The history of the Indian stock market began when a group of stockbrokers came together in 1850, but it was not until 1956 when the Bombay Stock Exchange was finally recognized by the government. Technology then expanded the exchange from being elitist to an investing platform for the common man, and in 1992, with the backing of leading financial institutions, banks and insurance companies the National Stock Exchange (NSE) was formed.
The Indian economy has shown remarkable resilience. The fundamentals of the economy are very strong and as a result the Indian stock market is one of the best performing among the emerging markets. Today, it is the world’s third largest exchange in terms of equities.
India is also home to one of the largest Muslim populations in the world. The growth in the global Islamic finance industry, and the large market potential for Shariah compliant products have prompted companies to launch Shariah products in India. The Indian stock exchange has one of the highest numbers of Shariah compliant stocks listed, even more than some Muslim countries. Shariah investment options have been available globally for more than 10 years, and have maintained on par if not better returns on investment for investors compared with conventional investment options.
Investing in stocks is a Shariah compliant activity as long as the company in which the investment is made adheres to the principles of Shariah. But for an individual investor to ensure that the companies listed on the stock exchange are Shariah compliant on a regular basis is a herculean task and literally impossible.
The companies may be Shariah compliant on the basis of the sector screening but may become non-Shariah compliant because of their accounting standards. It becomes very tough for the individual and even institutional investor to handle Shariah compliance issues.
The screening of stocks for Shariah compliance requires a large amount of research and the high expertise of Shariah scholars who keep a regular check on the activities of the companies, to ensure Shariah compliance.
The need to create a list of Shariah compliant stocks available of the NSE was fulfilled by Standard & Poor’s (S&P), along with its Indian partner India Index Services & Products (IISL).
In the year 2008 the S&P CNX Nifty Shariah and S&P CNX 500 Shariah indexes were launched by S&P with IISL to tap and provide an opportunity for Shariah compliant investors in India.
The number of companies in the S&P CNX Nifty Shariah Index as on the 31st March 2010 is at 31 against 50 companies which constitute S&P CNX Nifty Index which is the underlying index. This varies depending on the number of companies which are found Shariah compliant on a monthly basis. Thus the Shariah Index makes up approximately 72% (approx) market capitalization of the parent index.
Ratings Intelligence Partners, a company based in the UK provides Shariah screening services for the S&P CNX Nifty Shariah Index. The Shariah board consists of scholars who are world renowned and have been advising notable financial institutions across the globe.
The stocks which comprise the S&P CNX Nifty Shariah and S&P CNX 500 Shariah give a lot of scope for companies and investors in India. S&P CNX Nifty Shariah gives investors exposure to an index based on the screening and selection process according to Shariah principles.
Equity investments have been the mainstay of investors not only in India but globally. Stock market dynamics are such that it evolves and responds to various factors whether economic or political, giving investors profit or loss. Investors flock to the market with one primary reason to make money by buying into various investment options available in the financial markets.
The schemes floating in the financial markets are many and varied, and often too complicated for the common investor. Shariah compliant schemes simplify this by providing investment in stocks that adhere to Shariah principles, which is akin to modern day ethical investing.
Exchange Traded Funds (ETF’s), when combined with Shariah principles, provide a very simple investment option in a financial world full of complex products. ETF’s are essentially Index funds that are listed and traded on exchanges like stocks. ETF’s provide opportunity to invest in the market on a real time basis at a much lower cost than the traditional funds.
The ETF/Index fund is a mutual fund scheme which follows a passive indexing strategy instead of picking individual stocks. Also, it is simple and neutral since it replicates the index movements, and provides instant diversification for the investor. This feature is the main lure for investing in ETF/Index fund – one unit gives investors exposure to the whole index at a very low price. They provide exposure to all the constituents of the index, instead of betting on just one stock or even a couple of stocks. A Shariah compliant ETF/Index fund provides an opportunity to invest in a diversified portfolio and since the returns are directly linked to the performance of the Index, the need of betting on any particular stock is eliminated.
Benchmark Mutual Funds, a company known as pioneers in ETF’s/Index Funds launched “Shariah BeEs”, India’s first Shariah compliant ETF in February 2009 with S&P CNX Nifty Shariah Index being the underlying index.
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Can be easily bought/sold like any other stock on the exchange through the trading terminals
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Real time price and can be bought/sold during market hours
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Minimum investment is one unit, thus a lucrative investment option for small investors also
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Expense ratio is lower
Shariah BeES is one of the few Shariah compliant ETFs available across the world and it has been just over a year since the fund was listed on the NSE.
Benchmark’s introduction of the Shariah compliant product saw other companies take the cue.
Shariah index companies adhere to the principles of Shariah and do not comprise of companies dealing with interest, alcohol, gambling and other prohibited sectors. The basic and foremost characteristic of Islamic financing is that instead of a fixed rate of interest it is based on profit and loss sharing. Similarly Shariah compliant ETF’s/Index funds do not guarantee any fixed rate of return, thus making the Index fund concept Shariah compliant.
The table below gives an overview of the sectored spread for Shariah BeEs and it is evident that the fund gives exposure to a wide variety of sectors which enjoy a robust growth rate in the Indian economy.
Larsen & Toubro, Tata Consultancy Services, Bharat Heavy Electricals, ABB, Maruti Suzuki, Cipla, Steel Authority of India and Siemens are some of the companies which comprise the Shariah Index. It is evident that the investors of Shariah compliant index funds get exposure to a wider variety of sectors, and the growth of these sectors is linked to the success of the growth of the Indian economy.
The market capitalization of S&P CNX Nifty Shariah Index is INR2.32 million (US$50,000) as on the 31st March 2010 whereas the market capitalization of S&P CNX Nifty which is the underlying index is INR3.3 million (US$71,000).
Conclusion
The fastest growth in Islamic finance is occurring in funds. Islamic assets are going to touch US$1 trillion globally, with an annual growth rate of 10% to 15%.
Equity investments is all about return based on performance, productivity and quality of the company, and this is truly a Shariah compliant manner of investing.
ETF’s have taken this to the next level of sophistication by providing opportunity to investors to take exposure in all the constituents of the Shariah compliant index. This also rules out the possibility of any kind of speculation or betting – the two trends for investors that are normally non-Shariah compliant.
It would not be wrong to say that ETF’s based on the Shariah index, S&P CNX Nifty Shariah) provides a complete Shariah compliant investment option.
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The author does not endorse any product/investment scheme mentioned above; they have been quoted for informational purpose only.
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The names of the companies mentioned in the article are trademarks of the companies.
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The products mentioned also are trademarks of the companies mentioned respectively.
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The views expressed are of the author. It does not mean that REDmoney or IFN subscribe to the same views.
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The author has the right to use the article in any presentations in future.
Ali M Shervani
Owner
Consigliori Consultants
Email:
[email protected]