The writer is a non-resident Senior Fellow at the Atlantic Council and leads the Middle East Debt Advisory team for Alvarez & Marsal

Islamic finance has made much progress over the past two decades across banking, asset management and capital markets. There are now some $5tn of Islamic finance assets in an industry grounded in faith-based principles, according to estimates from the LSEG's Islamic Finance Development Indicator. But Islamic finance -- and in particular equity investing -- needs further conversation about how to balance ethical integrity with the financial complexity of today's world.

Islamic equity investing traditionally relies on two filters: business activity and financial ratios. The former excludes sectors such as alcohol, gambling, conventional finance and music. The latter limits companies that carry excessive debt or derive material income from interest. These screens form the ethical backbone of halal investing. But as companies become more complex -- and revenue streams more opaque -- they are proving harder to apply.

Take Amazon, for example -- a logistics and cloud computing giant, but also a retailer that sells alcohol and pork. Or Spotify, which earns all its revenue from streaming music, a category long viewed with discomfort by many Shariah scholars. Food delivery apps routinely partner with restaurants that serve alcohol. Even tech platforms with ad-based models may derive revenue from prohibited industries. For Islamic investors, this presents a dilemma: avoid the firms shaping the future of the global economy, or accept exposure to prohibited income.

There is no global consensus on how to resolve this. One way is through a tolerance threshold -- for instance, the MSCI Islamic Index Series permits up to 5 per cent of revenue from non-compliant sources, provided dividend income from this is "purified" through charitable donation. But some Shariah boards reject such allowances as diluting Islamic ethics in pursuit of returns. The result is inconsistency. A company deemed compliant by one fund may be excluded by another. For retail investors, it is often unclear how these decisions are made.

This has performance consequences. According to the MSCI's Shariah index methodology, companies deriving more than 5 per cent of revenue from conventional financial services -- such as banking, insurance or mortgage lending -- must be excluded. Similarly, S&P Dow Jones Shariah indices remove such entities. That structural tilt leaves Islamic benchmarks notably underweight in financial services -- often at or near zero -- while overweighting low-leverage sectors like technology and healthcare.

The result is limited diversification and persistent underexposure to dividend-yielding sectors such as consumer staples and banking as well as geographic concentration in a few compliant markets.

Differences in interpretation across Shariah boards prevent the emergence of a unified global standard. As a result, fund managers often apply divergent screening criteria -- sometimes even within the same jurisdiction -- leaving both retail and institutional investors uncertain about what qualifies as compliant. Passive investors may unknowingly hold companies with borderline compliance or rely on index methodologies that vary in transparency.

There are, of course, differing legitimate views on what is Islamic compliant. But unlike the sukuk debt market -- which is grappling with standard-setting -- there are fewer moves towards global convergence in Shariah-compliant equity investment principles in sight. The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions offers guidance. But investment approaches differ widely, particularly outside the Gulf and Malaysia.

The risk is that Islamic equity investing becomes increasingly reactive. In some areas, equity holders have pushed companies towards better disclosure and sustainability goals. But Islamic investors remain largely outside that conversation, often relegated to a strategy of divestment or avoidance. That may reflect theological caution, but it limits Islamic finance's ability to shape the markets it operates in.

There are ways forward. Companies can improve revenue transparency and clarify business lines. Screening methodologies can be made more dynamic and consistent across geographies. And technology -- particularly fintech tools capable of real-time compliance monitoring -- offers potential benefits. Without change, Shariah-compliant investors may find themselves watching the global economy pass by -- compliant in principle but constrained in practice. More debate is needed.

Islamic equity investors face a difficult choice