Shariah Funds: An overlooked opportunity

Shariah Funds present a great opportunity to Indian fund houses to meet the needs of those domestic and foreign investors who like to make investments that comply with Shariah, says Khozema Dhanerawala

Muslims represent around 12-15% of total Indian population and the investable surplus of this class of investors is increasing. Moreover, according to a report Ernst & Young Islamic Funds and Investment Report 2010, global asset under management under Islamic funds was nearly $52.3bn in 2009. This growth in Islamic institutions gives the 2^nd fastest growing emerging country ‘India’ a better chance than other countries to attract these funds and presents a great opportunity for Indian fund houses.

Shariah funds are popularly known as Islamic Investment Funds. It’s a pool of money collected just like a conventional mutual fund for investments to earn profits. The only difference is that these funds are in strict conformity of Islamic shariah.

Basic principal for shariah investing are as follows:

• Business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest like insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies which manufacture or selling liquor, pork, or involved in gambling, night club activities, pornography etc.
• Any kind of investment in conventional banking is outlawed. With the concept of debt also contrary to the principles of Islam, investment in highly-leveraged companies is also not permitted for Shariah-compliant funds.
• If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given to charity and must not be retained by the shareholder. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

A wide variety of funds can be launched to attract investors who follow this kind of investment style. One can launch equity, commodity and sukuk funds.

• Equity funds: In an equity fund the amounts are invested in shares of joint stock companies. It is obvious that if the main business of a company is not lawful in terms of Shariah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the share holder in that prohibited business.
• Commodities fund: The subscription amounts are used in purchasing different commodities for the purpose of the resale. The profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make this fund acceptable to Shariah, it is necessary that all the rules governing the transactions are fully complied with. For example:

1. The commodity must be owned by the seller at the time of sale, therefore, short sales are not allowed in Shariah.
2. The commodities must be halal. Therefore, it is not allowed to deal in wines, pork or other prohibited materials.

• Sukuk Funds: These are just like bond funds minus the concept of interest. These funds collect money and invest in projects, joint ventures, and start ups. Neither the principal nor the returns are guaranteed. The return on investment depends on profit earned from these investments.

Mr. Zafer Sareshwala, CEO of Parsoli Corporation says “Opportunities are immense for the Indian mutual fund industry to launch Islamic mutual funds and attract foreign flows to India but lack of proper regulation is a hindrance. Also mutual fund house should launch schemes naming them as Islamic funds or shariah funds and appoint a shariah committee to screen the investments to win the trust of Muslims. Right now even though Tata Pure Equity Fund is shariah compliant, the Muslim people don’t know about it. Hence, they are reluctant to invest their money in such funds. This is also the cause for low demand from Muslims. Hence there is a need to name schemes predominantly Islamic so as to make it visible for the investors”.