gif Market Review


INDIA ISLAMIC FINANCE MARKET GROWS STEADILY


Source: GlobalIslamicFinanceMagazine.com


The market for Islamic finance in India is growing and it is becoming a more welcomed method of financing. The $1.5 trillion market for Sha- riah-adherent products is expected to grow by around 20% annually. In India, 1,200 of the total 6,000 stocks are Shariah-compliant already.


Over the last one year, Shariah- linked funds, which manage assets worth Rs139 crore, have outperformed the Sensex by a mile. Change is in the air, write Nitin Shrivastava and Sachin P Mam- patta. Shariah compliant investments and broad market performance might suggest that Shariah-compliant funds have caught the interest of investors. Over the last one year, the 30-stock BSE Sensex has slipped 13.21%, while the 50-stock Shariah index has lost only 5.25%.


That is to say, Shariah-compliant invest- ments steer clear of shares of over-indebted companies and those whose business is related to gambling, pork, alcohol, tobacco and interest-earning lending — have per- formed better than the broader market. For instance, three mutual fund schemes that adhere to the Shariah-stipulated exclusions have outperformed the broader market by up to 10%. Currently, there are around 1,200 stocks of the total 6,000, including around 150 companies on the BSE 500, that are Shariah-compliant.


In any un defensible economic climate, lend- ers like banks struggle. As Shariah funds avoid such institutions and prefer low-debt (hence fitter) companies anyway, they out- perform the broader market. For instance, banks and non-banking finance companies form nearly a fifth of the Rs62 lakh crore market capitalisation of the Indian equity market. But because they earn interest on loans, Shariah investors skip their shares.


70 Global Islamic Finance May 2012


The ‘passive’ Goldman Sachs S&P CNX Nifty Shariah Index Exchange Traded Scheme attempts to match the re- turns of the National Stock Exchange’s Shariah index by buying shares in the compa- nies constituting the index in the same proportion as the in- dex, without any active churning of the portfolio. Even this passive fund — it gave returns of -8.33% — fared better than the Sensex.


Shariah-compliant funds in India man-


And they are much the better for that - af- ter all, the BSE’s banking index has dropped 12.04% over the last one year, points out Waqar Naqvi, CEO of Taurus Mutual Fund, an asset management company that oper- ates Shariah-compliant Taurus Ethical Fund. “When the economy is not doing well, banks underperform. Their absence in Shariah portfolios helps these funds do better than the broader market. Also, these funds only look at companies where interest payments are low, which inevitably points to cash-rich companies. These again do well in a rising interest rate scenario,” explains Naqvi.


Agrees Pradeep Gokhale, fund manager for the Tata Ethical Fund, another Shariah- compliant investor. “ One of the main Sha- riah conditions is that companies have a low level of debt. This and the absence of inter- est rate affected companies have helped our fund to outperform.” The “ethical” funds of both Taurus and Tata are two of three ‘ac- tive’ mutual fund schemes that are open to Indian retail investors. Their negative re- turns of -7.96% and -2.53%, respectively, are still better than the Sensex show. The third ethical fund, started by Benchmark Asset Management Company, has been bought by Goldman Sachs.


age a total of Rs139 crore, a minuscule por- tion of the trillion-dollar-plus global Islamic finance pie spanning Malaysia, Indonesia, Kuwait, Bahrain and Saudi Arabia, according to Shariq Nisar, director of operations and research at Taqwaa Advisory and Shariah Investment Solutions (Tasis), a firm that pro- vides guidance and support to individuals and corporates on Islamic finance.


“Globally, funds and financial products worth around $1.5 trillion (Rs 75 lakh crore) are currently managed using Shariah invest- ment principles. Shariah-compliant financial investing is still at a nascent stage. In India, though we have indices based on Shariah, there are very few products available right now. But this market is expected to grow around 20% in the coming years,” says Nisar.


Tasis advises financial institutions, regularly screens stocks, develops lists of stocks com- pliant with Shariah principles and structures products for its clients. “Every month, we screen the universe of around 6,000 Indian stocks for likely additions or deletions to the list of Shariah-compliant companies,” says Nisar. And in all likelihood, there will be more additions than deletions as advisors such as Tasis will look to spot more companies that fit the Shariah norms.


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