously, generating fees that multiple analyses estimated in the millions annually.  The concentration of certification authority in a small number of highly compensated scholars creates the same capture dynamic that credit rating agency fees created in the structured finance market before 2008.  The rating agencies rated the structures that the banks that paid them wanted rated.  The fiqh scholars certified the products that the institutions that paid them needed certified.

AAOIFI — the Accounting and Auditing Organisation for Islamic Financial Institutions — has published standards representing attempts to maintain substantive compliance requirements.  The gap between AAOIFI standards and market practice has widened consistently since the industry’s commercial expansion began in the 1990s.  The expansion required compliance.  Compliance was provided.  The standards bent toward commercial requirements rather than commercial requirements bending toward the standards.

The HSBC Shari’ah Committee that certified the Islamic Global Equity Index Fund is not an aberration.  It is the system functioning as designed — reviewing a passive index fund against screening criteria that the index methodology satisfies, and issuing a certificate that the methodology has been followed.  Whether the methodology captures what Islamic ethics actually requires is a question the certification process does not ask.

The Theological Dimension

Classical Islamic jurisprudence has a principle that shari’ah screening ignores with systematic thoroughness: sadd adz-dzara’i’ — the blocking of means.  The principle holds that an action that is technically permissible but leads to a prohibited outcome must be treated as prohibited, because permitting the means while prohibiting the end is incoherent.  Investing in a company that manufactures engines for tanks used to kill civilians is not made halal by the fact that the company also manufactures engines for aircraft.  The engine in the tank is still in the tank.  The investment that funded its production is still in the supply chain.  adz-Dzara’i’ — the means — leads to the prohibited outcome regardless of the revenue percentage it represents.

The mainstream shari’ah screening methodology does not engage with sadd adz-dzara’i’ because engaging with it would make much of the global equity market un-investable under Islamic ethics — which would make the Islamic finance industry as currently constituted commercially non-viable.  The commercial requirement produced the theological outcome.  The principle was set aside.  The certificate was issued.

Furthermore, the classical principle of hisbah — the obligation to prevent harm and enjoin what is right — places a positive duty on Muslim investors to actively avoid contributing to oppression.  Passive indexing inside a compliant methodology discharges no such duty.  It outsources the ethical question to a screening algorithm and declares the investor’s conscience clean.  The classical tradition does not recognise this outsourcing as adequate.  The conscience is not clean because the algorithm said so.

Mohammed Afzal Khan, Labour Member of Parliament and vice chair of the all-party parliamentary group on British Muslims, described the fund’s Palantir position as “a complete affront to Islamic finance practices.”  He is correct in spirit and incomplete in scope.  It is not an affront to Islamic finance practices as currently constituted — it is entirely consistent with them.  It is an affront to Islamic ethics, which is a different and more important category.

The Vanity Economics

The global Islamic finance industry manages US$4 trillion in assets as of 2025, according to the Islamic Finance Development Report.  It has grown at 10 per cent annually over the previous decade.  It employs thousands of scholars, compliance officers, structurers, and advisers.  It generates substantial fee income for the institutions offering shari’ah-compliant products.

The Muslim investor at the centre of this industry — the pensioner in Birmingham, the saver in London, the family in Manchester who chose the halal pension option — is paying above-market fees for below-market returns while their capital participates in the supply chains they specifically sought to avoid.

The industry’s growth is not driven by performance.  It is driven by identity.  The Muslim investor who chooses a halal fund does so because they wish their investment to reflect their faith.  The industry provides a label that satisfies this desire at a price premium.  The label does not guarantee that the desire is satisfied — as US$100 million in Israeli military supply chain exposure demonstrates.

This is the definition of a vanity project: a product whose primary function is the satisfaction of its purchaser’s self-image rather than the delivery of the outcome it claims to provide.  The vanity project charges a premium for this self-image satisfaction.  It underperforms the market.  It fails to deliver even the ethical outcome it promises.  The Muslim investor who understands this will approach the halal label with the same scepticism they would apply to any marketing claim — examining what is actually certified, by whom, against what criteria, and with what financial interest operating in the background.

The Alternative

The alternative is not comfortable, but it is more defensible.  The Muslim investor who wishes their capital to avoid the Israeli military supply chain, alcohol, tobacco, interest-bearing instruments, and all the other categories their faith identifies as prohibited needs to engage with the investment directly — examining specific holdings, specific supply chains, and specific consequences — rather than delegating the ethical question to a compliance algorithm and a certificate.  This requires more effort.  It may produce a smaller investable universe.  It may produce lower returns.  These are genuine costs.  They are the costs of genuine ethical investing rather than the costs of a branding exercise that delivers neither ethics nor competitive returns.

Imam Abu Hamid Muhammad ibn Muhammad al-Ghazali — Hujjat al-Islam, the Proof of Islam — devoted substantial sections of Ihya’ ‘Ulum ad-Din to the question of halal earnings.  His framework was not a screening algorithm.  It was a continuous, personal, effortful engagement with the question of whether one’s capital and one’s conscience were aligned.   He did not suggest that paying a scholar to certify an index fund discharged this obligation.

The label is not the ethics.  The certificate is not the conscience.  The compliance is not the compliance.  The HSBC fund proved it.  The Shari’ah Committee certified it.  The Muslim pensioner paid for it.  And the industry will continue, because the premium is profitable and the vanity is real.

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