Halal and haram business activities and screening

What you will learn

• Which industries are generally considered haram (prohibited) for investment, and which are disputed.
• Why most screening methods tolerate a small share of non-compliant revenue in otherwise halal companies.
• How to calculate a company's non-compliant revenue ratio from its segment data.
• How to run a two-step qualitative screen on paper.

Explanation

Halal means permitted; haram means prohibited. Buying a share means owning a small part of a business, so the business itself must be permissible. Sharia-compliant investing therefore starts with a business activity screen (also called a qualitative or sector screen) before any financial ratios are checked in lesson 3.

Core exclusions

Almost all Sharia standards exclude companies whose main business is:

• alcohol (production, distribution and, for many screens, bars and pubs);
• pork and pork-related products;
• conventional financial services based on interest: banks, conventional insurance, consumer credit, interest-based asset management and brokerage;
• gambling: casinos, lotteries and betting;
• tobacco;
• adult entertainment.

Disputed or provider-specific exclusions

Other sectors depend on the standard used. For example, the MSCI Islamic Index Series methodology (version published in October 2024) also excludes defence and weapons production, music, hotels, cinema and broadcast media, and online dating services. Other providers draw the line differently, and individual scholars may be stricter or more lenient. This is why you must always name the standard you apply.

The tolerance for mixed revenue

In a modern economy almost no large company is completely "pure". A supermarket sells some alcohol; an airline serves wine on board; a software company may sell advertising to a casino. Many scholars therefore allow investment in a company whose core business is halal, provided the non-compliant part is small. The most common tolerance is 5% of total revenue. AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based standard-setter) uses a 5% limit in its Sharia Standard No. 21 on financial papers, and MSCI excludes companies that earn more than 5% of revenue, cumulatively, from prohibited activities.

The formula is:

Non-compliant revenue ratio = revenue from prohibited activities ÷ total revenue

Two rules of thumb matter in practice:

• Add up all prohibited sources. The test is cumulative: 3% from alcohol plus 3% from gambling is 6%, a fail.
• Tolerance is not permission. The small haram income that remains is still not considered clean; investors are expected to "purify" it by giving the matching share of dividends to charity (lesson 11).

Where the data comes from

Companies report revenue by segment (business line) in their annual report. Segment data rarely matches Sharia categories exactly; alcohol sold in a supermarket, for example, is usually hidden inside "food retail". Professional screening providers estimate such figures, and estimates differ. As a private investor you can usually only approximate.

Worked example

Hypothetical example: You screen two companies. All figures are invented annual revenues in euro millions; interest income is ignored here because lesson 3 treats it.

Notice that Company A would pass if you looked only at alcohol (€70m ÷ €2,000m = 3.5%). The cumulative rule makes the difference. Company B passes the activity screen but must still pass the financial ratio screens in lesson 3.

Common mistake

Practice activity

A hypothetical hotel-and-restaurant group reports: total revenue €600m; room revenue €380m; restaurant food €150m; bar and alcohol sales €45m; casino lounge €25m. Using a 5% cumulative limit:

1. Calculate the non-compliant revenue ratio if only alcohol and gambling count.
2. Decide whether the company passes.
3. Explain how the result changes under a standard that also excludes hotels.

Key takeaways

• The activity screen comes first: a company whose core business is haram fails regardless of its financial ratios.
• Many standards tolerate up to 5% of total revenue from prohibited sources, measured cumulatively.
• Exclusion lists beyond the core (alcohol, pork, interest-based finance, gambling, tobacco, adult entertainment) differ by provider.
• Tolerated haram income still needs purification.

Next step

The next lesson adds the second filter: financial ratio screens for debt, cash and interest income.