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In order to remain in the main stream of
the economy and have equitable investment opportunity, equity
stock market (The Islamic way) provides the most cost effective
investment solution for the Muslims. Hence they should take advantage
of the boom in the equity market of the country so that they are
not left behind in the economic growth that is being witnessed
throughout. Equity market has proved that they are not only the
most effective, transparent, liquid and conducive to small and big
size investors as a means of investment, but it outperforms all
other asset classes where return on investments is the parameter
considered. In the long term equity market always goes up.
On the onset investment in equity market is Islamically a
permissible activity since it is based on Musharakah (Partnership)
and the profit is earned with risk of loss. However there are some
issues for a Muslim to invest in equity market (explained
later). With the guidance and approval from Ulama (Islamic scholar) it is
now possible to invest in equity market the Islamic way, and this
perhaps is the best option available for the Muslim.
We first look in to the inherent advantage investments in equities
have over other forms of structured investments.
Fixed Interest (Riba)
based investments
Fixed interest (Riba) based investments like the saving bank
deposits, Bank FDR, Postal savings, Debentures, Bonds etc are
prohibited in Islam.
“O those who believe, do not eat Riba (usury
or interest) multiplied many times. And fear Allah, so that you
may be successful.” (Al-Imran verse 130)
Islam has discouraged
fixed saving and withholding wealth but it has encouraged
investments. Profit is only with the risk of losses. In equity
investment, the profit and loss is shared in proportion to the
investments made. Thus, investment in equity market is in
accordance to the Quran and Hadeeth injunctions.
Investment in Real Estate
Investment in Real estate/properties, is though permissible but
it has certain disadvantages over equities. First, because of the
unit size, it is not possible for every individual to buy a property
since the cost involved is huge whereas, one can invest in equity
for an amount as low as one thousand and there are no upper
limits.
Secondly, property is subject to a lot of legal paper work
and one has to go through a very cumbersome procedure to acquire
properties. However, it is very easy to buy and sell shares by
being a member of a SEBI registered broker. So buying and selling
shares is as easy as snapping your fingers.
Finally, there is
often a threat of encroachment of the property which involves
costly litigation. Equity shares have a big advantage here since
the stocks purchased get directly deposited in the investor's Demat account where it is in the safe custody and one can sell
them whenever and as much as he wants to sell. And in terms of
returns in the long term, equity investment has outperformed this
asset class.
Investments in Conventional Mutual Funds
Investments in Conventional Mutual Funds are not permissible from
the view point that these mutual funds don't follow Shariah rules,
thus they do invest in 'Haram' or prohibited companies like
liquor, banks, hotels , entertainment etc that is strictly
prohibited in Islam, hence profit earned from these mutual funds
is impure and tainted. Investment done by mutual funds does not
take in to account the companies huge interest based debt and high
interest earning. However, Muslims can invest in Shariah compliant
Mutual fund / Shariah compliant PMS / Shariah ETFs.
One more point that goes in favour of equity stock market is
the Capital gains tax. There is no capital gains tax for long term
investors i.e. if the investment is held for more than one year.
And for the short term investments of less than a year, investors
have to pay only fifteen percent tax on its gains. Muslims must
take advantage of this benefit and invest in equities that would
help them create wealth in the long term in the Shariah way.
The concerning part in the equities investment is the market risk
and volatility. There is a way out to overcome this, investors
should take guidance from Equity Research advisors and Fund
managers who can guide and advice them on their investments. But
the best way is to invest in equity market through structured SEBI
approved Shariah compliant investment products like the PMS,
Mutual Funds, ETFs etc.
Role of Shariah Scholars
Islam makes 'Lawful Earning' (Halal) mandatory, and in Islam, the
spiritual and material aspects are one and the same. This implies
that Islam emphasizes the need to make a living by means that are
permissible under it.
After many decades of debate and discussions and upon
understanding the need of Muslims to invest in equity market,
Islamic scholars globally gave their consent to Muslim to invest
in equity markets, but with certain strict conditions. As
explained earlier that fundamentally investments in equity shares
is Halal on the basis of Musharakah (partnership) on profit and
loss sharing basis. But one cannot partner in the businesses that
are not permitted in Islam (e.g. liquor, pork, banking,
entertainment etc) moreover the conventional companies are prone
to take interest based debt and earn interest. And these are the
reasons for which the Muslim community kept themselves away from
the equity market.
Shariah scholars have imposed investment restriction and
conditions and only upon fulfilling these conditions Muslims can
invest in equity markets the halal way.
The conditions laid down are as follows:
1. Restriction Based on the Type of Securities: Investment should
only be done in Shariah compliant stocks as defined. Securities
trading in derivatives and day trading in stocks are strictly not
permitted. Short selling is completely prohibited. Securities
should only be sold upon having its complete possession.
2. Restriction on Business Activity: No investment shall be made
in stocks of the companies whose business activity is prohibited (Haram)
a. Conventional interest based banks and other financial
institutions like banks, NBFC, Insurance companies, stock brokers
etc.
b. Alcoholic beverages like wine and other liquor related products
and services.
c. Pork and non- Halal food products
d.Entertainment includes film production companies, cinema, Cable
TV, music etc.
3. Restriction Based on Financial ratios: Apart from the above
restriction on business activity, Islamic scholars from different
part of the world have set certain financial criteria based on the
need. In India Islamic Investment & Finance Board (IIFB)
comprising of eminent scholars have approved the following
financial criteria:
a. Interest bearing debt of the companies should not exceed 33
percent of its twelve months average market capitalization.
b. Cash plus interest bearing securities of the companies should
not exceed 33 percent of its twelve months average market
capitalization.
c. Trade receivable and other debtors of the companies to its
twelve months average market capitalization should not exceed 33
percent.
d. Interest Income plus prohibited activity (impure) income of the
companies to the company's total income should not exceed 5
percent.
4. Shariah Screening Process: Shariah screening is conducted for
all the listed equities as prescribed and mandated by Shariah
scholars. This process is done every quarterly. Those stocks that
successfully pass the Shariah screens are thus called Shariah
compliant universe. This process is done under the supervisor and
audit of Shariah committee of Aalims and Muftis.
5. Purification of Impure Income: The income thus derived from
trading and investments in shares do have some portion of impure
or prohibited income. This income can be in form of interest
received by the companies or some prohibited activity carried on
by the company that earns impure or tainted income needs to be
cleansed or purged. This is a compulsory process. The impure
income consequently cleansed should be given as charity.
Shariah compliant stocks
Though there are more than 5000 companies listed on Bombay Stock
Exchange (BSE) but on evaluation it was found that 3400 companies
are actively traded. Pragmatic Wealth Management Pvt. Ltd. under
supervision of its Shariah committee screened for Shariah stocks
and it was found that as on December 2010 out of the 3400
companies 915 are Shariah compliant, it roughly represent 27
percent of total traded stocks. The market capitalization of these
stocks as on December 2010 was ` 4,319,087 crore that is
approximately 63 percent of the total market capitalization of BSE.
This demonstrates the potential for the Muslims to invest in
equity markets.
Shariah based equity investment products
1. Direct Investment
Direct investing in equity means that the investor gets registered
with a SEBI approved Broker and trades on line directly with the
broker. He takes advisory from research analyst and often relies
on his own skills. the risk of investing directly is relatively
high.
2. Mutual Fund
A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. The money thus
collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through
these investments and the capital appreciation realised are shared
by its unit holders in proportion to the number of units owned by
them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed portfolio of stocks at a relatively low
cost. Shariah Mutual funds are managed on similar lines, but the
stocks selection is done on Shariah principles as explained.
Shariah Board comprising Islamic scholars supervises and certifies
the funds.
3. Shariah Portfolio Management Services
Shariah Portfolio Management Services (PMS) is an investment
portfolio in stocks and other individual securities, managed by a
professional money manager that can potentially be tailored to
meet specific investment objectives.
The Shariah PMS model is based on Mudarabah (profit-sharing) model
where the investor or Rabbul-Mal provides his capital to SEBI
approved licensed Financial Institution (Fund Manager or Mudarib).
The money is then invested in equity market on Shariah principles
(as explained earlier). Profits arising from investments are
periodically given back to the investor (rabbul-mal) after
deducting the fund manager's fees. This risk is solely borne by
the investor the fund manager gives his expertise.
The Shariah board has a vital role to play in portfolio management
funds. The Shariah board ensures that the stocks invested in the
funds are Shariah compliant and strict trading policy is followed
as prescribed by Shariah board.
4. Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) is security that tracks an index, a
commodity or a basket of assets like an index fund, but trades
like any other stock on an exchange. ETFs experience price changes
throughout the day as they are bought and sold. Its performance
tracks an underlying index, which the ETF is designed to
replicate. Exchange-traded funds follow a specific benchmark index
as closely as possible. Through an index ETF, investors get
exposure to a large number of securities in a single transaction.
Shariah Index ETFs comprises stocks that are Shariah compliant.
Shariah ETFs provide institutional and retail investors access to
investments based on Islamic principles.
Shariah Index
} Islamic Index is an Index of Shariah compliant stocks.
} Index includes stocks that pass the Shariah Screening norms on
industry and ratio screens.
} Industry screens filter stocks of companies that into non
compliant businesses.
} Ratio screens filter stocks on Cash Compliance, Debt Compliance,
and Receivables Compliance.
} By screening stocks for Shariah Compliance, the indices help to
reduce research costs and compliance concerns, Muslim investors
would otherwise face in constructing Islamic investment
portfolios.
} It gives Muslim investors the opportunity of putting faith into
finance and thus increases participation of Shariah Compliant
investors into the stock market.
} The Islamic index tracks the performance of Shariah compliant
stocks and thus acts as benchmark for Islamic investments.
How to Trade and Invest in Equity
The first step required to invest in equity market is the opening
of Demat account. A Demat account refers to a dematerialized in
which shares and securities are held electronically instead of the
investor taking physical possession of certificates.
For Opening an account investor has to approach to a SEBI
registered stock broker. After receiving the trading membership
forms he needs submit the following:
1. Duly completed account opening form and passport size photos.
2. A copy of PAN card as proof of identity;
3. Personalized cheque /Copy of the bank passbook
4. A copy of passport/voter ID/ ration card as a proof of address.
All applicants should carry original documents for verification by
an authorized official of the depository participant, under his
signature. Further, the investor has to sign an agreement with DP
in a depository prescribed standard format, which details rights
and duties of investor and DP. DP should provide the investor with
a copy of the agreement and schedule of charges for their future
reference. The DP will open the account in the system and give an
account number, which is also called BO ID (Beneficiary Owner
Identification number).
Islamic investment equity market is one of the fastest-growing
sectors within the Islamic financial system. Currently, there are
more than 100 Islamic equity funds worldwide. The total assets
managed through these funds currently exceed US$4.5 billion (RS.
20,000 crores) and is growing by 1315% per annum. With the
continuous interest in the Islamic Investments, there are positive
signs that more funds will be launched. Some Western majors have
just joined the fray or are thinking to launch similar Islamic
equity products. In India more than 15 million Muslim population
and absence of any alternate investment avenues, leave a huge gap
for Islamic investments. Looking at this potential SEBI recently
has given some relaxation to Shariah Based Investments Products.
Uptill now the practitioners and the Institutions have focused on
constructing Islamic investment products rather than the marketing
the same. “In India Muslims are sleeping giant and they should be
woken up”. More focus should be on to create awareness amongst the
Muslims on Islamic Finance. Shariah Scholars should come forward
and take a greater responsibility not only to create awareness but
help Financial Experts to develop Islamic investment products in
accordance to Shariah. Muslim social group, credit co-operative
societies, businessmen, Muslim Politician and Islamic finance
institution should come together to campaign for this much needed
Islamic investment options. This ethically sound and socially
responsible investments will not only help Muslims get a suitable
alternate but would help the entire mankind to get rid of the
menace of interest based conventional financial system prevalent
today.
In conclusion we believe that equity investment is indeed best
option available for Muslims.
Ziaulla Namani is associated with Islami Tijara
- India’s only Magazine, which covers Islamic Finance industry.
He can be reached at
zia@islamitijara.com
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