Earlier yesterday, a controversy broke out on the microblogging website Twitter after some users criticised the Tata Group for offering ‘Shariah-compliant’ mutual funds.
Many wondered what ’Shariah-compliant’ funds meant and why a reputed conglomerate such as the Tata Group was pandering to the Islamists.
Tata's Ethical Mutual Fund – How are MF's Sharia compliant? What's the process & ingredients that goes for making it Sharia compliant @TataMutualFund @TataCompanies @RNTata2000 pic.twitter.com/GfC5sqO7z4— Mayank Jindal (@MJ_007Club) June 19, 2022
Now TATA is going towards islamisation and all jihad Shariah law. Need to start boycott— Saffron Tweeple (@Saffron_Tweeple) June 19, 2022
I start from tata salt https://t.co/WabmzpSPOz
Several social media users, many of whom had no idea how ‘Shariah-compliance’ worked in the stock markets, were caught off-guard by the discovery that Tatas offered ‘Shariah-compliant’ mutual funds. The discussion threw light on various other aspects of Islamic banking and how ‘Islamic investments’ have been steadily making their way to the Indian stock markets.
It has always been deemed unethical for Muslims to earn interest in any investment as per Shariah law. It is one of the reasons many Muslims stay away from the banking system, and for the same reason, Reserve Bank of India has suggested opening Shariah banking windows in India. However, the idea was shelved in 2017.
But, do you know India has the ‘Shariah Index’ for companies on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)? Are you aware of the fact that there are Shariah-compliant mutual funds that are deemed ‘halal’ for Muslim investors? Let’s dive into the ‘Halal’ world of stock markets.
What is Shariah Index?
In simple terms, Shariah Index can be defined as an index of companies that are compliant with the Shariah Law. These companies are screened by an authorized board before getting listed in the indices. Such indices are present around the world, and in India, there are four main indices that index Shariah-compliant companies that are S&P BSE 500 Shariah Index, BSE Tasis Shariah 50 Index, Nifty 500 Shariah Index, and Nifty 50 Shariah Index. The boards that screen the companies for their inclusion in Shariah indices are required to be well-versed in the principles of the Quran governing personal law or Shariah.
Shariah-compliant indices have been functioning in India since late 2000s. For example, NSE’s Shariah indices were launched in 2008.
What is the process of screening?
The screening is done by an authorized board. Both NSE and BSE use Taqwaa Advisory and Shariah Investment Solutions (TASIS) for the screening process. Under the screening, the board checks if the company indulges in any business that is not allowed by Shariah.
For example, companies that indulge in the production, sale and marketing non-Halal food and beverages, Alcohol, Tobacco and other items will not get listing in Shariah Index. Hotels and Restaurants providing non-Halal products and entertainment, including gambling, will be kept away from the listing.
Apart from the business practices, the board also checks if the interest gained by investing in such stocks is within the maximum tolerance limits set by Shariah scholars, which in general is 3%. As per Nifty’s documentation on the Shariah index, “TASIS has adopted financial screening norms which are more conservative than those followed by its peers and also justified by empirical studies of the Indian environment.”
The norms include that interest-based investments should be less than 3% of the total income, and the receivables plus cash and bank balances should be less than or equal to 90% of Total Assets.
Then comes the Income Purification Ratio, which states that the investors are required to purge the pro-rata portion of interest income accrued on their holding of shares in a company.
Notably, screening of the listed stocks is done on a monthly basis, and if any company is found to have broken the ‘Shariah Code’, it gets delisted from the index.
Shariah Mutual Funds
Not only indices but there are also mutual funds available in the market that are Shariah-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).
Though these are Shariah-compliant funds, it is not compulsory for the investor to be a Muslim. These funds tout themselves as ‘ethical’ and claim that they do not harm ‘humanity’, craftily glossing over the fact that they mostly include those companies that conform to the principles ordained under ’Halal’, a religiously discriminatory practice that is prejudicial against non-Muslims.
These funds invest only in the companies that belong to something called the “Shariah-Compliant Universe”. According to an app called Islamicly, there are over 45,000 Shariah Complaint stocks across the globe. These stocks are part of the Shariah Complaint Universe, which means they follow the guidelines of the Shariah Law. Halal Stock has listed over 1,100 such stocks in India.
Why Muslims choose Shariah Complaint Mutual Funds
According to Shariah Law, they are not allowed to invest in funds that are in any way linked to any business that has been deemed ‘haram’ by Islamic canonical laws. These Mutual Funds allow them to invest in stocks while staying within the boundaries laid down by the Shariah Law.
The funds do not invest in businesses that make a profit by selling tobacco, alcohol, weapons, pork, pornography, gambling, and other military equipment. Following the concept of Riba, Shariah-Compliant MF forbids any and all types of interests. Whatever interest is earned by the investments goes to charity. These funds have a very low level of risk as high debt companies are not included.
Are Muslims investing in Shariah stocks and funds?
According to a March 2022 report of Salaam Gateway, the Muslim Financial Experts are on a mission to encourage Muslim to invest in Shariah-compliant stocks and funds. Interestingly, there are many experts who are running special courses to guide and teach Muslim investors how they can tap into the market without breaking the Shariah law.
Idafa Investments CEO Ashraf Mohamedy is one of such experts. He has an experience of almost 30 years, and his company offers Sharia-compliant wealth management services. Salaam Gateway quoted him saying that Muslims have started showing interest in the Shariah complaint share market during the lockdown.
Mohamedy said, in particular, that IT professionals and businessmen showed keen interest in such opportunities. It is notable that the number of Demat accounts has increased by 4 per cent during the lockdown. Earlier, 3% of the total population of India had Demat accounts, but now 7 per cent of Indians have Demat accounts so that they can invest in stock markets. There is no specific number available based on the religion of the investor, but it is believed that a large number of Muslim professionals opened such accounts.
OpIndia tried reaching out to Mohamedy but could not connect.
RBI had shelved the idea of Shariah banking
In 2016, the Reserve Bank of India floated the idea of opening a Shariah Complaint window in banks for Muslims also known as Islamic Banking or Shariah Banking. It was criticized heavily, and later in 2017, the idea was dropped after the centre did not show interest in it. In the same year, an RTI was filed where a copy of the letter sent by the Finance Ministry on the recommendations of the Inner Department Group regarding Shariah Banking. The Ministry rejected it under Section 8(1)(c) of the RTI Act.