Islamic Banking or Shariah Finance although a 15-20 year old legacy, has caught up only recently in the past 3 – 4 years. Currently estimated to be worth approximately USD $ 750 billion; this industry is growing at a remarkable pace of approximately 15% – 20% per annum and represents a vast global practice which has developed a worldwide presence (Source – The Banker, UK).
Shariah compliant products in the Retail and Investment Banking space are helping to unlock trillions of dollars of funds lying dead with high net worth individuals and corporates globally, who follow Shariah principles as their day to day business and investment philosophies and thus do not participate in usual financial transactions.
Despite having one of the largest Muslim populations in the world (estimated to be around 160 million, second only to Indonesia) and a strong demand for Shariah – compliant products from the community as well as the business sector, India currently offers limited options for investors looking at Shariah compliant investing. However, this should not go to undermine the scope for Shariah compliant investment opportunities in India.
Indian Economy – An Overview
The global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies.
However, despite the global nature of these events, emerging markets – and particularly Asian banks – have managed to avoid the very worst of the crisis. Growth has slowed down but at the same time, remained steady and at a level which some Western economies can only dream of. We believe India’s financial sector continues to be relatively insulated from the global meltdown and that the domestic economy still provides an opportunity for investors looking for sustainable returns in the medium to long term.
The Indian economy is amongst the largest emerging market economies (US$ 1 trillion) and believed to be amongst the most attractive growth opportunities globally. In fact, according to a Goldman Sachs report – BRICs and Beyond, January 2007, India’s GDP (in USD terms) is expected to surpass that of the US before 2050, making it the world’s second largest economy.
Also, the Indian capital market is well regulated, the stock markets in India, we believe, are amongst the most developed and organized markets in the world and the National Stock Exchange and the Bombay Stock Exchange are at par with the best in the world.
To gauge the scope of Islamic investments in the Indian stock market, it is imperative to examine the underlying opportunity in this sector. Below are findings from a thorough study conducted by Dr.
Shariq Nisar, an eminent personality in the field of Islamic Finance in India.
Islamic Finance Opportunity in India
The world’s economic centre of gravity is gradually shifting from the established, wealthy economies of Europe, Japan and North America to the emerging economies like China, India and South East Asia, with China and India projected to be the largest economies of the world in the next 50 years.
Improving macroeconomic fundamentals, higher disposable incomes, emerging middle class, low cost and highly competitive workforce, investment friendly policies and progressive reform processes are all likely to combine to make a strong case for India to have a larger share in the overall investment pie.
With this sound economic base and with hundreds of companies complying to the Shariah laws, India offers a large economic opportunity for Islamic investors, who follow Shariah investment and therefore can’t invest in interest-based ventures or in Islamically unethical ventures like tobacco, alcohol, fashion, gambling, vulgar entertainment and conventional finances like banks and non-banking financial institutions.
Realizing the growing need of Islamic investments in India, the Indian government has recently taken a number of steps in this direction. First, a high-level committee appointed by the government to prepare India’s future financial structure recommended interest-free banking for inclusion of Muslims in the financial sector. The Report draws its significance from the fact that this is first time an Indian finance committee has said something on the issue, which hitherto was considered quite sensitive in political circles. This is a good sign for Islamic finance in India.
Recently the financial crisis in the West and the drought of liquidity in this region has made Indian policy makers look for other alternatives of financing. The recent visit of the Indian Prime Minister, although at the fag end of the tenure of the present government, to a couple of GCC countries assumes more significance in this regard. The Indian Prime Minister visited the region along with his Chief Economic Advisor Professor Raghuram Rajan who had earlier recommended Islamic banking in his report to the government.
Taking a cue from these gestures, Indian corporates have also started placing themselves to capitalise on this big opportunity.
To measure in detail the scope of Islamic investment opportunities in the Indian stock market, it is imperative to examine stocks which conform to the norms stipulated by the Islamic Shariah principles.
A study on Shariah Compliant stocks
According to the Dr. Shariq Nisar, “the number of Shariah-compliant stocks in India is much higher than in Islamic countries put together, thus providing immense scope of parking money by Islamic investors”.
Out of the 1269 stocks listed in the NSE on which relevant data is available, 265 are Shariah compliant and out of the 491stocks listed in the BSE on which relevant data is available, 125 are Shariah compliant. The table below gives the number of Shariah compliant companies in India and their contribution to the total market capitalization for the last five years.
| Year | 2004 | 2005 | 2006 | 2007 | 2008 |
| BOMBAY STOCK EXCHANGE (BSE) | |||||
| Data available for BSE 500 listed companies | 465 | 474 | 484 | 494 | 491 |
| BSE 500 Shariah Compliant companies | 116 | 132 | 138 | 123 | 125 |
| BSE 500 Shariah Compliant companies | 116 | 132 | 138 | 123 | 125 |
| % Shariah compliant market cap of total | 31.61 | 44.01 | 41.37 | 28.46 | 20.14 |
| NATIONAL STOCK EXCHANGE (NSE) | |||||
| Data available for NSE listed companies | 1238 | 1272 | 1301 | 1310 | 1269 |
| NSE Shariah Compliant companies | 297 | 329 | 331 | 312 | 265 |
| % Shariah compliant market cap of total | 33.53 | 45.60 | 42.92 | 31.84 | 20.41 |
Source: TASIS Research
While examining the Shariah investment opportunity in India, it may also be interesting to understand the top sectors that contribute to the Shariah market capitalization in India. Below is a table giving details on the top Shariah compliant sectors, the number of companies in each sector and their contribution to the total Shariah Compliant market cap -
| BOMBAY STOCK EXCHANGE (BSE) | |
| Top Sectors | Number of Companies |
| Computer Software | 45 |
| Drugs & Pharmaceuticals | 12 |
| Automobile Ancillaries | 11 |
| Industrial Construction | 8 |
| Contribution of these top 4 sectors to total Shariah compliant market cap | 34.69% |
| NATIONALSTOCK EXCHANGE (NSE) | |
| Computer Software | 19 |
| Drugs & Pharmaceuticals | 6 |
| Cosmetics, Toiletries, Soaps & Detergents | 5 |
| Industrial Construction | 4 |
| Contribution of these top 4 sectors to total Shariah compliant market cap | 40.07% |
Source: TASIS Research (As on November 30, 2008)
The above study on Shariah compliant stocks and sectors in India is screened by TASIS (an Indian Shariah advisory firm, which has tied-up with Dar al Shariah of Dubai). Dr. Shariq Nisar added that TASIS norms are very conservative in comparison with other screening norms.
Conclusion
Dr. Nisar’s research suggests that with hundreds of Indian companies complying with the economic laws of Shariah, India has now become an attractive destination for Islamic investments. Islamic financial institutions and Shariah conscious domestic investors are finding the Indian stock market a good place to invest. The research further suggests that the Islamic options available in India are wider than those in many Islamic countries. This shows the vast potential that India can tap in the field of Islamic Banking and Finance.
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