Globally, the $1.5 trillion market for Shariah-adherent products is expected to grow by around 20% annually. In India, 1,200 of the total 6,000 stocks are Shariah-compliant already. Over the last one year, Shariah-linked funds, which manage assets worth Rs139 crore, have outperformed the Sensex by a mile. Change is in the air, write Nitin Shrivastava and Sachin P Mampatta.
A cursory comparison of Islam-based investments and broad market performance (as symbolised by the Sensex gyrations) might suggest that Shariah-compliant funds have caught the fancy of Indian investors. Over the last one year, the 30-stock BSE Sensex has slipped 13.21%, while the 50-stock Shariah index has lost only 5.25%.
That is to say, Shariah-compliant investments — in deference to religious stipulations of Islam, they steer clear of shares of over-indebted companies and those whose business is related to gambling, pork, alcohol, tobacco and interest-earning lending — have performed better than the broader market. For instance, three mutual fund schemes that adhere to the Shariah-stipulated exclusions have outperformed the broader market by up to 10%. Currently, there are around 1,200 stocks of the total 6,000, including around 150 companies on the BSE 500, that are Shariah-compliant.
In any weak macroeconomic scene like the current one, lenders like banks struggle. As Shariah funds avoid such institutions and prefer low-debt (hence fitter) companies anyway, they outperform the broader market.
For instance, banks and non-banking finance companies form nearly a fifth of the Rs62 lakh crore market capitalisation of the Indian equity market. But because they earn interest on loans, Shariah investors skip their shares. And they are much the better for that - after all, the BSE’s banking index has dropped 12.04% over the last one year, points out Waqar Naqvi, CEO of Taurus Mutual Fund, an asset management company that operates Shariah-compliant Taurus Ethical Fund.
“When the economy is not doing well, banks underperform. Their absence in Shariah portfolios helps these funds do better than the broader market. Also, these funds only look at companies where interest payments are low, which inevitably points to cash-rich companies. These again do well in a rising interest rate scenario,” explains Naqvi.
Agrees Pradeep Gokhale, fund manager for the Tata Ethical Fund, another Shariah-compliant investor. “One of the main Shariah conditions is that companies have a low level of debt. This and the absence of interest rate-affected companies has helped our fund to outperform.”
The “ethical” funds of both Taurus and Tata are two of three ‘active’ mutual fund schemes that are open to Indian retail investors. Their negative returns of -7.96% and -2.53%, respectively, are still better than the Sensex show. The third ethical fund, started by Benchmark Asset Management Company, has been bought by Goldman Sachs.
The ‘passive’ Goldman Sachs S&P CNX Nifty Shariah Index Exchange Traded Scheme attempts to match the returns of the National Stock Exchange’s Shariah index by buying shares in the companies constituting the index in the same proportion as the index, without any active churning of the portfolio. Even this passive fund — it gave returns of -8.33% — fared better than the Sensex.
Shariah-compliant funds in India manage a total of Rs139 crore, a minuscule portion of the trillion-dollar-plus global Islamic finance pie spanning Malaysia, Indonesia, Kuwait, Bahrain and Saudi Arabia, according to Shariq Nisar, director of operations and research at Taqwaa Advisory and Shariah Investment Solutions (Tasis), a firm that provides guidance and support to individuals and corporates on Islamic finance.
“Globally, funds and financial products worth around $1.5 trillion (Rs 75 lakh crore) are currently managed using Shariah investment principles. Shariah-compliant financial investing is still at a nascent stage. In India, though we have indices based on Shariah, there are very few products available right now. But this market is expected to grow around 20% in the coming years,” says Nisar.
Tasis advises financial institutions, regularly screens stocks, develops lists of stocks compliant with Shariah principles and structures products for its clients. “Every month, we screen the universe of around 6,000 Indian stocks for likely additions or deletions to the list of Shariah-compliant companies,” says Nisar. And in all likelihood, there will be more additions than deletions as advisors such as Tasis will look to spot more companies that fit the Shariah norms.