Islamic finance industry has undergone a transformation in the last few years. Today it has started asserting itself as an alternate system of finance. This industry has made a mark by its rapid growth not only in Muslim countries but also in other secular and developed nations as well [Britain is the largest issuer of Shariah bonds (Sukuk)]. Diverse Shariah compliant financial products, which include banking products like savings and current accounts (based on Wadia and Qard), (Mudarabah based) investment accounts, financing products such as Home financing and Ijarah, insurance products and capital market products like Mutual Funds, Portfolio Management Services and Stock broking, are being offered in both Muslim and secular countries.
Shariah compliant products are based on the principles of Shariah. Shariah means Islamic law, but that does not imply that a Shariah-compliant product is restricted for persons professing a particular religious faith. According to Shariah principles, dealing in interest-based transactions, investing in harmful and unethical sectors like Alcohol, Tobacco, Firearms, Pornography and Gambling, etc are prohibited.
In India Muslims are second largest population after Indonesia, Indian Muslims population is estimated to be around 150, millions. In spite of this India is routinely ignored in the vast majority of the books articles on the subject of Islamic banking and or investments. Dow Jones has Islamic index, FTSE of Britain has not only Islamic Index but also a full fledge Islamic bank, but unfortunately there is not a single Islamic Product or an Islamic benchmark in Indian investment environment.
In Indian Financial market there are adequate number of Shariah compliant stocks are available offering better ROI (return on investment). The aggregate PAT to Total Income ratio of the all listed stocks is 7.5% as compared to 8.7% for Shariah compliant stocks. It clearly proves that although the universe of all listed stocks is large as compared to that of Shariah compliant stocks, but in terms of profitability it ranks below the Shariah compliant stocks.
Financial institutions like Mutual Funds, Insurance, Portfolio management services, etc can use these Shariah compliant stocks to build profitable Shariah compliant investment portfolios and offer Shariah compliant investment products to Shariah conscious investors. They can attract the large segment of Muslim investors who have kept themselves away from the financial market till date. Besides they can also attract investors from other sections of society who do not wish their funds to be invested in companies involved in alcohol production, meat Industry, tobacco and other socially harmful activities, as companies engaged in these activities are removed during the Shariah screening process.
Shariah Investment is an investment fund which meets all of the requirements of Shariah law and the principles articulated for "Islamic finance." Shariah-Compliant Funds must follow a variety of rules, including investing only in Shariah-compliant companies, appointing a Shariah board, carrying out an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity.
Shariah-Compliant Funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. The concept requires considerable effort to implement, since much attention must be paid to compliance with the Shariah principles, both at the fund operations level and for all underlying investments.
Shariah-Compliant funds are prohibited from investing in companies which derives income from the sales of alcohol, pork products, pornography, gambling, military equipment or weapons. Shariah allows for a small portion of an investment's income to come from prohibited sources, though a Shariah-Compliant fund cannot profit from this income. Instead, it must separately account for these earnings and donate them to a charity.
While the roots of Islamic finance lie in ancient Islamic principles, the development of Islamic finance as an industry is relatively new. Developing at a remarkable pace of about 10-15% a year, this industry now represents a vast global practice which has developed a worldwide presence.
This can be attributed to the fact that many predominantly Islamic nations have seen an increase in financial wealth mainly due to a surge in exports and increasing oil prices. This increasing income is fuelling an increase in demand for new Islamic financial instruments along ethically-aware Shariah principles as an alternative to conventional commercial banking and investment products.
The share of the US in the world’s GDP is expected to fall (from 21% to 18%) and that of India to rise (from 6% to 11%) by 2025. The rising GDPs of emerging nations like India have opened up newer investment avenues for rich Islamic investors from the Gulf. In addition, there is tremendous scope for developing and marketing new Islamic financial instruments and Shariah-compliant funds in India.