KSE Meezan Index (KMI-30) – Stellar Performance

The previous decade saw tremendous rise in the acceptability and growth of Islamic financial products in Pakistan.

Deposits of Islamic Banks grew from an insignificant amount in 2002 to over Rs 400 billion in mid 2011, representing 8% market share of the entire deposits in banks.

With the development of the financial markets in the country, there was a need felt for new investment products to facilitate the growth and promotion of savings.

Mutual Funds industry has played an active role in providing new investment alternatives.

Presently, the stands at Rs 333 billion, in which the size of Islamic Funds is Rs 45 billion.

The market share of Islamic mutual funds has shown incredible growth over the period and has increased to 14% from 7.54% in mid 2008, also illustrated in the Figure below:

Need for an Islamic benchmark The index helps Shari’ah conscious investors to identify the Halal equity investments.

With the rapid growth and acceptance of Islaamic products in the market, a void was created for a benchmark that can accurately compare the performance of Islamic equity funds.

KSE Meezan Index (KMI-30) - Stellar Performance

As a result, KSE-Meezan Index (KMI-30) was established by the collaboration between Al Meezan Investment Management Ltd (Al Meezan) and the Karachi Stock Exchange (KSE) in 2008.

Al Meezan, in consultation with Shari’ah Department of Meezan Bank, provides Shari’ah expertise, guidelines, skills and stocks screening towards the activities pertaining the re-composition of the Index; whereas, KSE provides maintenance and dissemination support for the index.

The index helps Shari’ah conscious investors to identify the Halal equity investments.

It also provides them with a suitable benchmark to compare the performance of their investments.

Besides tracking the performance of Shari’ah compliant equities, its construction aimed to increase trust of Shari’ah conscious investors and enhance their participation.

The following table lists the Islamic Equity Funds in Pakistan, all of which use the KMI-30 Index as a benchmark.

In addition, it is also used by five Islamic Balanced Funds and Islamic Asset Allocation Funds for benchmarking.

— We attempt to evaluate the performance of the KMI-30 Index against the other indices on Karachi Stock Exchange since its launch in 2008.

Some interesting facts emerge through this exercise:

Since inception, the KMI-30 index has provided a return of 41% to its investors.

During the same period, KSE-100 (which tracks the performance of the top 100 market capitalised companies) and KSE-30 (which tracks the performance of the top 30 most liquid stocks based on free float methodology) both underperformed considerably; and, in fact, provided negative returns.

The time when KMI-30 Index was launched concurred with a financial crisis that swept the global markets, which also affected Pakistan’s Capital Market.

Despite these setbacks, the KMI-30 has been able to outperform KSE-100 and KSE-30 by 42% and 60% respectively.

Let us illustrate this with an example.

We take three hypothetical passive investors, each of whom invested a capital of Rs 1,000 in the stock market at the start of the FY’08.

They chose to invest differently however.

Investor A invested in the KMI-30 index, while B and C invested in KSE-100 and KSE-30 respectively.

Investor A’s investment has grown to Rs 1,413.57 yielding 41%.

Investor B’s portfolio was worth Rs 991.97 (a loss of 1%) and investor C lost 19% of his investment, which was worth Rs 806.93.

It can be inferred from the same example that once recovery began in the market, KMI-30 index outperformed the KSE-100 and KSE-30 indices over the entire period.

At times, the gap widened substantially.

URL: http://www.brecorder.com/supplements/88/1187328/

Strength, diversity and depth mark winners in daunting market

Deutsche Bank, Standard Chartered Bank and Citi lead the winners in The Asset Triple A Country Awards 2011 in Australia and South Asia as they demonstrated the strength, diversity and depth of their franchises amid the difficult market environment.

In Australia, Deutsche Bank is The Asset’s choice as the best foreign investment bank for the ninth year in a row as it continues to help its clients arrange deals across different product suites. In a year characterized by market volatility, it completed complex transactions such as the acquisition of Axa Asia-Pacific by Axa SA and AMP.

In the equity capital markets, Deutsche Bank created innovative structures to deal with client issues such as the Santos and Origin hybrid transactions and the AUD300 million convertible bonds for Colonial First State.

Barclays Capital continues to exhibit strong M&A credentials with landmark transactions involving BHP Billiton-Petrohawk, the takeover precedent-setting cross-border public transaction involving Qiagen and Cellestis, and the largest Australian company divestment with Centro selling its US portfolio to the Blackstone Group for USD9.4 billion.

Barclays also wins the best debt house award due to product innovation, high quality execution in volatile markets and for innovative capital management the enables its clients to enjoy greater funding flexibility.

Over in India, Deutsche Bank retains the best bank accolade for the fourth consecutive year, while Citi is the best foreign investment bank for the eighth year as it showed the diversity of its franchise in what is one of the most competitive markets in Asia.

Axis Bank also retains the two awards it won last year – best domestic bank and best domestic bond house – as it delivers superior profitability metrics against its peers and consistently gaining market share.

Standard Chartered Bank attains leadership position in India’s debt capital markets, extending comprehensive offerings in both foreign and local currency financing. The bank likewise retains the best M&A house award.

Kotak Investment Banking is again the winner of the best domestic investment bank award for the sixth year in a row, while Bank of America Merrill Lynch snatches the best equity house honour, anchored on its key deals involving Petronas’ USD2.1 billion block trade, Coal India’s USD3.5 billion IPO and Power Finance Corporation’s USD1 billion follow-on offering.

In Pakistan, Standard Chartered Bank displays its commitment to this market with several business initiatives on SMEs, consumer banking, Islamic banking and servicing high net worth banking customers.

Its wholesale banking franchise is noted for its expertise and has a solid track record for innovative transactions. These include the first ever local currency shipping finance transaction for Pakistan National Shipping Corporation amounting to USD120 million equivalent.

Not dollar, not euro, but gold

As the US dollar’s value continues to drop, China looks to invest in gold for stability.

Growing concerns about the slow death of the dollar rather than a saviour’s goodwill are underpinning China’s widely publicised purchases of European government debt, according to experts. But as the Eurozone debt crisis spreads from Greece and Portugal to countries like Italy and threatens the very survival of the euro, China’s finance mandarins and keepers of the country’s 3 trillion dollars foreign reserves are looking yet again at gold as the anchor of stability.

china ,dollar,yuan,government debt,central bank,china invest,china investment,dollar value drop,yuan increase,gold investment,china finance,china finance state


Yu Yongding, a former adviser to the Central Bank of China and strong critic of US treasury bonds, an asset in which about 1.2 trillion dollars of China’s foreign reserves are invested, has been calling on Chinese rulers to diversify as much as possible of China’s holdings to guard against a weaker dollar.  Continue reading

India to be third largest domestic banking sector by 2050: PwC

According to a PriceWaterhouseCoopers report titled Banking In 2050, India could become the third largest banking sector by 2050 after China and US, leaving Japan, UK and Germany behind.

According to the report, “India has particularly strong long-term growth potential.”

Indian banking sector in general and the Reserve Bank of India were applauded post financial crisis for fiscal prudence.


Harsh Bisht, leader (Banking and Capital Markets), PwC India said, “Post downturn, Indian banks have become more efficient due to tighter credit assessment and disbursals, cost efficient model, weeded out non profitable and highly risky portfolios and increased the CASA substantially resulting in lower cost of funds for the bank.”


Indian banks have improved their cost to income ratio by 6 per cent on an average, he added.


India’s largest private sector bank, ICICI Bank improved its cost to income ratio from 53 per cent in 2007 to 38 per cent in 2010, owing to shift in strategy from aggressive growth to cost rationalisation. Continue reading

Systematic Investment Plan (SIP): Advantages & Good time to start a SIP?

What are the advantages of a systematic investment plan (SIP)? Is it a good time for starting a SIP?
-Subhash Raj, Bhopal

A Systematic Investment Plan or SIP allows us to take advantage of the growth potential of stock mutual funds, even if we do not have a large sum of money to invest. Infact most mutual funds require a minimum of just Rs.500 per month to get started.

Most of us are used to paying for a car or home purchase with monthly EMIs (Equated Monthly Investments). Think of a SIP investment along those lines – only, you are paying yourself a monthly sum, and investing in the stock market, to build long-term wealth!

Advantages of a Systematic Investment Plan

You can budget for a SIP investment every month if you are say, looking to invest only a small amount on a regular basis.

Even if you have a lump sum to invest, you may not want to invest all of it at one go. And a systematic investment plan where you spread out the investment in the stock market over several months can provide several advantages. It will help you mitigate market risk and volatility. It helps you test out the waters and build your portfolio one step at a time.

Please look carefully at the table above. It becomes clear that most importantly, a systematic investment plan provides the benefits of what is called “rupee cost averaging”. In other words, if the stock market goes down, your next payment will buy more units. And If the market goes up, your investment will increase in value.

So, What’s a good time to start a SIP?

We have seen record highs in 2007 and record lows too, in 2008. Now in June 2009, we are seeing a market that showed a remarkable recovery from the lows of as recent as March 2009. Will it sustain or go down again? No one knows. It is simply not possible to time the market accurately. If it was that easy all the fund managers would be sitting at home with their fortunes, isn’t it.

So, how do you decide when is a good time to start investing in a SIP? The answer is simple. Anytime is good. If you can maintain the discipline of making regular monthly investments.

Consider the graphic below carefully. We are looking at an example where a investor started at possibly the worst time in the recent history of our markets – February 2000 – at the peak of the dot-com bull market. He started investing Rs. 1000 every month in a composite fund (consisting of the 10 largest open-ended equity funds with 10 yr plus track records) and continued investing till Sep 2008.

With the hindsight knowledge of the huge fall from the dot-com/technology driven high of year 2000, its a good bet that nobody would have advised the investor to start a SIP at that time. But look at the annualised returns of 29% compounding even after starting just before the market crashed! Now that’s as good a record, as any.

So we can see that it really did not matter when he started. Neither did it matter as much that again in Sep 2008 the market was touching record lows. 2001 to 2003 was a sticky bear market. But that meant that the investor was actually buying units of the mutual fund at very low prices. His patience and discipline got rewarded when the market finally took off in 2003.

And again from Sep 2008 to Mar 2009, if he continued investing he would have purchased those units at low prices, and reaping the benefits now.

There is a lession from this history. That if you have a fairly long investing time-horizon – upwards of 5 years, at the least – a systematic investment plan can reap you huge rewards.

Now that you are convinced of the utility of a SIP, why SIP is a smart move, and why you need to be regular with your instalments, you are probably ready to invest.

Which funds to invest in through SIP?

If you have reached this far, I am sure you are already asking but hullo, how do I decide where to invest in, which funds have the potential to give me the best returns, which are the top rated funds, etc.?

Not to worry, check out the top rated funds at ValueResearchOnline a site dedicated to mutual fund investing that will give you all the answers you need, and more.

Good luck! Get started today!


How Islamic banks fund projects

ISLAMIC finance uses both debt and equity to fund transactions.

Some experts see equity financing as being closer to the shariah’s original aim of promoting equality in sharing risks and rewards, but others say debt instruments play a similarly important role.

The global financial crisis has prompted debate about the use of excessive debt and speculation to fuel growth.

It has also renewed calls for Islamic finance to use more equity- based structures such as musharaka and mudaraba to reduce its reliance on debt funding.


A partnership where profits are shared as per an agreed ratio, whereas the losses are shared in proportion to the capital/investment of each partner.

All partners to a business undertaking contribute funds and have the right, but not the obligation, to exercise executive powers in that project, which is similar to a conventional partnership structure and the holding of voting stock in a limited company.

It is often used in investment projects, letters of credit and the purchase of real estate.


A limited partnership where thebank appoints the obligor as its limited partner to invest money in specific or general activities.

The losses are borne solely by the bank in the absence of fraud or negligence by the obligor, but profits are shared in an agreed ratio.

Customers can use mudaraba financing for overdraft requirements, short-term financing and bridge or project financing needs.


An investment agency where the bank appoints the obligor as its investment agent to invest the finance money in specific or general activities.

Any losses are borne solely by the bank in the absence of fraud or negligence by the obligor and the rates of return are variable.


The bank acquires assets from a vendor at cost and on-sells the assets to the obligor at a mark- up and on deferred payment terms. The economics of this product are similar to a fixed-term loan and the mark-up is almost invariably benchmarked against a conventional index such as Libor.

Because of its fixed-price nature, it is seen as more suitable for short tenures.

The assets are usually charged as security for the obligor’s payment obligations under the murabaha contract.

Used to purchase goods, for working capital and share finance.


A leasing structure where the bank acquires assets from a vendor at cost and leases the assets to the obligor for the duration of the financing.

Part of the rent payable is benchmarked as per the murabaha contract and the amount of rent due can be altered by the use of periodic notices.

The obligor usually undertakes to buy the assets back from the bank at maturity or on default, and the value to be paid for the assets is equal to the outstanding amount of the financing at the date of such purchase.

The structure is suitable for longer tenures and may be offered with floating rates of rent.

The assets are typically charged as security for the obligor’s payment obligations under the ijara contract.

Used to buy ships, aircraft, industrial equipment and real estate.


A diminishing partnership where the bank acquires assets jointly with the obligor from a vendor.

Their shares in the assets are proportionate to their capital contributions.

The bank leases its share in the assets to the obligor and the rent payable is benchmarked.

The obligor undertakes to purchase the bank’s share in the asset over time or as a bullet at the end of the financing.

This is the most flexible product as the principal payments (pursuant to the purchase undertaking) may be amortised and the rates may be floating.

Used to finance the purchase of houses, plants and machinery.


Shariah Compliance for PE Funds

Shariah Compliance for PE Funds

There has been a growing demand from investors domiciled in the Gulf Co-operative Council region for investment portfolios to include Shariah compliant instruments.

With growing credit crunch, LP defaults in other jurisdictions and other factors that have emerged from the global financial turmoil, the fund managers are evaluating options to tap investors in Gulf, which amongst other things require the fund to comply with the tenets of Islamic laws. This note briefly identifies some basic considerations whilst establishing a Shariah compliant fund.


Many Muslim investors conduct their commercial activities in accordance with an Islamic body of law called Shariah. Shariah, or literally “the way”, is based on the Quran (the religious text in Islam), Hadith (the sayings and actions of Prophet Mohammed), Isma (the consensus of Shariah scholars), Qiyas (reasoning by anology) and centuries of interpretation and precedents. Shariah law does not have uniform set of standards and interpretations.

While some institutions, such as the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institution, work to unify the various interpretations and opinions of scholars, but they are only recommendatory in nature. Whether an investor views a particular private equity fund and its investments as “Shariah-compliant” will depend upon the review and approval by a Shariah consultant or supervisory board engaged by the fund manager and/or the investors’ own consultant or supervisory board.

Investment Restrictions

In order to qualify as Shariah-compliant fund, a fund’s investment policy must contain restrictions that prohibit investment in industries considered haraam.

These restrictions usually prohibit investments in companies involved in the following industries and activities:

• Conventional financial services (including conventional banks and insurance companies);

• Gambling and casinos;

• Alcohol and pork products;

• Certain entertainment, such as gossip columns or pornography (but often including cinemas, music and publications);

• Weapons or military equipments; and

• Any other immoral or unethical activities identified by Shariah consultant or supervisory board.

What are considerations for fund managers?

An investment fund may be structured based on the Mudaraba contract under which an investor provides capital to another person/body (a fund manager), who uses their expertise to devise a suitable investment strategy. Any profits generated by the joint enterprise are divided between the manager and the investor in accordance with a predetermined formula. The financial losses are borne by the investor to a maximum of his capital investment. As indicated above, although there are several restrictions on investments that could be made by the fund, over a period of time there have been certain favorable interpretations by Shariah scholars which permit structuring of the investments and be within the four corners of the permitted activities. Some of the possible avenues include:

• Shariah prohibits usury, which may be defined as exploitation by the owner of a product which another requires. The payment of receipt of interest is usury and therefore investment in entities involved in lending (or borrowing) are prohibited. This restricts ability for most companies to have interest-based debt finance and invest surplus cash in interest bearing bank accounts and other investments. However, some Islamic jurisprudence accepts a debt to equity ratio of 1:3.

• Similarly, there is a school of thought that investors are not partners in a fund but are merely investors. Since no one investor has the power to veto, it would be wrong to ascribe responsibility to an individual for a particular transaction. This may allow some headroom to invest in entities which have merely incidental non-halal features, since investors will not be deemed under Shariah to have authorized the investment. In some instances any company engaged predominantly in halal business, but earns interest on account, an equivalent portion of any dividend paid to a Shariah compliant fund must be given to charity, be it at the fund or the investor level.

• An Ijara fund is usually established for the purpose of purchasing assets (property, machinery, etc) and then leasing those assets to third parties in return for rental income. This may be relevant for real estate funds. Legal ownership of assets remains with the fund as does responsibilities for the management of such asset. A management fee will normally be paid to the manager. It is important that the assets that are leased out must be used in a halal manner and the leasing arrangement is compliant of Shariah.

It is evident from above that there are number of interpretations whilst ensuring whether a particular activity or investment by the fund would be Shariah compliant. Therefore, funds appoint a Shariah consultant or supervisory board that reviews proposed investments and operations and issues opinions as to their compliance with Shariah. There are also certain service providers with their own Shariah boards, which may be engaged on a contractual basis to advice a fund.

Some investors may insist on establishment of Shariah Committee in relation to the fund, which would consist of Islamic scholars and which would advice the General Partners in relation to Shariah compliance. Compliance will be an ongoing obligation and the Shariah committee will be responsible for conducting annual audits to ensure that the fund and portfolio companies continue to operate in accordance with Shariah. One other option that is looked at is that a Shariah compliant parallel vehicle could be established with the main fund.

It is important whilst structuring the fund and preparing investments strategies, private placement memorandum and other fund documents that above restrictions are appropriately addressed for the fund to be able to attract investors for a Shariah compliant fund. With demand for providing opportunities to Gulf investors, the Shariah-compliant funds are growing in numbers and present opportunities to General Partners to tap wider investor base.




Over the last ten years Islamic finance has grown quite impressively. With the growth in Islamic finance the need for shariah compliant financial products have also increased very much.

However, Islamic capital markets in various Muslim countries are still quite underdeveloped. In these circumstances there have emerged a number of Indices developed by Dow Jones, FTSE and others to track shariah compliant stocks from the world over.

This paper using the shariah screening norms as adopted by the Dow Jones show that Indian capital market provides tremendous shariah compliant investment opportunities as compared to a number of Islamic countries.

1.0 Introduction

Slowly the world’s economic centre of gravity is shifting away from the established, wealthy economies of Europe, Japan, and North America to the emerging economies like China, India, and South East Asia. China and India in particular are projected to become the two largest economies of the world in the next fifty years.

China riding high on its manufacturing ability, has recorded tremendous economic growth in the recent past. But as far as foreign investments are concerned, it is still looked at with suspicion, mainly for its political setup and the economic model. On the other hand India the world’s largest democracy, offers some very clear advantages. India is one of the fastest-growing large economies in the world.

With a population of over 1.3 billion, with huge human and natural resources, and with costs that are at the very low end of the global average, India represents economic opportunities on a massive scale. Its legal framework which protects foreign investments, is one of the best in the region. The economy offers an abundance of technical and managerial talent, with international experience.

And most importantly, India has a demographic advantage that will see its working age population continue to grow in the next couple of decades.

Islamic finance, on the other hand is another great success story of modern times. Emerging modestly from a small town of Egypt, less than four decades ago, Islamic finance has already reached critical mass. Those busy mocking at it not long ago have now started practicing it.

Everywhere Islamic financial institutions are now praised and awarded for their excellence and ethical concerns. But the real journey has just begun.

In these times Islamic finance needs to keep its feet firmly on the ground. Keeping itself informed with a high level of concern for equity and justice, differentiating between the lawful (halal) and the prohibited (haram) and a sense of responsibility towards the weaker sections, Islamic finance needs to continuously look at opportunities beyond the land of oil and gas. That India is one such land of opportunity is the purpose of this paper.

India started liberalizing its economy in 1991, when the current Prime Minister, Dr Manmohan Singh took over the charge of Finance Ministry. Under his direction the Central government embarked on large-scale economic reforms. India the world’s largest democracy possesses political liberty, plural and mostly secular society and institutional framework that is best suited to a global economy.

India’s strength lies in bottom-up potential. Companies are well run and valuations are reasonable given current earnings’ growth. The country has an enormous consumer market and relatively inexpensive labour force. Since economic reforms the country has grown at over 5 percent, and now expanding at close to 8 percent.

Compare that to European growth of less than 2 percent on a 10-year average, and U.S. growth of around 3 percent. India is predicted to be one of the world’s two biggest economies by mid-century.[2]

2.0 Corporate Performance

Corporate India has been consistently showing good operational results. This, along with strong macroeconomic fundamentals, growing industrial and service sectors provides great potential for investment in the Indian economy.

Between March 2000 and December 2005, total sales of corporate India have grown from US$ 259 billion to US$ 488 billion, an impressive growth of 88 percent. In the current financial year between March to December sales have registered a growth of over 26 percent.

Profit after tax (RAT) has jumped almost four times during the same period. Net worth of corporate India during the period of March 2000 to December 2005 has grown over US$ 100 billion, whereas, total assets have registered a growth of 85 percent during the same period.[3]

Table 1: India’s Corporate Sector Performance


Year Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Dec-05
Sales 13.97 -0.46 13.13 12.41 3.51 26.33
PAT -1.37 12.14 52.33 65.77 20.99 9.51
Net Worth 8.49 2.02 11.27 17.22 1.14 25.98
Total Assets 9.29 6.22 10.96 13.24 0.89 25.75

Fresh investments in Indian corporate (Capital Expenditure) are on the rise at record speed. A recent survey by the Centre for Monitoring Indian Economy (CMIE) shows a 23 percent rise in outstanding investments under various stages of consideration and implementation. The survey captures 9,833 investment projects entailing a total investment of Rs. 24566.15 billion. During the previous financial year also new investment recorded 29 percent growth. These investments have been the highest over the years and reflect stronger investments momentum in the country than witnessed anytime in the past.

Sector wise over 31 percent investment is dedicated to manufacturing; 27 percent to electricity; and 26 percent to services. Irrigation, construction and mining account for the remaining 15 percent.

3.0 Capital Flows

Throughout the world FDI inflows has been stagnant for the last four to five years. In fact after three years of consecutive decline, global inflows of FDI marginally rose in 2004 to $648 billion.

This growth reflected increased flows to a number of developing countries. Inflows to developing countries surged by 40 percent, to $233 billion, as a result, the share of developing countries in world FDI inflows rose to 36 percent, the highest level since 1997.

In terms of the most attractive investment locations, India’s high ranking is marked remarkable in a survey conducted by UNCTAD, which shows that 42 percent Experts on FDI has put India as the third most attractive location after China and the US. In the same survey MNCs have put India as the second most attractive location for FDI after China.[4]

In the year 2004-05 total net capital inflows to India was $ 32 billion of which about 45 percent was in the form of non-debt inflows. FDI inflows during the year 2004-05 stood at $ 5.5 billion which was 18 percent higher than FDI in the previous financial year.

In 2001-02 FDI ($6.1 billion) constituted 71 percent of the total net capital inflows into the country. Since 2001-02 total FDI inflows in the country was US$ 21.38 billion.[5]

In fact huge capital inflows in the country mutely reflect the strong economic fundamentals as well as the confidence of foreign investors in the ability of Indian economy to match the expectations.

Net Foreign Institutional Investments (FII) inflows into India have increased steadily since 1999-2000 to reach an annual peak of US$10.25 billion in 2004-05. Cumulatively, FII investments as on December 31, 2005 have been US$ 41.10 billion.

In December alone FIIs pumped over US$ 2 billion.[6] The number of registered FIIs in India has shot up in the last two years. According to the Securities and Exchange Board of India (SEBI), as on December 31, 2005, over 800 FIIs were active in the country of them over 300 have been registered since April 2004.

4.0 Stock Markets Performance

Among the 23 stock exchanges that India has three are major and two are among the five largest in the world. By end December 2005 total listed companies in India were 8281. Bombay Stock Exchange (BSE) established in 1875 is the oldest in Stock Exchange in Asia. It is India’s biggest bourse, in terms of listed companies (4661) and market capitalization. Kolkata Stock Exchange has 2620 companies listed on it, whereas, National Stock Exchange (NSE) had 1000 companies listed on it at the end December 2005.

NSE is the youngest to be incorporated in 1992 with an active support of the central government and its maintained institutions. By number of transaction NSE and BSE respectively occupy third and fifth largest in the world.[7] Market capitalization of total listed companies in India has jumped from US$ 119 billion in March 2001 to over US$ 564 billion at the end of December 2005, an increase of 373 percent.

Between March 2001 and December 2005 BSE market capitalization has recorded a jump of over 400 percent, whereas the same for NSE has been over 300 percent. Book value of BSE listed shares has almost doubled from merely US$ 86 billion in 2001 to over US$ 167 billion in December 2005.

At present P/E of BSE stands at 18.27 with the price to book value (P/B) ratio being 3.32. BSE thirty share index (Sensex) has grown from 3972.12 in December 2000 to 9397.93 at the end of December 2005. Market capitalization of BSE Sensex has swollen over 363 percent during the period of March 2001 to December 2005. Trade volume of Sensex has grown over three times from US $ 107 million to over US$ 371 million during the same period.[8]

NSE, which is the third largest stock exchange in the world after Nasdaq and NYSE has given an average return of 124 percent between December 2002 to December 2005. Its fifty share index (S&P CNX Nifty) closed at 2836 at the close of market in 2005.

Traded volume of NSE has grown from US$ 130 million in March 2001 to over US$ 406 million at the end of December 2005. At end December 2005 NSE’s P/E multiple stood at 17.07 with a Price to Book Value at 3.74.[9]

5.0 Islamic Investments Opportunities:

To assess the extent of Islamic investment opportunities on the stock market one has to look at the availability of stocks which conform to the norms stipulated by the Islamic shariah.

When we talk about shariah compatible stocks, at least three important criteria to bear in mind are: (i) business of the company, (ii) nature of contract under which the invested capital of the enterprise is mobilized, and (iii) shariah compatibility of trading practices of the concerned shares of the company.

Keeping the above three criteria in mind a thorough study of Indian stock market was conducted. In the process about 1500 companies listed on BSE and NSE were examined. Findings of this study are described in the following sections.

However, before we come to the results of the study, a few words are called for about the qualifying criteria and the tools (ratios) used to measure the Islamic compatibility of the listed companies.

At present there are number of institutions that are active in tracking shariah compliant stocks the world over. Few major among these are the Dow-Jones Islamic Market Index (DJIMI), US; the Shariah Advisory Council of the Securities and Exchange Commission (SEC), Malaysia; and the Meezan Islamic Fund Criteria, Paksitan.

As far as primary activities of the company are concerned all institutions agree that at least the primary or core activity of the company should not breach Islamic law.[10]

  • Then there are companies whose main activity is not un-Islamic but a part of their income is not purely Islamic or a minor part of it comes from un-Islamic activities, for example hotel, sugar, entertainment etc.
  • Further there are companies whose primary business is purely Islamic but they have huge cash flows and as part of their treasury management, they keep their monies in bank and earn interest.
  • Then there are companies whose main activity is not un-Islamic, they do not have large interest earning but their activities to a large extent are financed by loans on interest.
  • Also there are companies whose assets comprised largely of receivables and cash.

All such companies violate one or other criterion on which the Islamic compatibility of a company is judged.

Different scholars have set different criteria for selecting the qualifying stocks. It is obvious that in the real financial world against any criterion one will find a continuum of companies ranging from those which fully qualify with no infractions to those that are completely disqualified due to gross violation of the criterion.

So the assessor has to set qualifying limits in terms of minimum ratios or percentages whereby the qualifying stocks can be screened out of non-conforming stocks. Dow Jones, SEC, Malaysia and Meezan all have their own qualifying norms.

However, broadly speaking they use more or less the same methodology or criteria. We, in our study, have used the qualifying criteria as practiced by DJIMI, which are as follows:

5.1 Un-acceptable Business Activities

DJIMI, which in its shariah board has some of the most respected scholars of the Islamic financial world, has termed some industries as inconsistent with shariah percepts. Therefore investments in these stocks are not permitted.

These industries are alcohol, pork-related products, conventional financial services (banking, insurance etc.), entertainment (hotels, casino/gambling, cinema, pornography, music etc.), tobacco, and weapons and defense industries. In addition, in our screening, we have excluded the sugar industry too as the units in this industry almost invariably produce potable alcohol as a byproduct from the molasses generated in the production process.

5.2 Un-acceptable Financial Ratios

After removing companies with un-acceptable primary businesses, companies are further put to test on the following financial ratios.

5.2.1 Debt to Assets

Exclude companies if Total Debt of the company divided by its Trailing 12-Month Average Market Capitalisation is greater or equal to 33 percent

5.2.2 Impure Income

Exclude a company if cash plus interest bearing securities are equal or greater than 33 percent of Trailing 12-Month Average Market Capitalisation.[11]

5.2.3 Receivables to Assets

Exclude companies if Accounts Receivables divided by their Trailing 12-Month Average Market Capitalisation is greater than or equal to 33 percent.[12]

6.0 Shariah Compliant Stocks in India

When we put to test the 1000 companies listed at the National Stock Exchange (NSE) on the basis of the abovementioned parameters, we found that 335 companies qualified on shariah parameters.

Market capitalisaton of the qualifying stocks was 61 percent of the total market captalisation of the NSE listed companies. Surprisingly, the growth in market capitalization of shariah compliant stocks was found to be more impressive than the growth in market capitalization of non-shariah compliant stocks.

Another remarkable finding of the study is that even when the number of shariah compliant stocks was very limited the share of shariah compliant market capitalization never went below 50 percent of the total market capitalization.

In fact the current share of shariah compliant market capitalization (61percent) is highest even when compared with the number of Islamic countries such as Malaysia, Pakistan, Bahrain etc. where share of shariah compliant market capitalization was 57 percent, 51 percent, and 6 percent respectively of the total market capitalization.[13]

Sector wise computer software, drugs and pharmaceuticals and automobile ancillaries were the largest sectors among the shariah compliant stocks. They constituted about 36 percent of the total shariah compliant stocks on NSE.

Table 2 shows the year wise performance of shariah compliant stocks at the NSE. In March 2002 only 115 companies were qualifying as shariah compliant. But as the market India started performing better and the stock market rose the number of shariah compliant stocks increased from 137 in March 2003 to 335 in December 2005.

Table 2: National Stock Exchange Listed

Year Mar-2002 Mar-2003 Mar-2004 Mar-2005 Dec-2005
Total Number of Companies (Listed at NSE) 988 988 988 988 1000
Shariah Compliant Companies 115 137 185 237 335
Total Market Cap (Rs. Billion) 5728.96 7005.99 10366.13 15265.83 20171.72
Total Market Cap Annual Growth (percent) -20.02 22.29 47.96 47.27 32.14
Shariah Compliant Market Cap (Rs. billion) 2895.64 3801.57 6305.17 8910.54 12311.13
Share of Shariah Compliant Market Cap (percent) 50.54 54.26 60.82 58.37 61.03
Shariah Compliant Market Cap Annual Growth (percent) -26.77 31.29 65.86 41.32 38.19

(Source: CMIE). Number of listed companies keeps varying. During the study period, initially the number of total listed companies at NSE was 988, which later on rose to 1000.

The same test was applied to BSE 500 (by and large India’s ‘Fortune 500’). The results (Table 3) suggest that here again the performance of shariah-compliant stocks was better than the performance of non-shariah compliant stocks. From merely 95 companies in March 2002 the total number of shariah compliant companies on BSE has risen to 112, 164, and 196 at the end of respective financial year up till 2005.

Table 3: Bombay Stock Exchange (BSE 500)

Year Mar-2002 Mar-2003 Mar-2004 Mar-2005 Dec-2005
Total Number of Companies 500 500 500 500 500
Total Shariah Compliant Companies 95 112 164 196 237
Total Market Cap (Rs. Billion) 4634.1 5411.41 8804.52 13635.74 18262.52
Total Market Cap Annual Growth (percent) -20.95 16.77 62.70 54.87 33.93
Shariah Compliant Market Cap (Rs. Billion) 1894.78 2234.73 4824.04 7393.16 10728.21
Share of Shariah Compliant Market Cap 40.89 41.30 54.79 54.22 58.74
Shariah Compliant Market Cap Annual Growth (percent) -32.84 17.94 115.87 72.57 45.11

Source: CMIE

At BSE out of 500 total 237 companies qualified on shariah parameters as at end December 2005. The Share of shariah compliant market capitalization with respect to the total market capitalization of the selected companies varied between 40 percent and 58 percent during the period of study.

Here again the rate of growth achieved by shariah compliant stocks was better than the rate of growth achieved by non-shariah compliant companies. On BSE sector wise drugs and pharmaceuticals constituted the largest number of qualified stocks followed by computer software and automobile ancillaries.

7.0 Conclusion

India as compared to many other developing countries has been a star performer in recent years, both in terms of returns and attracting funds from overseas. Favorable demographics, wide opening of the economy and global competitiveness have put India on the economic radar of the global players.

Leading indicators and available information both suggest that the Indian economy is poised to build upon the gains in macroeconomic performance secured in the recent past. Robust strengthening of manufacturing activity, high corporate profitability, buoyant equity markets, robust merchandise exports and imports and lead indicators of service sector activity all point to a brightening of prospects for the Indian economy in the future.

Consequently, the return from the equity market has also been very handsome. Islamic financial institutions that are looking for investment opportunities beyond the Arabian Gulf can find Indian stock market a very good place to put their funds.

Shariah conscious domestic investors can also find Indian stock market a better place to invest. They all will find a large number of stocks consisting various sectors from IT, drugs and pharmaceuticals, automobile to core sectors like energy, cement, steel and mining etc. In fact the Islamic options available in India are wider and much better than the availability of the same in many Islamic countries.

[1] Shariq Nisar holds PhD in Economics with specialization in Islamic finance.  He writes regularly on Islamic finance in leading academic and industry magazines and is joint editor of one of the oldest periodicals on Islamic Economics, “Islamic Economics Bulletin”. He has spoken in conferences, including that on Islamic Non-Banking Financial Institutions: Islamic Alternatives”, Kuala Lumpur, 2004.  Dr. Shariq worked for Al-Najib Milli Mutual Benefits Ltd as their Branch Manager for over two years.

[2] Manufacturing in India: Opportunities, Challenges, and Myths, KPMG, May 2005.

[3] Centre for Monitoring Indian Economy (CMIE). Note: data comprise total of 9691 companies.

[4] World Investment Report 2005, p. 66.

[5] RBI Annual Report 2004-05, Reserve Bank of India, Mumbai 2005, p. 285, table 1.56.

[6] Securities and Exchange Board of India (SEBI).

[7] Economic Survey 2004-05, Ministry of Finance, Government of India 2005, p. 76.

[8] Bombay Stock Exchange

[9] National Stock Exchange

[10] For example, if the primary activity of the company is production, distribution or trading of any un-Islamic item it would disqualify the stock. Hence stocks of all conventional financial institutions that are engaged in interest-earning activities, of companies producing or distributing un-Islamic products such as pork, liquor, tobacco etc. would disqualify the company on the first criterion that is economic activity.

[11] Earlier DJIMI was screening companies on the basis of their gross revenue to total, which was earlier fixed at 9 percent then reduced to 5 percent of the gross income of the company. We have followed the 5 percent criterion, which said that exclude the company if its impure (interest) income is equal or greater than 5percent of its total revenue. We have not used the new criterion as we feel that linking this to market capitalization will make the screen unnecessary biased in favour of market capitalisaton, which very often might not reflect the fundamentals of the company but the sentiments of traders and speculators. Moreover, the argument for changing the criteria has also not impressed us. For more details on this please see, Ali, Salman Syed, Islamic Capital Market Products: Developments and Challenges, Islamic Research and Training Institute, Islamic Development Bank, 2005. For argument on changing the criterion, please see, Obaidullah, M., Islamic Financial Services, Islamic Economics Research Centre, King Abdul Aziz University, Jeddah, Saudi Arabia, 2005, p. 219.

[12] Again in this case DJIMI has changed the criterion and linked this also to market capitalization, which earlier was linked to Assets. This has made DJIMI criteria very liberal and biased in favour of developed capital markets. We in our screen have excluded companies if their receivables were equal or greater than 45percent of their total assets.

[13] Islamic Capital Market Products: Developments and Challenges, Islamic Research and Training Institute, Islamic Development Bank, 2005, p. 23.

Taken from  http://www.financeinislam.com/article/7/1/543

Principles of Shariah Governing Islamic Investment Funds – Mufti Taqi Usmani

Principles of Shariah Governing Islamic Investment Funds – Mufti Taqi Usmani

The term ‘Islamic Investment ’ in this article means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shari’ah. The subscribers of the Fund may receive a document certifying their subscription and entitling them to the pro-rata profits actually accrued to the Fund.

These documents may be called ‘certificates’ ‘units’ ‘shares’ or may be given any other name, but their validity in terms of Shari’ah, will always be subject to two basic conditions:

Firstly, instead of a fixed return tied up with their face value, they must carry a pro-rata profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return on their subscription will increase to that proportion; however, in the case the Fund suffers loss, they will have to share it also, unless the loss is caused by the negligence or mis-management, in which case the management, and not the Fund, will be liable to compensate it.

Secondly, the amounts so pooled together must be invested in a business acceptable to Shari’ah. It means that not only the channels of investment, but also the terms agreed with them must conform to the Islamic principles.

Keeping these basic requisites in view, the Islamic Investment Funds may accommodate a variety of modes of investment, which are discussed briefly in the following paragraphs.

Equity Fund

In an equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly achieved through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also achieved by the dividends distributed by the relevant companies.

It is obvious that if the main business of a company is not lawful in terms of Shari’ah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the share holder in that prohibited business.

Similarly the contemporary Shari’ah experts are almost unanimous on the point that if all the transactions of a company are in full conformity with Shari’ah, which includes that the company neither borrows money on interest nor keeps its surplus in an interest bearing account, its shares can be purchased, held and sold without any hindrance from the Shari’ah side.

But evidently, such companies are very rare in the contemporary stock markets. Almost all the companies quoted in the present stock market are in some way involved in an activity, which violates the injunctions of Shari’ah. Even if the main business of a company is halal, its borrowings are based on interest. On the other hand, they keep their surplus money in an interest bearing account or purchase interest-bearing bonds or securities.

The case of such companies has been a matter of debate between the Shari’ah experts in the present century. A group of the Shari’ah experts is of the view that it is not allowed for a Muslim to deal in the shares of such a company, even if its main business is halal. Their basic argument is that every share-holder of a company is a sharik (partner) of the company, and every sharik, according to the Islamic jurisprudence, is an agent for the other partners in the matters of the joint business.

Therefore, the mere purchase of a share of a company embodies an authorization from the shareholder to the company to carry on its business in whatever manner the management deems fit. If it is known to the share-holder that the company is involved in an un-Islamic transaction, still, he holds the shares of that company, it means that he has authorized the management to proceed with that un-Islamic transaction, In this case, he will not only be responsible for giving his consent to an un-Islamic transaction, but that transaction will also be rightfully attributed to himself, because the management of the company is working under his tacit authorization.

Moreover, when a company is financed on the basis of interest, its funds employed in the business are impure. Similarly, when the company receives interest on its deposits an impure element is necessarily included in its income which will be distributed to the shareholders through dividends.

However, a large number of the present day scholars do not endorse this view. They argue that a joint stock company is basically different from a simple partnership. In partnership, all policy decisions are taken by the consensus of all the partners, and each one of them has a veto power with regard to the policy of the business.

Therefore, all the actions of a partnership are rightfully attributed to each partner. Conversely, the policy decisions in a joint stock company are taken by the majority. Being composed of a large number of share-holders, a company cannot give a veto power to each shareholder. The opinions of individual shareholders can be overruled by a majority decision.

Therefore, each and every action taken by the company cannot be attributed to every share-holder in his individual capacity. If a shareholder raises an objection against a particular transaction in an Annual General Meeting, but his objection is overruled by the majority, it will not be fair to conclude t hat he has given his consent to that transaction in his individual capacity, especially when he intends to withdraw from the income relatable to that transaction.

Therefore, if a company is engaged in a halal business, however, it keeps its surplus money in an interest-bearing account, where from a small incidental income of interest is received, it does not render all the business of the company unlawful. Now, if a person acquires the shares of such a company with clear intention that he will oppose this incidental transaction also, and will not use that proportion of the dividend for his own benefit, how can it be said that he has approved the transaction of interest and how can that transaction be attributed to him?

The other aspect of the dealings of such a company is that it sometimes borrows money from financial institutions. These borrowings are mostly based on interest. Here again the same principle is relevant. If a shareholder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him.

Moreover, according to the principles of Islamic jurisprudence, borrowing on interest is a grave sinful act for which the borrower is responsible in the Hereafter; however, this sinful act does not render the whole business of the borrower as haram or impermissible. The borrowed amount being recognised as owned by the borrower, anything purchased in exchange of that money is not unlawful.

Therefore, the responsibility of committing a sinful act of borrowing on interest rests with the person who wilfully indulged in a transaction of interest, but this fact does not render the whole business of a company as unlawful.

Conditions for investment in Shares

In the light of the foregoing discussion, dealing in equity shares can be acceptable in Shari’ah subject to the following conditions:

1. The main business of the company is not violative of Shari’ah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shai’ah, such as the companies manufacturing, selling or offering liquors, pork haram meat, or involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is halal, like automobiles, textiles etc, but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the share-holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the shareholder must be given to charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given to charity.

4. The shares of a company are negotiable only if the company owns some illiquid assets. If all the assets of a company are in liquid form, i.e. in the form of money, they cannot be purchased or sold except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

What should be the exact proportion of illiquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of illiquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle:

‘The majority deserves to be treated as the whole of a thing’

Some other scholars have opined that even if the illiquid asset of a company are 33%, its shares can be treated as negotiable.

The third view is based on the Hanafi jurisprudence. The principle of the hanafi school is that whenever an asset is a mixture of liquid and illiquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:

Firstly, the illiquid part of the mixture must not be in ignorable quantity. It means that it should be in a considerable proportion.

Secondly, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of the 30 dollars are in exchange of the fixed assets.

Conversely, if the price of that share is fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of ‘riba’ and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by that share, no part of the price can be attributed to the fixed assets of the share.

In this case, the remaining amount will not be adequate for being the price of 75 dollars. For this reason the transaction will not be valid. However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where the price of a share goes lower than its liquid assets.

Subject to these conditions, the purchase and sale of shares is permissible in Shari’ah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shari’ah as partners ‘inter se’. All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies.

The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as ‘purification’.

The Shari’ah scholars have different views about whether the ‘purification’ is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of ‘purification’ is necessary, because the market price of the share may reflect an element of interest included in the assets of the company.

The other view is that no purification is required if the share is sold, even if its results in a capital gain. The reason is that no specific amount of the price can be allocated for the interest received by the company.

It is obvious that if all the above requirements of the ‘halal’ shares are observed, the most of the assets of the company are ‘halal’, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also ignorable as c ompared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the ‘halal’ assets only.

Although this second view is not without force, yet the first view is more precautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the process of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted there-from, reducing the net asset value per unit, he will get a lesser price as compared to the first person.

On the contrary, if purification is carried out both on dividends and on capital gains, all the unit-holders will be treated at par with regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains also. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as ‘mudaribs’ for the subscribers. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.

The second option for the management is to act as an agent for the subscribers. In this case, the management may be given a pre-agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shari’ah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net value of the fund (1) at the end of every financial year.

However, it is necessary in Shari’ah to determine any one of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon by all the subscribers.

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