Alternative Investment funds based on Islamic banking tenets yet to take off in India

Almost nine years after the launch of the first Sharia-compliant investment fund in India, the alternative investment funds based on the tenets of the Islamic banking are yet to take off in the country.

While Islamic banking is not permitted by law, people are free to raise or invest in Sebi-registered venture capital funds (VCF) that are in compliance with Islamic finance rules. Kozhikode-based Secura Investment Management (India) launched its first Sharia-based fund in 2009 and is currently into its third fund.

Islamic teaching encourages trading, investment and charity, but frowns on giving or receiving of interest, or riba, which it categorizes as usury. Sharia stipulates against earning fixed returns such as interest, warns against excessive speculation and shares the risk of the business. Currently, there are about 400-500 Islamic banks that are managing close to $1 trillion worldwide and this figure is expected to touch $4 trillion by 2020.

Mehaboob MA, managing director, Secura Investment Management, told FE that only a Bengaluru-based company has managed to launch a Sharia-complaint VCF apart from Secura. He added that direct FDI from Sharia funds are happening in major infrastructure projects, but Indian fund managers are unable to raise funds from domestic investors.

Tightening of regulations by Sebi has put pressure. For instance, as per the latest Sebi norm, the minimum investment to the VCF has been fixed at Rs 1 crore, against Rs 5 lakh when we started,” he said. The Kerala government was also not successful in raising Sharia-complaint funds through the NBFI, Cheraman Financial Services.

Mehaboob still believes that Sharia-based funds have great potential in India as a large section of the Muslim population believes in not taking interest.

In late 2008, a committee on financial sector reforms, headed by former RBI governor Raghuram Rajan, had stressed the need for a closer look at the issue of interest-free banking in the country as the non-availability of interest-free banking products results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith.

SM Wasiullah of Taqwaa Advisory and Shariah Investment Solutions (TASIS), which is India’s premier Sharia finance advisory institution, believes that investors are turning to the capital market as a preferred avenue for Sharia-compliant investments.

In terms of composition and share in the capital market as on September 30, 2018, out of 6,681 companies listed on the BSE, 3,517 companies qualify as business compliant and 1,329 companies qualify as Sharia compliant. Similarly, of total 1,675 companies listed on the NSE, 1,318 companies qualify as business compliant and 515 qualify as Sharia compliant,” he said.

The Islamic segment of the capital market comprises shares of companies that do not engage in activities that are considered ‘haram’ (prohibited).

The TASIS Sharia board has developed its own set of financial parameters which include norms that total interest-bearing debt and issued preference capital should not be greater than 25% of total assets of the company, interest income from all sources and 8% of interest-based investments should not exceed 3% of the total income of the company and receivables plus cash and bank balances should not be greater than 90% of the total assets of the company.