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.
