Indian corporates foray into Islamic finance
By MUSHTAK PARKER | ARAB NEWS
Published: Nov 14, 2010 22:55 Updated: Nov 14, 2010 22:55
THE launch by India’s Tata Group of its debut Islamic equity fund two weeks ago sees the entry of another major Indian asset management company in the Islamic finance space. This follows the establishment by the rival Reliance Anil Dhirubahi Ambani Group of a dedicated Islamic asset management company in Malaysia, Reliance Asset Management Malaysia Sdn Bhd, in late 2009 to spearhead its global Islamic asset management activities.
While Reliance seems to be a bit over-cautious, Tata in October 2010 launched the Tata Indian Shariah Equity Fund (TISEF) through its Tata Asset Management (Mauritius) Private Limited (TAMM), which is also the fund manager. According to TAMM, the offering is a diversified open-ended equity fund investing in Shariah-compliant equity or equity-equivalent listed Indian companies. The minimum subscription is $5,000 and the benchmark is the Standard & Poor’s CNX Nifty Shariah Index.
The stock universe of the (TISEF) comprises such luminary corporates as Cummins India, Bharti Airtel, Reliance Industries, Gujarat Mineral Development Corporation and others, whose stocks are deemed to be Shariah-compliant and therefore satisfy the various Shariah screens relating to business activity and financial ratios. The fund asset allocation is 31 percent equities and 69 percent cash and other asset classes such as sukuk.
The choice of Mauritius as the fund domicile is not surprising. Mauritius over the last few years has been promoting itself as an offshore banking center and an Islamic capital markets hub. To underline its commitment to developing the island state as an international Islamic capital markets center, Port Louis has acceded to membership of the Islamic Financial Services Board (IFSB) and last month in Kuala Lumpur became a founding participant together with nine other central banks and two multilateral agencies in the International Islamic Liquidity Management Corporation (IILM) with a $5 million equity subscription.
Tata’s entry into the Islamic asset management space virtually coincided with the official visit of Indian Prime Minister Manmohan Singh to Malaysia at the end of October 2010.
India has had a strange relationship with the Islamic finance industry over the last few years. At a political level, despite the fact that Manmohan Singh since his days as finance minister has been a strong supporter of facilitating Islamic finance in India, the government has been very slow to react to the global growth of Islamic finance.
Given that India has the world’s largest Muslim minority at almost 200 million, the introduction of enabling legislation to facilitate Islamic finance would have advanced financial inclusion especially for the above minority and millions of others who are interested in ethical and socially-responsible financial services.
Whether for political or religious reasons, those opposed to the introduction of enabling legislation to allow Islamic financial products, tend to see Islamic finance as an extension of political Islam, which is both incorrect and misleading. While Islamic finance has a definitive faith-based ethos, some of whose values are also found in other faiths including Judaism, Christianity, Buddhism and Hinduism, it is considered especially in non-Muslim jurisdictions as an alternative system of financial management. In the UK legislation, for instance, sukuk are regarded under the Finance Act 2010 as Alternative Financial Investment Bonds. Even in Muslim countries such as Turkey, Islamic banks are called Participation Banks in the Banking Act 2007.
Another difficulty in India is at the sate level, where communist-inspired legislatures and administrations, for instance, are against the introduction of Islamic banking for ideological reasons. This does not detract from the fact that they do allow conventional banks, the very epitome of the market-based capitalism, supposedly the sworn enemy of socialism. Not surprisingly, in April this year the Kerala High Court directed the state government and its institutions not to promote and invest in the Kerala State Islamic Development Corporation, a Shariah-compliant finance company, aimed at developing infrastructure in the state and attracting inward investment from the Middle East and Southeast Asia.
India’s inertia effectively is a lost opportunity cost because Islamic finance could be a valuable savings mobilization vehicle and also contribute to the country’s huge development and infrastructure needs. Of course there are those who argue that if the UK can authorize five Islamic banks, and countries such as Singapore, South Africa, Mauritius and others also have licensed Islamic banks, why can’t India do the same?
India has had some Islamic finance activity mainly through brokerage and finance companies such as Al-Falah, Parsoli and Barakat. These have largely been disappointing and ineffectual because of the lack of a serious business model and transparency. The first two were embroiled in various allegations of fraud and/or mismanagement. The Saudi-owned Dallah Al-Baraka Group was one of the first overseas groups to venture into India establishing the Al-Baraka Finance House Merchant Bank in the 1990s with participation of the local Oomer Group. The latter eventually bought out Al-Baraka’s shares and changed the name to Al-Barr Finance House, which is still operating out of Mumbai.
Over the last few years however prominent Indian Muslim businessmen, bankers and professionals have been lobbying the government and the Reserve Bank of India (RBI), the banking regulator, to consider introducing a legal and regulatory framework to facilitate the introduction of Islamic financial products in India.
“There have been from time to time demands for experimenting (with) Islamic banking. I would certainly recommend to RBI, which is looking into the question, to look at what is happening in Malaysia in this regard,” stressed Prime Minister Manmohan Singh during his visit to Kuala Lumpur where he had talks with his Malaysian counterpart Mohammed Najib Tun Abdul Razak, who is a very proactive supporter of the Islamic finance industry.
The global Islamic finance industry has seen steady growth over the last three decades with estimated assets under management totaling $1.2 trillion with the potential to rise to $4 trillion over the next few years.
There are signs that State Bank of India (SBI) is starting to warm to Islamic finance. According to Indian asset management industry sources, SBI circulated a White Paper earlier this year on Islamic finance inviting comments from the public on whether the RBI should open the market to Islamic financial services companies based in India to offer products in the local market. However, realistically, given the notorious bureaucracy in Indian state institutions including the government apparatus, the progress toward the introduction of Islamic financial products in India through enabling legislation will take some time. Unless, of course Prime Minister Manmohan Singh’s government fast tracks such legislation as a policy priority. This, however, would require a much more proactive engagement between RBI, the financial services industry and professional Muslim groups in India. Similarly, India could also seek cooperation with organizations such as the Islamic Development Bank, the IFSB and counterpart regulatory authorities such as Bank Negara Malaysia and the Saudi Arabian Monetary Agency (SAMA).