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Kuala Lumpur/Jakarta: India’s biggest bank has set up an Islamic equity fund, the highest-profile endorsement of Shariah-compliant finance to date in a nation that is home to the world’s third-largest Muslim population.

SBI Funds Management Private Ltd, a venture between the government-owned State Bank of India and France’s Amundi Group SA, started a fund to invest in local stocks that comply with the Koran’s tenets, chief executive officer (CEO) Dinesh Kumar Khara said in a 27 November e-mail interview in Mumbai. India’s benchmark share gauge has surged 35% this year, the most in Asia.

Opposition from Hindu politicians has stymied the development of Shariah-compliant banking even after a panel led by Reserve Bank of India (RBI) governor Raghuram Rajan recommended its introduction in 2008. There have also been no sukuk sales. Tata Asset Management Ltd and Taurus Asset Management Company Ltd have raised the equivalent of $40 million since setting up equity funds targeting the nation’s 166 million Muslims.

“SBI’s Shariah-compliant fund is India’s first credible effort to promote Shariah investments from the biggest financial institution," H. Abdur Raqeeb, general secretary of the Indian Centre for Islamic Finance in New Delhi, said in a 26 November e- mail interview. “Muslims who constitute about 15% of India’s population are in need of an investment option which fulfills their faith criteria."

Emerging industry

“SBI Funds appointed London-based Ratings Intelligence to screen Indian stocks for the portfolio and will register the product offshore to also tap global investors," Khara wrote in an e-mailed response to questions. “The fund was started on Monday with the initial offer set to end on 15 December," he said.

Shariah law forbids investment in companies involved in gambling, alcohol and pork. Standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), also exclude businesses that have a debt-to-market value ratio of more than 30%.

“We expect to be a significant player in this category in one year’s time," Khara said. “With the evolution of Indian equity markets and demand from the investor community, we felt the need to launch an equity fund, which invests in stocks that are screened for Shariah principles of investing."

India’s economy already has a few financial products that comply with the religion’s ban on interest. The stock exchange introduced a Shariah-compliant share index in May 2013, and Cheraman Financial Services Ltd, an Islamic investment company that offer services including leasing and private equity and is based in Kochi in Kerala state, began operating in July last year.

Political opposition

The southern Indian state, where 24% of the population are Muslim, allowed the registration of non-banking financial institutions that operate according to Shariah principles in 2011.

The Kerala High Court rejected a complaint by Subramanian Swamy, a former central government minister, who argued that Indians should not be made to pay taxes to promote a particular religion. At the time, Swamy was president of the Janata party, which has since merged to form the ruling Bharatiya Janata Party (BJP) led by India’s Prime Minister Nahendra Modi.

“More Islamic funds and venture capital coming out in India would increase awareness and change the perception that Islamic finance is only for Muslims," Thanveer Mohiyudheen, chief operations officer at Alternative Investments and Credits Ltd., a Shariah finance consultancy in Kochi, said in a 28 November interview. “It’s likely that we can see sukuk from India in the next few years."

Most promising

The political climate and the lack of laws to put Shariah bonds on an equal tax footing with non-Islamic debt means there have been no sovereign or corporate sukuk sold in India. The dearth of Islamic lenders is another obstacle.

Rajan, a former chief economist at the International Monetary Fund (IMF) who took over as RBI’s governor in September 2013, led a panel of experts that recommended the country allow banking that complies with Islam.

Hong Kong, the UK and Luxembourg have sold debut sukuk this year as non-Muslim majority nations tap an Islamic finance market that Ernst and Young Llp sees exceeding $3.4 trillion in assets by 2018. Sales worldwide increased 14% to $44.2 billion in 2014 from a year earlier, on track to break the record $46.8 billion in 2012, data compiled by Bloomberg show.

Standard Chartered Saadiq, the Islamic arm of the UK’s fifth-largest bank, sees India, along with several nations in Africa, as the most promising new markets for Shariah-compliant finance. Authorities in New Delhi may “come to the conclusion that allowing Islamic finance helps the economy and the people of India," as they seek new sources of finance, CEO Afaq Khan said on 9 September.

‘Significant momentum’

Prime Minister Modi, who took office in May, has pledged to spend $25 billion on power plants, roads and airports in an economy that analysts surveyed by Bloomberg forecast will grow 5.5% in 2015, from an estimated 4.7% this year.

The “Islamic financial market has gained significant momentum in India due to huge interest by Islamic funds in the country’s growing economy," Abas A. Jalil, CEO at Kuala Lumpur-based consultancy Amanah Capital Group Ltd, said in an interview on Monday. They “definitely want to participate in the financial opportunities in India," he said. Bloomberg

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