Globally, Islamic finance is estimated to be worth about $350 billion, growing at 20% annually. With this growth, the need for Shariah compliant financial products has also increased. The product offerings are similar to normal banking products; however the main difference is that the funds collected are not for the purpose of accumulating/ paying interest or invested in any negative businesses that harm morality of the society. The basic principle of Islamic banking is the prohibition of interest.
India with a 15% Muslim population, the highest in a non-Islamic country and third highest in the world is slowly becoming forefront of Islamic banking initiatives. It has benefited the Indian economy by attracting investments from the cash rich Middle Eastern economies on the lookout for new investment destinations. After 9/11, most of these countries started pulling out their investments from the US and Europe because of the fear of freezing of assets. Another reason could be the slowdown in the economies of western countries. A growing Indian economy has created huge interests among Islamic nations. Five Indian companies, Reliance Industries, Infosys Technologies, Wipro, Tata Motors and Satyam Computer Services figure in the Standard & Poor’s BRIC Shariah Index.
Shariah is Islamic canonical law, which observant Muslims adhere to in their daily lives. Shariah has certain strictures regarding finance and commercial activities permitted for Muslims. It prescribes a set of criteria which needs to be satisfied before a Muslim investor or institution can invest in the equity of a given company. From the view point of Shariah law, businesses such as those dealing in pork, alcohol, gambling, conventional financial services, media or advertising, tobacco, pornography, music etc are non-permissible for investment. Furthermore, companies have to be screened so that they satisfy certain accounting ratio restrictions.
Out of 6,000 BSE listed companies, approximately 4,200 are Shariah compliant. The market capitalization of these stocks accounts for approximately 61% of the total market capitalization of companies listed on BSE. This figure is higher even when compared with a number of predominantly Islamic countries such as Malaysia, Pakistan and Bahrain. The growth in the market capitalization of these stocks was more impressive than that of the non-Shariah compliant stocks.
The software, drugs and pharmaceuticals and automobile ancillaries sector were the largest sectors among the Shariah compliant stocks. They constitute about 36% of the total Shariah compliant stocks on NSE. Further on examining the BSE 500 the market capitalization of the 321 Shariah compliant companies hovered between 48% and 50% of the total BSE 500 market capitalization.
Under Islamic banking, the conditions for investing in shares are :
Once companies are chosen from the above criteria, further screening is done on the basis of following financial ratios :
For profits made through capital gains, the accepted rule is that if requirements of the ‘halal’ shares are observed, then most of the assets of the company are ‘halal’, and a very small proportion of its assets may have been created by the income of interest, so the whole price of the share therefore, may be taken as the price of the ‘halal’ assets only.
Another opportunity is mutual fund which is based on 100% equity. These funds are invested in different sectors like IT, automobile telecommunication, cement and a few present in interest based financial institutes, almost 10 to 15 %. So investor has to purify that amount from the profits. And also there are many sectoral funds which invest only in a particular sector like automobile, Oil & Gas, etc.
Here are some of the most common types of the Shariah compliant funds and their basic investment profile, which an investor must know before leaving his/her hard-earned money at their disposal.
he real estate sector is attracting investment from Middle East, as fund raising has got difficult in this sector. India has so far seen investments of over $500 Million for middle-east investors in real estate sector. Investing in real estate is relatively better than stocks or mutual funds where risk and uncertainty are very high.
India as compared to many other developing countries has been a star performer in recent years, both in terms of returns and attracting funds from overseas. Economic reforms, successful services industry, growing manufacturing activity, high corporate profitability, buoyant equity markets, robust merchandise exports and imports and lead indicators of service sector activity all point to a brightening of prospects for the Indian economy in the future. Consequently, the return from the equity market has also been very handsome.
As we mentioned earlier, around 50% of Indian stocks are believed to be Shariah complaint, but very few companies realize the potential, which is primarily due to non-availability of data on Shariah based investment appetite among local Muslims. Investors, local as well as global, will find Indian stock market a better place to invest, and sectors like IT, pharmaceuticals, automobile, energy, cement, steel and mining to choose from. Islamic financial institutions that are looking for investment opportunities beyond the Arabian Gulf can find Indian stock market a very good place to put their funds.
Mr. Rahul Singh is a B.Tech (Electronics) fom IIT Roorkee. He did his MBA from Kelly School of Business, Indiana University in 2008. He worked as a developer and a project lead at Support Soft India (Aug 2004-June 2008), a small software firm, where he was instrumental in establishing a critical product vertical within the firm. He also spent two years at Infosys between 2002 and 2004. He also worked as a Business Strategy intern (May 2007-Aug 2007) at Wetpaint.com Inc. in Seattle and gained significant experience in managing strategy and operations at a start-up.