Understanding Shariah-Compliant Businesses

Understanding Shariah-Compliant Businesses

Shariah, or Islamic law, governs all aspects of Muslim life. This includes financial transactions, commercial agreements, and civil arrangements that fall under the scope of mu’amalat (معاملات). When one comes across the term “Shariah-compliant businesses”, this refers to businesses that adhere to Islamic principles, ethics, and values when conducting their business. According to researchers at Universitas Indonesia, Shariah-compliant companies have much higher brand equity than companies that do not.

Complying with Shariah has become increasingly popular for businesses globally. Muslims and non-Muslims who are interested in ethical and socially responsible business practices will find themselves drawn to such enterprises. However, Shariah compliance is not confined to food, beverage and financial sectors. Rather, all types of businesses may meet the halal (permissible) requirements. Such compliance is achieved through ingredients, processes, as well as supply chain or logistics. Practices in Shariah-compliant companies can be traced to several overarching principles. 

Shariah-compliant business principles

  • Prohibition of interest (riba)

Islam prohibits riba (الربا) which means usurous or exploitative gains. Often, it is translated as interests. Riba is forbidden because it can lead to unfair economic exploitation and unequal distribution of wealth. Thus, various scholars and jurists produced fatwas (فتوى), or legal rulings, prohibiting its involvement. In Malaysia, the fatwa is issued at the State level. One such ruling is published by the Federal Territories Mufti’s Office.

  • Prohibition of uncertainty or speculation (gharar)

Gharar (غرر) is another element prohibited by Shariah. It refers to instances where the consequences or nature are concealed from the relevant parties. Some scholars interpret gharar as “uncertain [subject matter or risk]”. Authors of al-Fiqh al-Manhaji (3/12) ruled that the subject matter or risk must either exist or be ascertained at the time of the transaction. Sales of something that doesn’t exist is, thus, prohibited. Some modern transactions prohibited are futures, options or other derivative transactions. Transactions are too complicated that they become difficult to understand and also risk being regarded as gharar.

  • Prohibition of investing in haram activities (forbidden activities)

There are activities prohibited in Islam. It may be declared haram by the four sources of Islamic law: al-Quran, as-Sunnah, qiyas (analogical reasoning), or ijma’ (scholarly consensus). In Malaysia, the State Muftis or the National Fatwa Council may issue legally persuasive fatwas which determines the permissibility of an activity. For example, the al-Quran, in Surah al-Maidah: 90, declares alcohol, divination, gambling, and idolatry as haram. Thus, businesses involved in the production, trade, distribution, warehousing, and transportation of these activities are also prohibited. Other prohibited activities include pornography, tobacco (some jurisdictions may rule tobacco as makruh or discouraged), products derived from pork, and dangerous drugs. Businesses, retail stores and pharmacies for example, complying with Shariah must be mindful to not be involved in these activities. 

  • Ethical business conduct

Shariah-compliant businesses must adhere to ethical business practices that uphold Islamic values, such as honesty, transparency, and accountability. For example, companies must treat their employees fairly and provide a safe and healthy working environment. Businesses are also expected to treat their customers in the same honest, transparent, and fair manner. Deliberately short-changing customers is frowned upon.

  • Fair distribution of profits

Generating profits is not prohibited. Scholars often cite how the Prophet’s s.a.w. first wife, Siti Khadijah r.a., was involved in business and trade. Through various sayings and conduct of the Prophet as well as based on rulings by Islamic scholars and jurists, how a business handles its profits is also guided by Shariah. For investors, profits are shared fairly based on the business’ performance rather than an arbitrary rate of return. Beneficiaries of this sharing include the owners and shareholders, the employees, as well as the community.

Types of Shariah-compliant Businesses

  • Islamic finance and banking

Financial services that comply with Shariah principles include Islamic banking, Islamic insurance (Takaful), Islamic mutual funds (Sukuks), and Islamic microfinance. These services are without interest. Instead, they employ profit and loss sharing models.

Islamic finance has become a significant player in the global financial industry, with assets estimated to be worth around $ 2 trillion. In Southeast Asia, the assets are mostly concentrated in Malaysia.

  • Halal food industry

Everyone loves good food, but not all food is for everyone. Shariah-compliant businesses in the food industry must produce, process, and distribute food that is permissible according to Islamic law. This means no pork, alcohol, or other forbidden ingredients. Non-Muslims who are concerned about the quality and safety of their food also consume halal food. Other factors taken into account are how the ingredients are handled as well as the processing, preparation, and packaging of the products. 

On top of that, various government bodies and Islamic organisations develop and refine the halal certification programmes. One such body is Malaysia’s Department of Islamic Development (JAKIM) which awards Halal certification in Malaysia. 

  • Islamic fashion and cosmetics

The halal beauty market is one of the fastest-growing industries. In 2022, its market size reached US$ 30.3 billion and was expected to hit US$ 53.2 billion by 2028. Islamic fashion includes clothing and accessories that cover the body appropriately, while Islamic cosmetics are free from haram ingredients, such as alcohol and animal-derived products.

  • Halal tourism and hospitality

Halal tourism and hospitality refer to businesses that provide services to Muslim travellers, such as hotels, restaurants, and tour operators. For these services, the Shariah compliance impact the offerings of on-site F&B outlets and checking in of unmarried couples. According to the MasterCard-CrescentRating Global Muslim Travel Index (GMTI) report, Malaysia ranked first in the ‘Muslim-Friendly Destination of the Year (OIC)’ category in 2022.

  • Zakat and waqf-based businesses

Zakat is a religious obligation or charitable donation for Muslims, while waqf is a donation of a property for a specific purpose. The rates of the zakat are predetermined by the various organisations and governments. Zakat and waqf are administered by the Baitulmal. It aims to alleviate poverty and support community development initiatives. Over 1.2 million people are estimated to have been beneficiaries of zakat funds allocated by UNHCR in 2021.

Shariah-compliant businesses are seeing positive growth globally. This can be traced to increasing interest in ethical and socially responsible practices. The principles used are based on Islamic values and apply to all types of businesses. Despite the COVID-19 pandemic and drop in oil prices, Islamic finance is experiencing a considerably faster growth rate in 2020, with total assets increasing by 10.6%

Moreover, Shariah compliance promotes fairness, accountability, and financial inclusiveness for sustainable business practices in Muslim communities and beyond. As the global Muslim population continues to grow, the demand for Shariah-compliant products and services is expected to increase, making Shariah-compliant businesses a promising area for investors and entrepreneurs.