Imtiaz Merchant, founder of Pragmatic Wealth Management talks to Cafemutual on the demand for Shariah funds in India and his plans to attract more investors in Shariah compliant funds.
What in your estimate is the size of the market for Shariah compliant investments?
Islamic investment industry is still nascent in India. Globally, it is growing at 20% compared to conventional investments industry which is growing at 10%-12%. Shariah compliant investments started in mid-nineties when Islamic scholars came out with norms that enabled Muslims to participate in equity markets with certain caveats.
They observed that it is good to invest in equities to earn higher returns rather than putting money in bank deposits as earning interest in not permissible under Islamic investment laws. Equity returns are based on profits of companies which is also a form of partnership (known as musharakah in Islam) which is allowed in Islamic investment laws. However, Islamic investment laws don’t allow Muslims to become partners in companies which are engaged in liquor, gambling, tobacco, entertainment, securities trading, banking and finance. We can invest in industries like textile, construction, pharmaceuticals, etc.
What has been the response to Shariah compliant products in India?
According to our estimate, there is a good demand in India for Shariah complaint products but there aren’t enough products to cater to this demand. Awareness about Shariah investments is also low. So a lot of marketing effort is required.
Bonanza is run by Hindus but still they have collaborated with us because they see a potential in this market. We also have Hindu clients who invest in our funds because they believe in our concept. Muslims are not concerned if they earn slightly less returns as long as we comply with Shariah rules. On the other hand, Hindus are comfortable investing in our funds as long as the fund’s performance is good.
What is required to make them more popular?
There is a lot of misconception about equity markets and we are helping bring Muslims in the mainstream of the economy. We have plans to establish an academy which will offer courses and training on Islamic finance. The idea of launching Islamia Tijara magazine was to create awareness about Islamic investment in India. The Muslim population in India is about 15%. Only 2% of Muslim population is investing in equity markets.
What led to the launch of Pragmatic Wealth Management?
I was an equity analyst for more than 15 years. I’m a fundamental and technical analyst. I used to advise people on stocks. After a lot of research on Islamic investments I developed a screening methodology and a Shariah Board for our company. I travelled across India for two years and met many scholars to read the pulse of the people. I discovered that there was a demand for this product.
Tell us how is your fund run in compliance with Shariah laws?
We launched a Bonanza Pragmatic Shariah Fund in 2011. Shariah rules have certain parameters relating to business activity and interest income of Shariah complaint companies. A company which gets more than 5% of its income through interest is not Shariah complaint. Money should be invested in the business and not parked in banks to earn interest so that investors earn better returns. Similarly, a company’s debt should not exceed 33% of the average market capitalization over a 12 month period. Taking money on interest is not permissible but scholars have some leeway or tolerance level which is capped at 33%.
We don’t do day trading or indulge in speculation. Among the five biggest sins in Islam, interest is one of them. Giving, taking, or being guarantor while giving loans is sin. When banks collapse depositors share the burden. But when the economy is doing well depositors still receive the same percentage of interest. We feel secured if our money is kept in the bank but is not so.
If people don’t derive any utility from a service or product then it is not worth doing that business. A company may derive some profit but the mankind loses morality and ethics.
There is better distribution of profits if companies raise money through equity than debt. Money is monopolized. Large companies take loans from banks which add to their costs. Companies pass on this cost to consumers. This leads to inflation and the end consumers suffer. Companies construct residential apartments by raising money from banks and consumers in turn have to take a loan from bank to buy a house.
Apart from 33% debt criteria which are the other filters?
The company’s cash on the books should not be more than 33%. We pay premium to buy stocks so the cash should be fully invested in the business. Similarly, receivables should also not be more than 33% of the market capitalization of the company.
How often do you monitor your shortlisted stocks to ensure that they have not flouted Islamic investment laws?
We monitor our stocks on a quarterly basis. We have a customized in-house screening system. We publish the list of stocks which come in and move out of Shariah laws in our magazine.
How much assets do you manage across all your funds?
We manage around Rs 5 crore currently. We have hired some relationship managers and salespeople to market our funds.The conversion rate is slow right now but we are hopeful that our products will be well received over a period of time. We have applied for a broking license which will allow us to give franchises. Around 150 people have already showed interest in enrolling for our broking services. We have around 15 clients in our PMS and 30 clients have subscribed to our advisory services. We have an advisory arm which is called Adaaf Advisory. We advise people who already invest a minimum of Rs 5 lakh to Rs 8 lakh in equity markets in order to help them comply with Islamic investment rules.
How do you reach out to your target audience?
We have planned a host of activities like conducing conferences, using social media, engaging call centers and appointing RMs to grow our business. We will do conferences in places like Hyderabad, Bangalore, Malerkota (Punjab), Akola (Maharashtra), Kochi (Kerala) and Mumbai which have a large Muslim population.
You launched a magazine in 2010. How has it been received? What is its circulation and subscription base?
It is a new initiative which is not tested in the market. We have subscribers from abroad who are ready to pay Rs 100 and pay carriage charges to read our magazine. We have close to 500 subscribers. We print about 2000 copies which are also sold on the stalls. We distribute some complementary copies.
The response in in towns is not so encouraging because not many Muslims are well versed in English. They read Urdu or Hindi. But a lot of people have appreciated our magazine.
How is the demand for your services in the overseas markets?
We have two clients who are from Qatar and Dubai but they are NRI Indians.We are contemplating of doing a conference in Dubai. IMF has also recognized Islamic Finance. London has become an Islamic finance hub. I was called in Europe to give a presentation on Islamic Finance. So a lot of work is happening around the world in this field. Slowly the world is realizing the benefits of socially responsible investments.
Do Islamic rules allow investment in gold?
Gold is compliant with Shariah laws but personally I don’t encourage investing in gold. Gold itself is a form of money. So how can you invest in money?Gold was used as currency one point of time for buying and selling of goods. Then gold was valued at a price. Gold cannot produce anything. People should invest in something which can generate employment and create wealth for the mankind. If gold prices go up how does it help the industry or anyone?
