There is a belief that Muslims can't invest in a company which borrows money on interest. A group of Shariah experts is of the view that it is not allowed for a Muslim to deal in the shares of such company, even if its main business is 'halal'. However, there is another group of experts which do not endorse this view. In fact, there is a lot of confusion as far as ways of earnings permissible in Islam are concerned. Same problem persists with investment avenues. In this article, we have tried to gift our readers, a comprehensive list of avenues, which are in terms with Shariah (Muslim Law). But before we proceed, it is better to develop a clear understanding about permissible and non-permissible avenues of investment as per Shariah.
In Islam, the spiritual and material aspects are the same and it makes halal (lawful earning) mandatory. Islam emphasizes on a living by means of those are permissible under it. If the main business of a company is not lawful in terms of Shariah, it is not allowed for a Muslim to invest in that company. Shariah experts are almost unanimous on the point that if all the transactions of a company are in full conformity with Shariah, a Muslim can invest in that. But such companies are very rare in the contemporary stock markets. Almost all the companies in stock market are in some way or other involved in an activity, which violates the injunctions of Shariah. Even if the main business of a company is halal, its borrowings are based on interest. In addition, 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 Shariah experts. A group of Shariah 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 logic is that every shareholder is a sharik (partner) of the company and every sharik is an agent for the other partners in the matters of the joint business according to the Islamic jurisprudence. However, there is another group of experts which do not endorse this view. Their basic argument is that each and every action taken by the company cannot be attributed to every shareholder in his individual capacity. If a shareholder raises his objection against a particular decision in an Annual General Meeting of the company, but his objection is overruled by the majority, it will not be fair to conclude that the person has given his consent to that particular decision in his individual capacity. But majority of Shariah based investment experts are in favour of the latter view, which is more flexible than the former one.
In India, Islamic Investment & Finance Board (IIFB) comprising of eminent scholars have approved the following financial criteria for investment in stocks. It is not allowed for investors to invest in excessive debt companies (no investments in companies that have debt-to-market cap exceeding 33 per cent), companies with high outstanding receivables (net receivables in excess of 45 per cent of market cap) and companies that do not have at least 25 per cent of its capital in fixed assets.
What is not allowed ?
As we are now clear on the contemporary thoughts, it is the time to look at the avenues which are not allowed for investment. As per terms of Shariah, Fixed interest (Riba) based investments like the saving bank deposits, Bank FDR, Postal savings, Debentures, Bonds etc are prohibited in Islam. No investment shall be made in stocks of the companies whose business activity is prohibited (Haram)- conventional interest based banks and other financial institutions like banks, NBFC, Insurance companies, stock brokers etc, Alcoholic beverages like wine and other liquor related products and services, Pork and non- Halal food products and Entertainment includes film production companies, cinema, Cable TV, music etc. Investment is gambling-related business and is not allowed. Security trading in derivatives and day trading in stocks is strictly not permitted. Short selling is completely prohibited. Securities should only be sold upon having its complete possession. Investment in traditional Mutual Funds is not permissible as these mutual funds don't follow Shariah rules, thus they do invest in Haram or prohibited companies. Insurance is not allowed as per Shariah.
Shariah compliant avenues
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 companies is permissible, as well as in precious metals like Gold, Silver, Platinum etc. as per Shariah. As far as stock market is concerned, investment can be done in Shariah compliant stocks. Keeping these views in mind, a Muslim can have exposure to below given financial avenues.
Direct exposure to stocks
As far as stock market is concerned, investment should only be done in Shariah compliant stocks but with above discussed restrictions. Dr. MY Khan, Chairman, Pragmatic Wealth Management (PWM) Pvt. Ltd., says, "Equity investment is a profit and loss based investment and it is fully compatible with Shariah." As per research of PWM, there are 3400 actively traded stocks in BSE and out of these, 915 are Shariah compliant (As on December 2010). It roughly represents 27 percent of total traded stocks and approximately 63 percent of the total market capitalization of BSE. In December 2010, BSE along with Taqwaa Advisory and Shariah Investment Solutions (TASIS) had launched a Shariah compliant index. The BSE TASIS Shariah 50 Index includes some of India's leading companies like Reliance Industries Bharti Airtel, Tata Teleservices etc.
Earlier in February 2008, NSE had launched S&P CNX 500 Shariah and S&P CNX Nifty Shariah index with the help of Standard & Poor's and India Index Services & Products. The S&P CNX Shariah index comprises stocks that are Shariah compliant. As a result, the fund house will not invest in business activities related to pork, alcohol, gambling, financials, advertising and media (newspapers are allowed and sub-industries are analysed individually), pornography, tobacco and trading of gold and silver. A Muslim investor can invest in these stocks directly. For that, he should get himself registered with SEBI approved broker. However, it is really important to know that the risk of investing directly is relatively high. To reduce this risk, he should take advisory from research analyst and experts of Shariah based investment.
Mutual funds and ETFs
Mutual Fund is the most suitable investment for retail Muslim investors who do not have time to track the stock markets closely. In addition, mutual funds offer professionally managed portfolio of stocks at a relatively low cost. Shariah mutual funds are managed on similar lines and Muslim investors can go for these. Shariah BeES by Benchmark Mutual Fund is an open ended scheme which was launched in March 2009. It is a passively managed fund that invests in securities that constitute the S&P CNX Nifty Shariah Index in the exact proportion as in the index. It is having a significant exposure in companies operating mainly in the sectors of energy, technology, metals, healthcare, automobile, engineering, construction, communication and FMCG.
Taurus Ethical Fund by Taurus Mutual Fund is an actively managed diversified equity fund launched in March 2009. Taurus Ethical Fund invests in the stocks of those companies which are part of the S&P CNX 500 Shariah Index. It prefers stocks of companies in the mid cap space. Tata Ethical Fund (TEF) by Tata Asset Management Company is another such mutual fund scheme. As per the scheme's new mandate, TEF will invest in equity scrips of companies that are compliant with the Islamic Sharia laws.
Shariah Index ETFs comprises stocks that are Shariah compliant. Shariah ETFs provide institutional and retail investors access to investments based on Islamic principles. In January 2009, Benchmark Mutual Fund had launched the first-ever Shariah Benchmark Exchange-traded scheme in India. The open-ended listed index scheme is benchmarked against the S&P CNX Shariah index.
Investment in E-Gold
Muslims can trade in E-Gold and E-Silver under Shariah. National Spot Exchange Limited (NSEL) has got its e-series products such as e-gold, e-silver and e-copper Shariah-compliant through which retail investors can buy the commodity in demat form at real-time Indian prices. Taqwaa Advisory and Shariah Investment Solutions, a Mumbai-based Shariah advisory institution, has certified NSEL's investment products. The E-series products are available in demat form and in small denominations to enable investments in the forms of SIP (systematic investment planning).
E-Gold launched by NSEL has the ideal combination of both the forms- physical and electronic. E-Gold can only be purchased in electronic form and one need to have a demat account. The existing demat account which is for transacting in shares does not work for holding e-Gold units. One needs to open a separate demat account with one of the depository participant empanelled with the National Spot Exchange Limited.
Shariah compliant PMS
Apart from above discussed avenues, a Muslim investor can go for Shariah Portfolio Management Services (PMS), which is an investment portfolio in stocks and other individual securities. The Shariah PMS model is based on profit-sharing model where the investor provides his capital to SEBI approved licensed Financial Institution. The money is then invested in equity market on Shariah principles. Profits arising from investments are periodically given back to the investor after deducting the fund manager's fees.
Recently, Mumbai-based Bonanza Portfolio and Pragmatic Wealth Management Pvt. Ltd. have launched Bonanza- Pragmatic Shariah fund (BPS-Fund). The fund will be managed by Imtiaz Merchant as per Shariah guideline mandate by Shariah Board (IIFB). Bonanza Portfolio Ltd will take care of marketing and operational activities of the PMS fund. In February 2009, HSBC Asset Management had launched a Shariah portfolio scheme for affluent Indian investors. The HSBC Amanah India Shariah Portfolio is an actively managed open ended equity offering wherein investors can contribute their funds for investment, in conformity with Islamic Shariah principles.
Purification of Income
The income thus derived from investments in shares does have some portion of impure 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. Such income needs to be purged. This is a compulsory process for all the Muslim investors. The impure income consequently cleansed should be given as charity to deprived people.
Performance of Shariah compliant avenues
In last one month, BSE Shariah 50 has lost 7 per cent, while BSE Sensex has dipped 13 per cent. In last one year, BSE Shariah 50 has slipped 3.4 per cent, while BSE Sensex has gone down over 11 per cent. (As on August 24, 2011)
Taurus Ethical Fund, an actively managed diversified equity fund by Taurus Mutual Fund, has given a return of -6.87 per cent in last one month. Category return for the same period is -9.54 per cent. Taurus Ethical Fund has given a return of -10.98 per cent in last one year, while the category return for the period has been -13.34 per cent. (As on August 23, 2011)
NSEL had launched e-gold in March 2010 to meet the growing demand among retail investors to invest part of their savings in commodities. In March 2011, NSEL got its e-gold shariah-compliant through which retail investors could buy the commodity in demat form. Since its launch, e-gold has given a return of 57.58 per cent, which was the highest compared to all other form of investments in the precious metal.