Gaining Ground: India Must Be Vigilant as Islamic Finance Grows

Written by M. S. Shabbir, Managing Director of SenSage Financial Services Pvt. Ltd., Hyderabad, India

Thursday, 26 March 2009 15:07

India has finally woken up to the demands of the country’s largest ethnic group by giving a stamp of approval to the Benchmark Mutual Fund’s Shariah BeES, the first exchange traded fund (ETF) in India benchmarked against the S&P CNX Nifty Shariah Index.

Similarly, Taurus Mutual Fund has launched the first open-ended diversified equity fund namely, Taurus Ethical Fund benchmarked against S&P Shariah 500. An independent Shariah Advisory Board of TASIS will audit the fund’s investment books on an on-going basis and issue Shariah Compliance Certificate. Both the funds were launched in February. M S Shabbir

One thing that is certain is that many more players will now announce Shariah-compliant schemes. In one way, this is good for those who have been struggling hard to bring this kind of offering to the shelves. The 150-million-strong Muslim community can now invest its savings in a conscience-driven manner and contribute en mass to the GDP.

However, there are apprehensions about the possible exploitation of Shariah sentiments. This happened in the past when Islamic finance was in a nascent stage in India. Many fly-by-night companies came, exploited the concept and vanished. In the process, a stigma was left on the more serious and genuine players of that time. The biggest victim of this financial lust was the man on the street who placed his absolute trust in and supported the system by bringing his life savings to the doors of these institutions. Another victim was the cause itself, which many of these institutions had claimed to promote.

Learning from the Past

Now, when the Indian government is slowly opening the doors to Shariah finance, we hope that the system does not err again. There are certain lessons we need to learn from our past as well as from the experiences of seasoned Shariah finance market players in other countries. It is important for all of us to remember that:

•   Protecting our wealth is one of the key objectives of Shariah.
•   Promoting Shariah-compliant business falls under the category of “enjoining the right” (amr bil maroof).

Now that the Securities and Exchange Board of India has opened the lid, it is likely that many companies will emerge to capitalize on this new “God-sent” opportunity, since current market sentiment is very depressed. Some will come with dubious products as they aim to capture the market without consideration or respect for true Shariah compliance.

For one thing, the community must ensure that the job of a mufti is much more than that of a Shariah spokesperson. It is possible that the names of Shariah scholars who create the Shariah norms for Islamic products but may not be involved in their monitoring on an ongoing basis could be misused. What the community should ensure is that any scheme that claims Shariah compliance be regularly monitored by watchdogs that are competent and qualified. It should be the collective responsibility of the community to ensure proper adherence to Shariah and regular monitoring of products and investment processes. Let us not take that right lightly.

Corporations and individuals engaged in marketing and distribution of these products should satisfy themselves completely before they offer them to the community. The following questions can help evaluate whether a product is Shariah compliant in true spirit.

•   How is this scheme or product Shariah compliant?
•   Who has structured it?
•   If it has been structured by muftis, are they adequately qualified and competent?
•   What is the nature of the scholars’ association with the company offering the Shariah-compliant scheme?
•   Who ensures that the product offered is in accordance with the structure/ processes given by Shariah scholars?
•   Is there any monitoring agency?
•   If yes, is the agency reputable, qualified and competent for such monitoring?

Transparency is the key to Shariah compliance. Norms given by Shariah scholars, the methodology adopted in deriving and applying those norms and the results of the monitoring agency should all be in the public domain for everyone to see.

Let us stand, be counted and not fall prey to any deception in the name of Shariah. We have a long way to go. At the same time, let us pledge to give wholehearted support to authentic Shariah-compliant products. We need them more than anyone else.

M.S. Shabbir is Managing Director of SenSage Financial Services Pvt. Ltd., Hyderabad, India. He has more than three decades of experience in personal advisory services.