Investing in Allah's name

The colour green is widely revered by Muslims. This could explain the new-found affinity for greenbacks that comply with Islamic jurisprudence, Shariat. Shariah or Islamic funds are making a quiet beeline for India to participate in its growth story, led by a slew of banks in West Asia. At last count, funds worth a billion dollars had lined up to invest in the Indian stock markets. The only condition? The money should be invested in companies that are Shariah-compliant. This precludes companies or industries associated in any way with alcohol, tobacco, gambling, entertainment, pornography, hotels, pork-production, arms and ammunition, banking and financial services (because they profit via interest income), among others.

"Shariah funds are nothing but socially responsible investments that allow Muslims to take part in the stock market boom without compromising their religious beliefs. There's a Shariah screen of financial ratios that enable fund managers to decide whether a company is Shariah-compliant or not, aside from the fact that its trading or business activities should not violate Islamic principles," explains Zafar Sareshwala, MD, Parsoli Corporation, which has tied up with Germany's Baader Service Bank to launch the First Islamic India Fund with a total corpus of $135 million.

Green Brigade

At least $1 billion is headed the way of Indian equities.

Fund Manager: Bank Muscat
Amount: $300 million

Fund Manager: Kotak Wealth (Kotak India Shariah Fund)
Amount: $50-100 million

Fund Manager: Parsoli Corp. and Baader Service Bank (First Islamic India Fund)
Amount: $135 million

Fund Manager: Khaleej Finance and Investment, Kuwait Investment Company, Kuwait Finance House
Amount: $200 million

Fund Manager: TAIB Bahrain (Everest Fund II)
Amount: Minimum subscription of $250,000

Fund Manager: Al Madina, Gulf Bank
Amount: $170 million
 
According to Sareshwala, for a company to be Shariah-compliant, its total debts should be less than 33 per cent of its market capitalisation; the net cash receivable should be less than 45 per cent of its gross net worth; it should have at least 25 per cent of its assets as fixed; and in case it derives some income from "impure" (read non-Shariah compliant) means, that income should not exceed 10 per cent of its gross revenues. In the last mentioned case, 10 per cent of the earnings are donated to an approved charity. Each of the fund managers also has an Islamic scholar on board who screens each corporate entity for Shariah compliance.

Investments are not limited to Muslims. "Many Shariah funds are billed as SRIS or socially responsible investments and nearly 60 per cent of the investors are non-Muslims," informs Thomas Kelly, Director and Head, Asset Management, TAIB Bahrain, which will be launching its Everest Fund II-to be managed by UTI and SBI-during September-October 2007. Another common feature among the India-specific Shariah funds is that most of them are offshore funds, though Sareshwala is planning a rupee-fund.

In fact, more by default than by design, the Tata Select Equity Fund has been rated as Shariah-compliant by Islamic scholars. However, according to Ved Prakash Chaturvedi, MD, Tata Mutual Fund, the company has no plans of marketing it as an Islamic fund. The RBI, which had done a detailed study a couple of years back on Islamic banking, says there is no proposal at the current juncture to issue any guidelines to the banks to tap the growing market of Islamic financial services (see Tapping the Islamic Billions). That may appear surprising, considering India is home to the world's second-largest Muslim population after Indonesia. Sareshwala's guesstimate is that just the Shariah funds market in India is worth Rs 1,000 crore. The money invested globally in Shariah funds is estimated in the region of $500 billion.