The ethical investor

On Mumbai’s bustling Cadell Road you could walk past the office of Taqwaa Advisory and Shariah Investment Solutions (P) Ltd (Tasis) without noticing it. A low-key signboard in a row of other businesses, typical of old-fashioned office blocks all over the island city, is all that announces their existence.

It isn’t the first such index in the country. The National Stock Exchange already compiles a list of Shariah-compliant stocks. But it is the first that is based on the stipulations of a wholly India-based Shariah board. The architects of the BSE Shariah 50 are counting on a new wave of attention that they hope will transform the landscape for observant Muslims, as well as investors concerned with social responsibility.

“The notion of Shariah compliance has been around for 1,400 years," says Jamil Ahmed Shaikh, director of Tasis. “In India, you could date the practice of Islamic banking to the late 1970s when small groups of Muslims in north India and in Mumbai started cooperative societies and chit funds." But the effects were marginal, he says, and remained so until recently. “Over the last decade, people started to look at it as a way of alternate finance, and there’s more enthusiasm than ever after the subprime crisis (of 2008)." He smiles, “Once you get stuck in one area, you start to look for others."

So what does a Shariah index do? Broadly speaking, it offers you the chance to invest only in companies that comply with the ethical practices mandated by Islamic law. This means that investing in certain entertainment companies, the hotel and food industries, and companies related to liquor, tobacco and weapons, is prohibited. So is banking, because charging interest is not permissible in Shariah practice, and neither is the accumulation of debt.

But screening out businesses is just one half of the job. The financial equations involved are more complex. To put the index together, Tasis gathered data on Indian market patterns for a decade. They put these forward to their Shariah board, whose muftis considered the data and decided on the nitty-gritty of permissible financial limits. These parameters include debt-to-equity ratio (25%) and interest-to-total-income (3%).

“We look at what average industry rates are, and based on that we ask what our rates should be," Shaikh explains. “Essentially, these are compromises with the zero-interest requirement, but the rationale was to come to a consensus about these rates."

In the absence of a consensus, investors and advisers have often set their own parameters. This has always meant factoring in geographical and cultural differences. BSE and Tasis say that having a domestic, India-based Shariah advisory board factors in unprecedented local expertise, as well as a reliable authority, whose guidelines will be well-recognized.

“What works for Saudi Arabia or Dubai does not necessarily apply in India," Shaikh says. “The market here is different—and potentially big. Even with our conservative screening, we are left with about 1,100 Shariah-compliant scrips in India. That’s more than all the scrips—including non-compliant ones—available in all the Arab world put together."

Given the strictness of their screening, the BSE TASIS Shariah 50 has conservative standards compared with other Shariah advisory boards in the world, says Shaikh. But the BSE says it’s exactly what the country needs to encourage inclusive growth. “Islamic investors in India and abroad have been hesitant to invest in the market," says James Shapiro, head, market development, BSE. “But this index provides investors, regardless of faith, with what is, in a broader sense, a socially responsible index."

There is an interesting clause there. Ashraf Mohamedy, of Mumbai-based Idafa Investments, says non-Muslims have traditionally been responsible for the biggest chunk of Shariah-compliant investments. “The biggest investors in Taurus Ethical Fund and Tata Select Equity Fund (both equity funds that take Shariah compliance into account) are Jains who look for ethical avenues of investment. The fund managers have left out processed food and leather industries, which makes it compliant for observant Jains. It’s social engineering at its best." Idafa’s own non-Muslim clients “have no problem" with eliminating tobacco, alcohol and banking stocks from their portfolios, he says.

BSE thinks the Shariah index will encourage first-time investors unsure about how their investments tally with their religious beliefs. Three weeks in, the response has been “overwhelmingly positive", Shapiro says. People from around India and the world “approach us asking for information and instructions on how to use the index. We expect that investment vehicles like exchange-traded funds and mutual funds will be available in the market soon, given the strong demand we’ve seen for these."

“The news of the Shariah index itself should attract curious investors," Mohamedy says. “With the BSE’s history and visibility, it means a much increased level of confidence."

Forty-year-old Sikandar Munshi, who owns a medical store on the Jogeshwari-Vikhroli Link Road, says he began to invest in the market three years ago. “The market’s ups and downs made me think, and after I asked around, I decided to invest as per the Islamic ways," he says. Strict requirements for debt freedom and sustainable growth reduce risks significantly in Shariah-compliant investment. “There are probably other people who may not even be aware that it’s possible to do so. The Shariah index will give them a chance to think about it."

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