In recent years Islamic finance has evolved from niche to mainstream. With global assets under management (AUM) in the Islamic finance sector projected to reach US$7.5 trillion ($9.8 trillion) by 2028 from US$4.9 trillion in 2023,[1] there is a growing need for a deeper understanding of both how Shariah principles – which screen companies based on business activities and financial ratios[2] – are interpreted across different regions, and how they may affect portfolio construction decisions.
As the market expands, the sophistication and diversity of how Islamic investment principles are integrated are advancing in parallel. That means investors and asset managers with faith-based mandates need the tools to build sophisticated Shariah-compliant portfolios to take advantage of these trends and meet a growing demand for resilient, risk-aware investment outcomes.
Drivers of change: Rising investment flows to Southeast Asia
This is especially true in Asean, where Islamic finance assets are set to exceed US$1 trillion by end-2026.[3]
Several factors underpin this growth. Regulatory changes, including those in Singapore,[4] have sought to promote investor confidence in the Islamic finance sector, while technology has increasingly democratised access to it.[5]
Specifically, the strong growth of Islamic finance in Asia can be attributed to the growing integration of the region's Muslim-majority countries into the global economy and its capital markets, investors' quest for healthy and sustainable returns, and enhanced legal frameworks that have aided the emergence of Islamic financial institutions and Shariah-compliant capital-raising instruments such as Sukūk bonds.[6]
“Investors are recognising that the objectives of Islamic and sustainable investing often align,” says Saurabh Katiyar, executive director of MSCI Research & Development. “This has led some to consider how these principles could fit within Shariah-compliant portfolios to support more balanced risk and return outcomes.”
More broadly, trade tensions have shifted global equity allocations toward emerging markets (EMs) to form – with Europe and the US – an increasingly tripolar global investment landscape.[7] Performance has played a part, with EM equities outperforming developed markets in early 2025 while trading at significant discounts to US stocks and insulating against US-specific risks.[8]
In short, these trends have opened the door to more sophisticated portfolio strategies that integrate Shariah-compliant principles with a global appetite for diversification, ethical investing and resilient asset-backed alternatives.
“The growing complexity of investor needs is reshaping Islamic portfolio management. Across Southeast Asia and beyond, managers are moving beyond simple exclusions toward multi-dimensional strategies that combine Shariah compliance with factor, sustainability and thematic overlays," says Anson Ng, head of market cap index methodologies at MSCI.
Meeting the challenges of Shariah-compliant portfolio management
For investment managers, offering services that conform to Islamic finance principles can help capture new AUM growth and better serve the needs of regional and global investors. To do so means navigating the complexities inherent in the field, as well as accounting for the risk-return impact of different interpretations of Shariah-compliant principles.
The foundation is the adoption of clear, rules-based portfolio construction tenets consistent with Shariah law. This will screen out prohibited stocks – such as companies active in or deriving more than a very small proportion of revenue from activities including gambling, tobacco, defense, hotels and alcohol.
Monitoring financial ratios is also important: companies with excessive leverage or significant income from interest may need excluding. In some cases, dividends will need purification before distribution. Regular reviews are crucial to ensure funds have global reach and local depth, with no single security dominating.
How these rules are applied can lead to wide variance in potential sectoral and factor exposure within different portfolios. For instance, the exclusion of highly leveraged firms leads to a structural tilt toward the quality factor in a portfolio. In addition, how company size is calculated – either by total assets or market capitalisation – affects which companies qualify, and whether a portfolio is more exposed to capital-intensive or growth-oriented sectors.
Using total assets would give a value-oriented tilt toward companies in sectors such as energy and materials, while a market-cap-based calculation would allow for the greater inclusion of IT and healthcare sectors, and hence would be more exposed to growth and momentum factors.
Market-cap based leverage screens increase tech exposure in MSCI Islamic M-Series Index
Data from June 30, 2009, to Aug. 29, 2025. Chart shows the median active sector exposures where the median has been calculated over monthly observations for MSCI ACWI Islamic and MSCI ACWI Islamic M-Series Indexes relative to MSCI ACWI Index.
Different sector and factor characteristics can drive divergent performance outcomes among Islamic funds as market and economic conditions evolve.[9] For that reason, asset owners and investment managers will want to ensure they capture the full opportunity set across developed, emerging and frontier markets, and various factors and themes.
One challenge in doing so is accessing comprehensive Shariah-compliant data that include small-, mid- and large-cap companies, limiting investors’ ability to build compliant, well-diversified portfolios across key domestic markets.
MSCI, for one, has taken steps to address these challenges by updating its Islamic indexes, expanding coverage to include small-caps to enhance client value and offer broader access to Shariah-compliant securities:
- The Islamic Index Series measures ratios against total assets, which favors including companies in capital-heavy sectors like energy and materials, to deliver strong returns and efficient risk-adjusted outcomes in EMs and other markets in Asia-Pacific, especially Malaysia, Indonesia and Singapore.
- The Islamic M Series, which uses a three-year average of market capitalisation, enables the inclusion of growth-oriented companies.[10] This index, which has a marked tilt toward US technology and healthcare stocks, is favored by growth-led markets at the global level.
Global Reach, Local Depth
Increase in number of companies in specific regions
Data are as of August 2025 Index Review.
LATAM includes: Brazil, Mexico, Chile, Peru, Colombia. Europe includes: United Kingdom, France, Germany, Switzerland, Netherlands, Sweden, Italy, Spain, Denmark, Belgium, Finland, Norway, Ireland, Austria, and Portugal. EM EMEA includes: South Africa, Poland, Turkey, Greece, Hungary, Czech Republic, and Egypt. GCC includes: Saudi Arabia, United Arab Emirates, Kuwait, and Qatar. SEA includes: Singapore, Malaysia, Indonesia, Thailand, Philippines.
Choosing between the two indexes depends on which interpretation of Shariah principles is required, with further considerations including investment profile and target sectors and countries, along with factor characteristics like quality, style and value.[11]
Overall, MSCI’s Islamic indexes provide the foundation, including a transparent, rules-based starting point that can be extended into factor, thematic, sustainability and climate strategies. This flexibility enables investors to align Shariah compliance with broader performance, risk-management and sustainability objectives, reflecting the increasing sophistication now seen among institutional and retail participants alike.
Conclusion
Islamic investing is growing fast in Southeast Asia, presenting new opportunities for asset owners and investment managers. To reach their goals is likely to require an approach that allows for broad exposure to the opportunities on offer, and prioritises diversity and stability.
Islamic indexes such as those from MSCI[12] represent the breadth and diversity of assets that might be included in the growing variety of investment approaches that conform to regional interpretations of Shariah law. These approaches could well prove a differentiator for investment managers seeking to capture new Islamic finance AUM flows in the region, and for asset owners who require diversified investment strategies that are compliant with Shariah law and Islamic values.
For more on the latest enhancements to the MSCI Islamic indexes. Watch the webinar here.
[1] https://www.msci.com/research-and-insights/blog-post/a-factor-and-sector-lens-for-islamic-investing
[2] https://www.msci.com/indexes/group/islamic-indexes
[3] https://www.mifc.com/-/asean-islamic-finance-industry-to-cross-1t-in-2026
[4] https://www.mas.gov.sg/regulation/guidelines/guidelines-on-application-of-banking-regulations-to-islamic-banking
[5] https://www.qfc.qa/-/media/project/qfc/qfcwebsite/documentfiles/research/global-islamic-fintech-report-2024-25.pdf
[6] https://www.ifsb.org/wp-content/uploads/2023/10/Islamic-Finance-for-Asia_-Development-Prospects-and-Inclusive-Growth_En.pdf
[7] https://www.msci.com/discover-msci/events/the-role-of-shariah-compliant-indexing-in-apac-portfolios
[8] https://www.msci.com/research-and-insights/blog-post/emerging-markets-in-a-world-beyond-us-exceptionalism
[9] https://www.msci.com/research-and-insights/blog-post/a-factor-and-sector-lens-for-islamic-investing
[10] https://www.msci.com/research-and-insights/blog-post/a-factor-and-sector-lens-for-islamic-investing
[11] https://www.msci.com/research-and-insights/blog-post/a-factor-and-sector-lens-for-islamic-investing
