How a 30-year Shari’ah-compliant framework is shaping investing

Thirty years ago, Shari’ah investing was viewed as restrictive, yet today it increasingly aligns with mainstream approaches to sustainability and long-term value creation. Principles such as prohibiting excessive corporate leverage and speculation, prioritising real economic activity, and considering social impact are now recognised as forward-thinking by mainstream investors. 

Islamic finance has become a global force, with assets reaching $5.98tn in 2024 and projected to exceed $9.7tn by 2029, reshaping capital allocation worldwide. Its appeal extends well beyond religious obligation. By mandating low leverage, prohibiting speculative excess and requiring tangible asset backing, Shari’ah screening enforces the prudent disciplines that conventional investors associate with quality factor investing. In an era of elevated debt and aggressive financial engineering, these structural safeguards have delivered measurable improvements in risk-adjusted returns.

Is performance constrained or advantaged?

Shari’ah strategies have long faced scepticism based on the premise that restricting investing must impair returns. However, data tells a different story. The S&P 500 Shari’ah Index comprises approximately 230 constituents that meet AAOIFI screening criteria. By excluding banks, insurers and highly indebted firms, the index exhibits higher exposure to technology, healthcare and consumer-oriented sectors.

As shown in the top table, Shari’ah indices outperformed in six of seven years. The 2022 exception reflected rising interest rates, which triggered selloffs in technology shares and disproportionately affected growth-oriented Shari’ah portfolios. Even then, the absence of bank stocks – which suffered significant unrealised bond losses, culminating in the Silicon Valley Bank collapse – provided important downside mitigation. In 2025, major Shari’ah exchange-traded funds (ETFs) continued outperforming, with top performers delivering 26.37% versus the S&P 500’s 17.72%.

The Sukuk market: Fixed-income growth

Sukuk – Islamic bonds representing ownership in tangible assets rather than conventional debt – have experienced exceptional growth. The global market surpassed $1tn in outstanding issuances in 2025, with annual issuance reaching a record $264.8bn, up from $234.9bn in 2024.

This is the result of several structural factors: GCC countries’ financing needs for Vision 2030 and economic diversification; lower global rates making Sukuk issuance cost-effective; and foreign-currency Sukuk volumes doubling since 2021. From a credit perspective, Sukuk markets demonstrate notable stability. According to Fitch ratings, 93.6% of Sukuk issuers maintained stable outlooks in 2023, while defaulted Sukuk accounted for just 0.2% of outstanding issuance – remarkably low by any fixed-income standard.

Balance sheets still matter

The Shari’ah requirement that debt remain below 30-33% of market capitalisation or total assets is prudent risk management delivering measurable advantages.

Research from Stern Value Management confirms operating, financial and total leverage correlate negatively with shareholder returns during crises: -0.58, -0.51, and -0.60 respectively. The mechanism is straightforward: highly leveraged companies face rising interest costs, tightening credit and diminishing ability to service debt. Firms with conservative balance sheets retain operational flexibility, continue investing through downturns and avoid distressed-debt spirals. As highlighted in the lower graph, companies with low leverage outperformed highly levered companies by a substantial margin during the global financial crisis as well as the Covid-19 pandemic period.

Looking ahead 30 years, this advantage is likely to intensify. Ultra-loose monetary policy is ending, fiscal constraints are tightening across developed markets, and the green transition requires massive capital deployment. Self-funding growth, weathering volatility and avoiding refinancing risk is critical. Shari’ah screening excludes the most vulnerable companies before crises arrives. For South African retirement funds focused on member outcomes over three decades, this protection warrants serious consideration.

Forward-looking prospects

Several trends suggest that Shari’ah-compliant investing will strengthen over the next 30 years. 

Geopolitical capital flows: Continued wealth accumulation across the Islamic world – Saudi Vision 2030, UAE diversification, Indonesia’s rising middle class, and Malaysia and Gulf expansion – represents capital pools exceeding $9.7tn by the close of the decade. South African managers with credible Shari’ah capabilities can access these flows.

ESG convergence: As ESG integration becomes standard, Shari’ah screening identifies sought characteristics such as sustainable business models, ethical practices, stakeholder consideration and long-term orientation. For South African retirement funds under Regulation 28’s sustainability requirements, Shari’ah compliance addresses similar concerns through a more time-tested framework. 

Technology positioning: Shari’ah’s exclusion of conventional financials and highly leveraged businesses results in a structural overweight in technology, healthcare and consumer sectors – industries poised to define the next three decades. Growth areas such as artificial intelligence (AI), biotechnology, clean energy and digital infrastructure are well-represented in Shari’ah indices. These companies are building the future..

Strength in simplicity: Shari’ah’s prohibition on complex derivatives and opaque structures shifts the focus toward businesses that generate returns through operational excellence. In a world where accounting complexity often obscures true business quality, the emphasis on simplicity and transparency is valuable. 

Ancient principals, future-proof investing

The investment world of 2056 will demand frameworks capable of navigating uncertainty, identifying quality amid complexity, and compounding wealth across cycles. Shari’ah-compliant investing offers precisely this.