In May 2006, when the Sensex, Bombay Stock Exchange’s benchmark index, first crossed 12,000, a Muslim investor approached Ashraf Mohamedy, managing director of Idafa Investments, with a question.
The investor wanted to know whether it was halal—or permissible—under Islam to invest in the stock of Mid-Day Multimedia Ltd, a publishing company that runs a popular afternoon paper here and, like a lot of papers these days in India, features photographs of scantily clad women.
Mohamedy, who heads Idafa, one of two Indian Shariah—or Islamic-law compliant—brokerages in India, responded by immediately striking the publisher off his list of companies in which a Muslim can invest without running afoul of his religious principles. Mohamedy’s logic: the photographs were harmful to the readers of the tabloid. “Anything harmful to anybody is un-Islamic,” he says.
Fast-forward to today. The Sensex has risen to 13,049 points after a roller-coaster ride that saw it cross 14,000 points last month, even though Mid-Day Multimedia’s shares have actually dropped from Rs72 to about Rs37 since May.
But even as Islamic investment and banking services are gaining ground in many parts of the world, Indian Muslims, bereft of most Shariah-compliant offerings, are finding themselves torn between the urge to invest in a booming stock market—up a whopping 47% in 2006—and strict religious edicts that bar them from earning income based on either speculation or through interest-generating products.
“Even educated Muslims are not sure if they can invest in the stock market,” says Farid Batawala, a Mumbai-based trader. “Most of them still hoard wealth and hide stacks of money in their pillows and mattresses.”
Outside India, over 300 institutions spread across West Asia, Europe, Asia and America now offer Shariah-compliant banking and financial services with assets valued at $500 billion, according to an FTSE Global market report released in March 2006. HSBC Amanah, the global Islamic banking division of HSBC Group, alone has 110 million customers for its Shariah-compliant banking in 77 countries. The products are widely marketed and accessible to Muslim investors. But in India, home to 150 million Muslims, there are just two brokerages—Idafa and Parsoli Corporation Ltd, with a combined customer base of just around 2,000 clients—that currently offer formal Shariah-compliant investment services.
“We did explore the demand for Amanah in the Indian context and met the Reserve Bank of India in this regard but currently the regulatory environment for banking in India does not permit us to launch Amanah,” says Nicholas Winsor, head of personal finance at HSBC India, even as he notes that the “Muslim wealth is substantial in India.”
HSBC isn’t alone in not being able to cater to this potentially lucrative segment. Deutsche Bank, ABN Amro, UBS and Citigroup also offer Islamic financial products and services globally but not in India.
Earlier this week, the government said in Parliament that there was no plan to set up an Islamic bank in India, throwing water on some media reports that Prime Minister Manmohan Singhhad appointed a committee to explore the idea.
On Saturday, Parsoli is organizing what it bills as the first “Islamic Investment Opportunities” conference in Mumbai to discuss Shariah-compliant opportunities, complete with a separate enclosure for women and arrangements, during the day-long conference, for Zohar prayers.
But, notwithstanding the nascent efforts by Idafa and Parsoli, the paucity of opportunities isn’t any better in equities than it is with banking and mutual funds.
Consider Faisal Ahmed, a Bangalore-based incense manufacturer. He has been playing in the market for about three years, dealing with both losses in day trading and his father’s angst over doing something haram, or forbidden by Islam. Ahmed says he has met dozens of religious experts seeking advice on investments in the stock market. Each time he meets an expert, he has had to explain that owning shares was not necessarily a speculative activity as it involved owning a piece of the company. “They know about the Koran and I know about the market but it was difficult to make a meeting ground of the two,” says the 35-year-old.
Ahmed, who is always collecting religious advice on investing, would have benefited greatly from India’s first seminar last month on Islamic investing, where 1,100 fellow investors—most of them Muslims—discussed the pros and cons of playing the stock market. The conference was organized by Zafar Sareshwala, managing director of Parsoli, the Ahmedabad-based brokerage firm which also launched an Islamic financial portal at the event.
Parsoli has been around for 15 years and is a publicly-traded entity. Sareshwala says his Shariah-compliant stock index has mirrored the rapid rise of the Sensex. His apparent success, even if with a very small client base, has attracted attention, especially overseas. Germany’s Baader Wertpapierhandelsbank AG, the largest securities trading firm in Germany and owner of Baader Bank, recently took a 30% stake in Parsoli. While Indian Muslims may not be beating a path to his doorstep, India’s sizzling stock market is fuelling Sareshwala’s plans to launch a fund, along with Baader Bank for West Asian investors interested in Shariah-compliant firms in India.
Sareshwala has tried to build investor confidence by teaming up with religious scholars such as Mufti Abdul Qayoom, who is also an investor in the stock market. “Traditionally, Muslims did not enter the market because they equated it with gambling,” says Qayoom. “But now they see that there are opportunities to make money in a halal way.”
Indeed, more Muslims seem to be starting to dip their toes in the market if Idafa’s numbers are any indicator. Mohamedy says that of his investor base of about 1,000, some 350 have come on board just in the past year.
With its three television sets tuned to financial channels, Idafa’s office in a dilapidated building in Crawford Market has the trappings of a regular brokerage, though the excitement is definitely muted—in part because day trading, where money is made off intra-day volatility, is forbidden under Shariah. Still, Mohamedy says his clients’ average annual returns this past year has been between 30% and 40%.
Mohamedy updates his list of Shariah-compliant stocks at regular intervals. At the moment, the list includes roughly 15% of the listed stocks on Indian bourses—780 of 4,600. He meticulously avoids stocks of hotels, liquor companies, banks, tobacco firms, pesticides and genetically modified crop companies. He also avoids companies involved in gaming and manufacturing products such as asbestos because of their environmental impact. Islamic practices also do not allow investing in companies whose debt is more than a third of their market capitalization and receivables are less than 5%.
To be sure, not every Muslim investor is always Shariah-compliant. One of Mohamedy’s clients is Roshan Naik, the 75-year-old mother of Indian television’s most famous Muslim preacher, Zaquib Naik. Naik, who has been investing in the market for more than three decades, says she did invest in hotel and other non-halal stocks in her early days though she has since pruned her portfolio to Shariah-compliant stocks in deference to her preacher son. And she is a devout Muslim when it comes to not having a bank savings account or even an insurance policy.
While Islamic tenets were meant to discourage profiting from speculation and gambling, applying them to modern times can sometimes be problematic. Insurance, for instance, is an area where a dearth of Islamic offerings is particularly noticeable.
“I really feel that I should be insured,” says Tariq Qureshi, a Mumbai-based trader, who exports meat, garments and machinery. But when it comes to shares, he is definitely taking the high road. “There are many stocks we want to buy,” he says. “But we also have to think of the world after.”