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Kuala Lumpur/Jakarta: Indian Islamic property and stock funds are starting to give the world’s third largest Muslim population Shariah investment options in a nation where banking in line with the Koran’s tenets is prohibited.

Taqwaa Advisory and Shariah Investment Solutions Pvt. Ltd, a Mumbai-based consultancy, is setting up the 250 crore fund on behalf of a company backed by the Kerala government, director Shariq Nisar said in an interview on Wednesday. Secura Investment Management (India) Pvt. Ltd manages the country’s only other such real estate vehicle. India has two Shariah equity funds and BSE Ltd, the stock exchange operator, introduced a new Islamic share index on 2 May.

India hasn’t made any progress on allowing Islamic banking since the central bank formed a committee to look at the issue in 2005, while no sukuk have been issued in the country due to a lack of legal recognition. The South Asian nation that has the highest sovereign bond yields among the 10 major Asian emerging markets is unlikely to introduce legislation in the near term as such a move may anger the 81% Hindu majority, according to Kuala Lumpur-based consultancy Amanah Capital Group Ltd.

“Islamic finance is in a nascent stage in India and definitely any new product will create more awareness and opportunity," Taqwaa’s Nisar said. “There’s a lack of awareness and interest, which will take some time to be removed."

Expert panel

The fund will be run by Al Barakah Financial Services Ltd, whose shareholders include Kerala State Industrial Development Corporation Ltd, which is owned by the state government, Nisar said. The vehicle will invest mainly in commercial real estate in the southern Indian state, he said.

In 2008, a 13-member panel of experts led by Raghuram Rajan, a former chief economist at the International Monetary Fund and now the top adviser in India’s finance ministry, recommended that the country allow banking that complies with Islam’s ban on interest. The government did not take any action, and central bank governor D. Subbarao said this month that Shariah-compliant banking is inconsistent with the nation’s laws.

“At this point in time, the Indian constitution restricts any regulation or law which favours any religion," Abas A. Jalil, chief executive officer at Amanah Capital, said in a 28 May e-mail. “We don’t foresee any amendment to regulate Islamic banking to be put in place in the near future."

Political barrier

India’s 10-year sovereign bonds yield 7.15%, well ahead of 5.97% in Indonesia, the next highest in the region, data compiled by Bloomberg show.

Other countries with minority Muslim populations have taken steps to develop Shariah-compliant finance. Singapore introduced laws in 2006 to give sukuk equal tax treatment, while the UK did the same in its 2007 budget.

“The challenge is that every time India tries to offer Islamic banking, the tendency is to politicize this product," Raj Mohamad, managing director at consulting company Five Pillars Pte, said in an interview from Singapore on Wednesday. “India should look at non-traditional Islamic finance markets and see how they have done it."

Most Indian Muslims want basic Shariah banking products such as mortgages, rather than sophisticated investment options, according to H. Abdur Raqeeb, the general secretary for the Indian Centre for Islamic Finance in New Delhi.

Muslims by and large are not very rich in this country, he said in a 15 May interview. Less than 1% of Muslims are in the capital market.

Stock funds

Internationally, an increasing amount of Shariah-compliant financial assets has buoyed demand for sukuk, with worldwide sales reaching a record $46.5 billion last year. Issuance has risen 7% so far in 2013 to $18 billion, data compiled by Bloomberg show.

Taurus Asset Management Co. Ltd. says it established India’s first Islamic stock investment vehicle in 2009. The Taurus Ethical Fund has 22.04 crore of assets, according to data compiled by Bloomberg. In 2011, Tata Asset Management Ltd switched the Tata Select Equity Fund to the Shariah-compliant Tata Ethical Fund, which had 103 crore of assets as of 30 April.

The average yield on Islamic debt rose 10 basis points, or 0.1 percentage point, to 3.38% on Wednesday, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. Borrowing costs have climbed 57 basis points this year, after reaching a record low of 2.67% in January. The yield premium over the London interbank offered rate, or Libor, widened five basis points to 181.

‘ More awareness’

Shariah-compliant bonds returned 0.5% this year, according to the HSBC/Nasdaq gauge, while emerging-market notes lost 3%, JPMorgan Chase and Co.’s EMBI Global Index shows.

Some 13% of India’s 1.2 billion people are Muslim, according to the CIA World Factbook, the third-biggest population behind Indonesia and Pakistan. Those two countries have 209.6 trillion rupiah and 837 billion Pakistani rupees of Islamic banking assets, the latest central bank data show. In Malaysia, a global pioneer in Shariah-compliant finance, holdings total 399 billion ringgit.

“With a huge Muslim population getting more awareness about Shariah-compliant products, Indian Muslims’ preference for Islamic solutions will rise," Mohammed Sohail, chief executive officer at Topline Securities Ltd in Karachi, said in an e-mail on Wednesday. Many Asian and Middle East countries can introduce Islamic products to tap the Indian market. Bloomberg

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