ABOUT THE INDEX
The Bombay Stock Exchange (BSE) and Taqwaa Advisory and Shariah Investment Solutions (TASIS) have partnered to develop the first Shariah compliant equity index in India constructed using the strict guidelines and local expertise of a domestic, India-based Shariah advisory board. The BSE TASIS Shariah 50 index consists of the 50 largest and most liquid Shariah compliant stocks within the BSE 500.
TASIS employs a strict, proprietary screening process their access to and deep local knowledge of listed Indian companies to ensure that all stocks included within the Shariah 50 are strictly compliant with Islamic Shariah law.
TASIS has adopted financial screening norms that are more conservative than its peers, making the product ideal for Islamic investors seeking investments that adhere to the strict, conservative Shariah compliance norms.
Additionally, the Shariah 50 is the first Shariah compliant equity index in India to be publically disseminated on a real-time basis, providing a new tool for use by Islamic and other socially responsible investors to track the performance of India’s largest and most liquid Shariah compliant stocks. The index can be licensed for the construction of Shariah compliant financial products including mutual funds, ETFs, and structured products.
The Shariah 50 is also India’s first equity index to employ index constituent weight capping. Index constituent weights are capped at 8% at rebalancing, in an effort to increase the diversification within the index and ensure greater compliance with international regulatory and statutory investment guidelines. ==
SHARIAH SCREENING PROCESS
BSE has partnered with TASIS, the premier Indian Shariah advisory firm to ensure that all stocks included in the BSE TASIS Shariah 50 meet the strictest possible Shariah compliance norms.
Business Screening: Ensures that companies selected are in businesses that do not harm society per Shariah law
Interest Activity Screening: Ensures that companies involved in interest-bearing activities are within Shariah tolerance levels.
Globally, Shariah Finance has been drawing attention from industry practitioners and regulators alike as an increasingly mainstream offering. India is one of the largest Islamic geographical markets in the world as Muslims constitute about 13.40 percent of India’s total population. The demographic factors coupled with the overall growth in the Indian financial services sector, present significant opportunity for global players to build and participate in a potentially large market for Islamic finance. However, the key to doing Shariah Finance in India is to marry the existing Indian regulations with the Shariah law principles, without coming foul of either of them.
Financial arrangements constitute an integral part of the process of economic development. A growing economy requires a progressively rising volume of savings and adequate institutional arrangements for the mobilisation and allocation of savings. These arrangements must not only extend and expand but also adapt to the growing and varying financial needs of the economy. A well-developed and efficient financial market is an indispensable prerequisite for the effective allocation of savings in an economy. A financial system consisting of financial institutions, instruments and markets provides an effective payment and credit supply network and thereby assists in channeling of funds from savers to investors in the economy. The task of the financial institutions or intermediaries is to design ways and means to mobilise savings and help ensure its proper and efficient allocation to meet the demands of the nation and facilitate broad-based inclusive growth.
Shariah Finance or interest-free finance is one such novel mechanism which has the potential to boost our economic growth. The Prime Minister’s Economic
Advisor Prof. Raghuram G. Rajan has already advocated (in the Report of the committee on Financial Sector Reforms) inclusion of Interest-free finance in our financial system. This according to the Committee Report, will help in financial inclusion of a large number of our people who are not part of our financial system because of their religious constraints. Another very important aspect highlighted in this report is allaying the fear of instability with introduction of Interest-free finance in the country. Successful functioning of this system in dozens of countries (including those from Europe and North America) further underscores that the system has more than just religious merit (as understood by some).
During the recent financial crisis the resilience shown by this system has not only been noticed but also appreciated by regulators all over the world. Shariah Finance (also called as Islamic Finance, Ethical Finance Interest-free Finance or special finance in various countries) has its roots in the Islamic religion. Concerns for equity and justice, lawful (halal) and prohibited (haram) and a sense of responsibility towards the weaker sections of society are some of the highlighted principles which guide and control the economic activity of the believers in Islam.
Today’s Islamic finance industry is rapidly evolving from niche to mainstream, with growth of Islamic banking assets now estimated at USD 750 bn and growing at a rate of 15 percent to 20 percent a year. The Gulf
Co-operation Council (GCC) proportion of total Islamic banking assets has reached 30 percent and is projected to rise to 40 percent in the next three years. In Islamic countries such as the United Arab Emirates (UAE), where less than 30 percent of the local populations are Arabs, sharia-compliant banks are gaining market share at the expense of conventional banks. The spectacular acceptance and demand for Islamic finance means that within the next decade, the industry is likely to capture half the savings of the 1.6 billion-strong Muslim world. It is tempting to assume that the growth is being fuelled by an older generation of Muslims keen to take advantage of an offering that complies with their traditional way of life.
Not so: the vast majority of the uptake comes from the under-30 segment of the Islamic world, and it is this segment that holds the key to success for the more than 250 Islamic banks that now operate in more than 75 countries worldwide. The popularity of Islamic finance among these young Muslims is a response to a resurgence of interest in their cultural and religious identity. This ‘baby boom’ of customers makes up the backbone of the industry.
Shariah Finance in India
Shariah Finance is close to a trillion dollar industry today and is emerging as one of the fastest growing areas of international finance. Currently its practices have spread to over 75 countries of the world; these include many secular countries of Europe, North America and South East Asia.
In the past few years, Indian regulators have approved schemes with exclusive claims of Shariah compliance. The following table gives a glimpse of the important actions that Indian government and institutions have taken in the recent past.
These actions are seen to have important ramifications for Shariah-compliant business in the country. The above actions indicate a cautious but systematic approach adopted by Indian policy makers towards Shariah Finance. India Inc, having sensed the momentum building up in favour of Shariah Finance, has started looking for strategic vantage positions to exploit the niche opportunity. Many private sector players have come up with Shariah-compliant/tolerant/friendly products abroad as well as in India. A leading private sector player has created an entire vertical for distributing Shariah tolerant products.
Potential of Shariah Finance in India
Muslims constitute 13.4 percent of India’s total population5. In absolute terms their population in India is second only to that of Muslims in Indonesia. According to current estimates and research, India’s Muslim population is close to 175 million. Sixty percent of the community’s population is below 25 years of age and over 35 percent of the community’s total population lives in urban areas, thus making Muslims one of India’s youngest and most urbanised communities.
Economically, the Muslim community is not much dependent on agriculture which is the mainstay of a major part (65 percent) of India’s population . Many prominent studies and reports have shown that Muslim participation in the financial system of the country is minimal. A report dated November 2006 by a committee headed by Justice Rajender Sachar (i.e. Sachar Committee Report) has reported that almost 50 percent of the community’s population is excluded from the formal financial sector. In some other studies it has been found that Muslim participation in the financial sector is even less than their participation in India’s prestigious government service (i.e. IAS). According to a Report by the country’s Central Bank (i.e. RBI), Credit: deposit ratio of Muslims is 47 percent against the national average of 74 percent. Another important study focusing on remittances coming from the Middle East to the Indian state of Kerala highlights that annually about INR 120,000 million (USD 2.4 billion) are sent back by expats of the community. A great majority of this money is either lying idle in bank accounts (more popularly known as 786 accounts) or is invested in real estate and
jewellery7. These findings indicate the community’s indifference towards the financial system for religious reasons.
This is an area in which Shariah-compliant mode of financing has been practiced in the country since the eighties, albeit on a small scale. Recently a major NBFC player has entered this field, along with participation from a foreign player. The viability of this mode of finance is greatly dependant on government regulations which impact on this type of transactions. Secondly, in practice competitive pressures on pricing of the leases can make it unviable unless the lessor has access to non-equity interest-free sources of funding (such as profit-sharing deposits).
Musharaka and Mudaraba based Financing
These transactions too have been practiced by various corporate and non- corporate entities. They have been used to promote ventures in various fields, particularly real estate and construction projects. Musharaka type arrangements mostly take on the modern partnership organisational format as they are essentially partnerships. They could also be structured as joint ventures, with the passing of the Bill on LLPs, that is another organisational format which is now available to put through mudaraba and musharaka arrangements.
Just a few days ago there have been reports in the press that the finance ministry is considering a new category of non-banking finance companies (NBFCs) that will offer Islamic banking products in India. If the ministry follows through with relevant action in accordance with the reports, it is likely to be a big move forward for Islamic finance in the country. At present, attempts at offering Shariah-based products in India through the NBFC route have been hamstrung due to certain specific NBFC rules. It is hoped that if a special category of NBFCs is created to offer Islamic banking products, these hurdles are likely to be removed. This could see a strong surge of interest in Islamic finance products in India and attract significant capital flows into the country too.