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Followers of Islam, the second
largest faith in the world with an estimated 1.7 billion
believers, can now be surer when an Indian firm stands the
pre-requisites for observant Muslims. The Shariah index launched
by the Bombay Stock Exchange (BSE) is a new measure in town,
assuring compliance with the Islamic canonical law.
Besides giving Islamic mega funds a surer handle on Indian
markets, the aim of the S&P BSE 500 Shariah Index is financial
inclusion of Indian Muslims - around 177 million in number and
hitherto wary of stock markets - and attract them to "correct"
equities.
"For us, the index is part of a bigger exercise - of inclusion and
fairness," said Ashishkumar Chauhan, managing director of BSE and
an alumnus of the Indian Institute of Techonology and the Indian
Institute of Management who spent his early years in Ahmedabad.
"The 'maahoul' (composite culture and environs) in the city
influenced my appreciation of 'inclusion' as an imperative,"
Chauhan, who in the past headed an Indian Premier League
franchise, told this IANS columnist.
Last month, the BSE Institute, a wholly owned subsidiary of the
exchange, in association with Taqwaa Advisory and Shariah
Investment Solution, announced an online certification programme
in "Islamic Banking, Finance and Capital Markets". Chauhan bets
there is a big market for students who have an understanding of
the latest developments in the fields of Islamic banking, finance
and the capital markets.
Islamic banking and finance extends to some 75 countries, growing
at over 15 percent per annum. To be able to sustain its growth,
the industry needs large numbers of banking and finance
professionals who require training about its basic principles and
practices.
This list includes fund managers, chief financial officers,
merchant bankers, corporate financial advisors, portfolio
managers, product development managers, finance marketing
professionals, chartered accountants, stock brokers, wealth and
fund managers, students and researchers.
Globally, S&P Dow Jones is big on Islamic financing. In its
existing partnership with Ratings Intelligence Partners, boasting
a crew of Islamic finance jocks and theologists on its board, S&P
offers a variety of Islamic indices:
-S&P Global BMI Shariah, with an adjusted market capitalisation of
$15.183 billion
-S&P Developed BMI Shariah, with an adjusted market capitalisation
of $13.340 billion
-S&P Developed LargeMidcap Shariah, adjusted market capitalisation
$11.554 billion
These are among 11 others encompassing Africa, Asia-Pacific,
Europe and North America. Befittingly, after S&P and the BSE
entered into a tie-up this February, the index is their first new
product. Ratings Intelligence Partners remains the knowledge
driver.
Each of the BSE indices, including the iconic BSE Sensex,
bellwether of India's market economy comprising 30 top stocks,
already stand co-branded under an "S&P-BSE" banner.
The preferred Islamic investment format is equity - interest is
forbidden. Yet, giving due currency to the exigencies of modern
businesses, particularly the pervasiveness of interest-based
transactions, Shariah scholars have a minimum compliance criteria.
These criteria, while excluding companies in gross violation, also
provide investors a reasonable choice of Shariah-compliant
equities. These minimum guidelines, however, are not uniformly
applied by all Shariah advisors.
Companies dealing with pork, alcohol, gambling, tobacco, telecom,
advertising and media, with some exceptions, are left out of
Islamic indices. So are banks as Islamic investors are not allowed
to profit from interest. Similarly, firms with certain financial
ratios - like a debt of more than 33 percent to the market value
of equity - do not make it to Islamic indices.
But companies, whose involvement in non-permissible businesses is
less than five percent of total revenue, do qualify. These
calculations are monitored and status updated from time to time.
Besides curbs on interest and debt, Islamic funds cannot pay fixed
or guaranteed return on capital. Instead of borrowing or lending,
Islamic finance relies on shared ownership of assets and therefore
risk in the form of profit or loss. As Islam forbids gambling,
derivatives, forwards, options and futures trading are also
prohibited - so are short-selling, margins and scalping trading.
Day trading is also considered akin to gambling.
Data from djindexes.com shows the Dow Jones Islamic World Index
has an adjusted market cap of $13.254 billion. The FTSE Shariah
All-World Index stood at $15.586 billion. All this suggests the
potential in India, where the BSE had a market capitalisation of
$1.2 trillion from over 5,100 listed stocks in 2012-13, is fairly
large.
Thus far, despite having the second-largest population of Muslims
on the planet, Indian markets had a dearth of scientific ways to
tell if the investee company eschews what's repugnant in Islam.
The financial exclusion of Indian Muslims also remained a
faultline and the walk to mend it hardly matching the talk. Now
there is hope, and promise.
Rohit Bansal is chief
executive and co-founder, India Strategy Group, Hammurabi &
Solomon, a business-incubation advisory, having a premier
affiliate in the UAE. Tweets @therohitbansal
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