MUMBAI // In an ambitious effort to ensure greater participation by Muslims in India's financial system, the Bombay Stock Exchange (BSE), the country's largest trading floor, yesterday launched a share index comprising stocks strictly compliant with Sharia law.
The Sharia 50 index comprises 50 of the largest stocks in the BSE 500 index that adhere to Sharia norms. The stocks will be screened by the Taqwaa Advisory and Sharia Investment Solutions (TASIS), an Indian Islamic finance company based in Mumbai.
"This is the first time a serious effort has been made to objectively track Sharia-compliant stocks in India," said Jamil Ahmed Shaikh, the director of finance at TASIS. "Lots of Muslims from around the world, especially the Middle East, want to invest in India's fast-growing market, but cannot decipher which businesses go against their religious principles. This index will meet that gap."
Mr Shaikh said the new equity index will be used to construct "socially responsible" investment products, including mutual funds and exchange traded funds.
India is home to the world's third-largest Muslim population, 175 million.
Despite strong demand among Muslims for investment products, India has so far offered limited opportunities for Sharia-compliant investing.
According to a 2006 report by a judicial committee appointed by Manmohan Singh, the prime minister, nearly 50 per cent of India's Muslim population remained excluded from the lucrative financial sector.
Another report by the Reserve Bank of India found that the credit-to-deposit ratio - the proportion of loan assets created against bank deposits - among Indian Muslims stood at 47 per cent compared with a national average of 74 per cent.
Experts say the new index will promote greater financial inclusion of India's Muslim population.
"This index will create increased awareness on financial investments [among Muslims]," said Madhu Kannan, the managing director and chief executive of the BSE. "It will give Islamic and other socially responsible investors another means to access the Indian market and will help attract pools of capital to India from the Gulf, Europe and South East Asia."
India has one of the largest number of Sharia-compliant stocks in the world. Last year, 132 such stocks were listed at the BSE and 337 at the National Stock Exchange, according to the consultancy KMPG.
Stocks for companies dealing in infrastructure, capital goods, information technology, telecommunications and pharmaceutical products form a major part of the BSE TASIS Sharia 50.
TASIS says it employs a tough proprietary screening process to exclude companies that deal in alcohol, conventional financial services such as banking and insurance, entertainment, tobacco, pork and conventional arms - all commercial activities that are not permissible under Islamic law.
Dr Shariq Nisar, the director for research at TASIS, says it conducts a review of companies listed on the index every month, and those that are found to have "become less Sharia-compliant" are immediately excluded. Inclusion on the list involves a meticulous three-level screening process, he says. In the first, the BSE recommends a pool of companies that it believes are compliant. In the second, TASIS checks whether its business operations fall within Islamic statutes.
If cleared in these two rounds, the company undergoes a rigorous financial screening. The company must not be heavily indebted: its debt-to-asset value must not exceed 25 per cent. And at least 97 per cent of its revenues must be generated from non-interest-based income.
The number of BSE-listed companies that TASIS found to be Sharia-compliant fell from 312 in 2007 to 132 last year. Most of the companies dropped were found to be "borrowing more during the financial crisis".
Dr Nisar admits that these criteria for inclusion on the index are "more conservative" than other global Sharia benchmarks such as the Dow Jones Islamic Markets Index, launched in Bahrain in 1999.
"We can afford to be more conservative because India's economy is very vibrant and offers great investor returns," he said.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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How to improve Arabic reading in early years
One 45-minute class per week in Standard Arabic is not sufficient
The goal should be for grade 1 and 2 students to become fluent readers
Subjects like technology, social studies, science can be taught in later grades
Grade 1 curricula should include oral instruction in Standard Arabic
First graders must regularly practice individual letters and combinations
Time should be slotted in class to read longer passages in early grades
Improve the appearance of textbooks
Revision of curriculum should be undertaken as per research findings
Conjugations of most common verb forms should be taught
Systematic learning of Standard Arabic grammar
