Islamic financial institutions generally maintain Shari’ah Advisory boards consisting of qualified scholars, which give counsel on matters regarding the compliance of financial products.

The Shari’ah forbids direct involvement or investment in industries such as alcohol, gambling, pornography, or interest-based financial services due to its prohibition in the Quran and the Sunna. As, however, almost all of today’s companies deal with some kind of interest, Shari’ah advisory boards have determined an upper limit to what percentage of a company’s income can be earned through interest. It is unacceptable for a Muslim believer to invest in a firm that exceeds this limit. If a firm an Islamic investor has invested in exceeds this limit, the proportion of income earned through interest is termed “impure” and given to charity (Zakat) .

This limit also comes into effect, when the company raises money via loans. Shari’ah based investments can only tolerate a certain amount of leverage in the company, as outlined below.

• Debt /market value of equity < 33%
• Liquid assets + interest bearing debt / market value of equity < 33%
• Accounts payable from trade and delivery / market value of equity < 33%

In addition to these obligations, funds investing their money in a Shari’ah -compliant way are also not allowed to invest into the following enterprises, which are considered as haram (impermissible):

• Tobacco-Industry
• Weapons and Defence Industry as well as companies trading with arms
• Conventional banks and insurances
• Producers of alcoholic beverages, including service providers, where alcohol is served (restaurant, hotels, airlines etc.)
• Grocers an retailers selling alcohol and/or pork meat
• Entertainment industry (casinos, betting, game of chances, music, cinema, pornography)

 It is important to note, that companies are allowed to do business in the above segments to a certain level. However, the revenue generated in the above topics may not exceed 5% of overall revenue.

As most private clients do not have the time and knowledge to calculate all these multiples by themselves and judge for themselves, if the above restrictions are adhered to, index-providers like Dow Jones Islamic Indices, Standard & Poor 500 Shari’ah or the FTSE Islamic Markets Index  provide Islamic Indices that only include companies that invest in a Shari’ah compliant way. These indices thus present orientation and guidance for the Islamic investor.