Seven businesses that are prohibited in Islamic Finance
2 min read
When determining whether or not a corporation is sharia-compliant, a sharia scholar or fund manager looks at the company’s principal operation. If a company’s business revolves around illegal activities, it’s out — end of storey; it doesn’t even make it to the finance round.
According to sharia, the following industries and activities are prohibited
- Traditional financial services that include interest, speculation, and/or gambling transactions: Conventional banks, investment firms, insurance firms, and other financial institutions are considered noncompliant under this criterion.
2. Companies whose principal activities involve alcohol, pork products, or other meat that isn’t slaughtered according to sharia law aren’t deemed compliant in the food and beverage industry.
3. The tobacco industry and unlawful drug-related activity: Tobacco usage has been a cause of debate and consternation in the Muslim community in the past. Most sharia experts now agree that smoking tobacco and investing in the tobacco industry are both forbidden. Of course, illegal narcotics (as well as any other unlawful activity) are prohibited.
4. Gambling: An Islamic fund cannot invest in casinos, online lotteries, lottery drawings, or betting transactions due to this restriction.
5. The manufacture of weapons of mass destruction (WMDs): In Islam, what the West refers to as collateral damage is considered the slaughter of innocent people, and is therefore prohibited. As a result, sharia prohibits the development of weapons of mass destruction.
6. Adult entertainment items, including as periodicals, movies, audio recordings, websites, and all ways of spreading pornography, are prohibited under Sharia law. Erotic arts are subject to the same restriction. Furthermore, certain genres of non-Islamic music and film are forbidden.
7. Cloning: This case illustrates an important point: Islamic scholars must constantly make choices about the status of new technologies and industries in terms of their compliance. Obviously, the prohibition of cloning activity is a new decision, and the prohibition of cloning could alter in the future depending on circumstances.
Islamic investment funds do not accept groups of firms with subsidiaries that participate in sharia-prohibited activities. Consider a hotel (owned by a major corporation) that obtains a significant portion of its revenue from a sharia-prohibited nightclub or casino.
An Islamic fund cannot invest in the corporate group as a whole because the profits from this nightclub or casino affect the entire profit.
Only a few organisations get a flawless score on the screening process for their main business’s industry. If a corporation has a large number of subsidiaries, you can assume that one or more of those companies will participate in illegal activity at some point.
As a result, sharia scholars and fund managers must develop and employ benchmarks to determine if a company or group has crossed the line into noncompliance.
Author: Faleel Jamaldeen
The Islamic Finance Expert website was founded and edited by Faleel Jamaldeen, DBA (ifinanceexpert.wordpress.com). He teaches courses in conventional finance, Islamic finance, and accounting at Effat University in Jeddah, Saudi Arabia.
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