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How Shariah index helps Islamic investors

Followers of Islam, the second largest faith in the world with an estimated 1.7 billion believers, can now be surer when an Indian firm stands the pre-requisites for observant Muslims. The Shariah index launched by the Bombay Stock Exchange (BSE) is a new measure in town, assuring compliance with the Islamic canonical law.
 
Besides giving Islamic mega funds a surer handle on Indian markets, the aim of the S&P BSE 500 Shariah Index is financial inclusion of Indian Muslims – around 177 million in number and hitherto wary of stock markets – and attract them to ‘correct’ equities. ‘For us, the index is part of a bigger exercise – of inclusion and fairness,’ said Ashish Kumar Chauhan, MD of BSE and an alumnus of the IIT and the IIM who spent his early years in Ahmedabad.
 
‘The maahoul (composite culture and environs) in the city influenced my appreciation of “inclusion” as an imperative,’ Chauhan, who in the past headed an Indian Premier League franchise said.

Last month, the BSE Institute, a wholly owned subsidiary of the exchange, in association with Taqwaa Advisory and Shariah Investment Solution, announced an online certification programme in ‘Islamic Banking, Finance and Capital Markets’. Chauhan bets there is a big market for students who have an understanding of the latest developments in the fields of Islamic banking, finance and the capital markets. Islamic banking and finance extends to some 75 countries, growing at over 15 per cent per annum. To be able to sustain its growth, the industry needs large numbers of banking and finance professionals who require training about its basic principles and practices.

This list includes fund managers, chief financial officers, merchant bankers, corporate financial advisors, portfolio managers, product development managers, finance marketing professionals, chartered accountants, stock brokers, wealth and fund managers, students and researchers. Globally, S&P Dow Jones is big on Islamic financing.
 
These are among 11 others encompassing Africa, Asia-Pacific, Europe and North America.

The preferred Islamic investment format is equity – interest is forbidden. Yet, giving due currency to the exigencies of modern businesses, particularly the pervasiveness of interest-based transactions, Shariah scholars have a minimum compliance criteria. These criteria, while excluding companies in gross violation, also provide investors a reasonable choice of Shariah-compliant equities. These minimum guidelines, however, are not uniformly applied by all Shariah advisors.

Companies dealing with pork, alcohol, gambling, tobacco, telecom, advertising and media, with some exceptions, are left out of Islamic indices. So are banks as Islamic investors are not allowed to profit from interest. Similarly, firms with certain financial ratios – like a debt of more than 33 percent to the market value of equity – do not make it to Islamic indices.
 
But companies, whose involvement in non-permissible businesses is less than five per cent of total revenue, do qualify. These calculations are monitored and status updated from time to time. Besides curbs on interest and debt, Islamic funds cannot pay fixed or guaranteed return on capital. Instead of borrowing or lending, Islamic finance relies on shared ownership of assets and therefore risk in the form of profit or loss. As Islam forbids gambling, derivatives, forwards, options and futures trading are also prohibited - so are short-selling, margins and scalping trading. Day trading is also considered akin to gambling.
 
Thus far, despite having the second-largest population of Muslims on the planet, Indian markets had a dearth of scientific ways to tell if the investee company eschews what’s repugnant in Islam.

The financial exclusion of Indian Muslims also remained a faultline and the walk to mend it hardly matching the talk. Now there is hope, and promise. IANS
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