all you need to know


Earlier yesterday, a row erupted on microblogging site Twitter after some users criticized the Tata Group for offering ‘Sharia-compliant’ mutual funds.

Many have wondered what ‘Sharia-compliant’ funds mean and why a reputable conglomerate like the Tata Group panders to Islamists.

Several social media users, many of whom had no idea how ‘Sharia compliance’ worked in stock markets, were taken aback by the discovery that Tatas was offering ‘Sharia-compliant’ mutual funds. . The discussion shed light on various other aspects of Islamic banking and how “Islamic investments” have gradually made their way to Indian stock markets.

It has always been considered unethical for Muslims to earn interest on any investment in accordance with Sharia. This is one of the reasons why many Muslims stay away from the banking system, and for the same reason the Reserve Bank of India has suggested opening Shariah banking outlets in India. However, the idea was scrapped in 2017.

But do you know that India has the “Sharia Index” for companies listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)? Are you aware of the fact that there are sharia-compliant mutual funds that are considered ‘halal’ for Muslim investors? Let’s dive into the ‘Halal’ world of stock markets.

What is Sharia Index?

Simply put, the Sharia index can be defined as an index of Sharia-compliant companies. These companies are reviewed by an authorized board before being listed in the indices. Such indices are found all over the world, and in India there are four main indices that index Shariah-compliant companies: S&P BSE 500 Shariah Index, BSE Tasis Shariah 50 Index, Nifty 500 Shariah Index and the Nifty 50 Shariah Index. Boards of directors selecting companies for inclusion in Shariah indices should be familiar with the principles of the Quran governing personal law or Shariah.

Sharia-compliant indices have been operating in India since the late 2000s. For example, NSE’s Sharia clues were launched in 2008.

What is the screening process?

The screening is done by an authorized counsel. The ESN and BSE use Taqwaa Advisory and Shariah Investment Solutions (TASIS) for the selection process. As part of the screening, the board checks whether the company engages in activities not permitted by Shariah.

For example, companies that engage in the production, sale and marketing of non-halal food and beverages, alcohol, tobacco and other items will not be listed in the Sharia Index. . Hotels and restaurants offering non-halal products and entertainment, including gambling, will be kept off the list.

Apart from business practices, the board also checks whether the interest earned by investing in these shares is within the maximum tolerance limits set by Shariah scholars, which are typically 3%. According to Nifty’s Sharia Index documentation, “TASIS has adopted financial screening standards that are more conservative than those followed by its peers and also substantiated by empirical studies of the Indian environment.”

The standards include that interest-based investments must be less than 3% of total income, and receivables plus cash and bank balances must be less than or equal to 90% of total assets.

Next is the income purification ratio, which states that investors are required to purge the pro rata portion of accrued interest income on their stock ownership in a company.

Notably, the screening of listed stocks is carried out on a monthly basis, and if a company is found to have violated the “Sharia code”, it is removed from the index.

Sharia Mutual Funds

Not only indices but also mutual funds available in the market that are Sharia compliant. The top three mutual funds in this section are Tata Ethical Fund (Launched in 1996), Taurus Ethical Fund (launched in 2009) and Nippon India ETF Shariah Bees (launched in 2009).

Although these are Shariah compliant funds, it is not mandatory for the investor to be a Muslim. These funds boast of being “ethical” and claim that they do no harm to “humanity”, cleverly concealing the fact that they mainly include companies that conform to the principles enacted by “halal”, a practice religiously discriminatory that is harmful to non-Muslims.

These funds only invest in companies that belong to the so-called “Sharia-compliant universe”. According to an app called islamically, there are more than 45,000 Shariah-compliant actions in the world. These stocks are part of the Sharia complaints universe, which means they follow the guidelines of Sharia law. Halal Stock a listing more than 1,100 such stocks in India.

Why Muslims Choose Sharia Complaint Mutual Funds

According to Sharia, they are not allowed to invest in funds related in any way to a business considered “haram” by Islamic canon laws. These mutual funds allow them to invest in stocks while remaining within the limits set by Shariah.

The funds do not invest in companies that make a profit selling tobacco, alcohol, weapons, pork, pornography, gambling and other military equipment. Following the concept of Riba, Sharia-compliant MF prohibits any type of interest. Whatever interest earned from the investments goes to charity. These funds present a very low level of risk because highly indebted companies are not included.

Do Muslims Invest in Sharia Stocks and Funds?

According to a March 2022 report by Salaam Gateway, Muslim financial experts are on a mission to encourage Muslims to invest in Sharia-compliant stocks and funds. Interestingly, many experts organize special courses to guide and teach Muslim investors how they can exploit the market without violating Sharia.

Idafa Investments CEO Ashraf Mohamedy is one such expert. He has an experience of nearly 30 years and his company offers Shariah compliant wealth management services. Salaam Footbridge quoted him as saying that Muslims started taking interest in the Sharia stock market during the lockdown.

Mohamedy said in particular that IT professionals and business people are showing keen interest in such opportunities. It should be noted that the number of Demat accounts increased by 4% during the confinement. Previously, 3% of the total population of India had Demat accounts, but now 7% of Indians have Demat accounts so that they can invest in stock markets. There is no specific figure available based on the religion of the investor, but it is believed that a large number of Muslim professionals have opened such accounts.

OpIndia tried to contact Mohamedy but could not connect.

RBI had shelved the idea of ​​Sharia banking

In 2016, the Reserve Bank of India floated the idea of ​​opening a Sharia Complaint Window in Banks for Muslims, also known as Islamic Banking or Sharia Banking. It was heavily criticized, and later in 2017 the idea was dropped after the center took no interest in it. In the same year, an ITR was filed containing a copy of the letter sent by the Ministry of Finance on the recommendations of the Interior Department group regarding Sharia banking. The Ministry rejected pursuant to Section 8(1)(c) of the RTI Act.