Scope if if in India

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Scope of Islamic Finance in India

Islamic Finance News

9 January 2009

Islamic Banking or Shariah Finance although a 15-20 year old legacy, has caught up only recently in thepast 3 - 4 years. Currently estimated to be worth approximately USD $ 750 billion; this industry is growingat a remarkable pace of approximately 15% - 20% per annum and represents a vast global practice whichhas developed a worldwide presence (Source The Banker, UK).Shariah compliant products in the Retail and Investment Banking space are helping to unlock trillions ofdollars of funds lying dead with high net worth individuals and corporates globally, who follow Shariahprinciples as their day to day business and investment philosophies and thus do not participate in usualfinancial transactions.Despite having one of the largest Muslim populations in the world (estimated to be around 160 million,second only to Indonesia) and a strong demand for Shariah - compliant products from the community aswell as the business sector, India currently offers limited options for investors looking at Shariah

compliant investing. However, this should not go to undermine the scope for Shariah compliantinvestment opportunities in India.Indian Economy An OverviewThe global financial system has undergone a period of dramatic turbulence, which has caused awidespread reassessment of risk in both developed and emerging economies.However, despite the global nature of these events, emerging markets and particularly Asian bankshave managed to avoid the very worst of the crisis. Growth has slowed down but at the same time,remained steady and at a level which some Western economies can only dream of. We believe Indiasfinancial sector continues to be relatively insulated from the global meltdown and that the domesticeconomy still provides an opportunity for investors looking for sustainable returns in the medium to longterm.The Indian economy is amongst the largest emerging market economies (US$ 1 trillion) and believed tobe amongst the most attractive growth opportunities globally. In fact, according to a Goldman SachsreportBRICs and Beyond, January 2007, Indias GDP (in USD terms) is expected to surpass that of the

US before 2050, making it the worlds second largest economy. Also, the Indian capital market is well regulated, the stock markets in India, we believe, are amongst themost developed and organized markets in the world and the National Stock Exchange and the BombayStock Exchange are at par with the best in the world.To gauge the scope of Islamic investments in the Indian stock market, it is imperative to examine theunderlying opportunity in this sector. Below are findings from a thorough study conducted by Dr. ShariqNisar, an eminent personality in the field of Islamic Finance in India.Islamic Finance Opportunity in IndiaThe world's economic centre of gravity is gradually shifting from the established, wealthy economies ofEurope, Japan and North America to the emerging economies like China, India and South East Asia, withChina and India projected to be the largest economies of the world in the next 50 years.Improving macroeconomic fundamentals, higher disposable incomes, emerging middle class, low costand highly competitive workforce, investment friendly policies and progressive reform processes are all

likely to combine to make a strong case for India to have a larger share in the overall investment pie.With this sound economic base and with hundreds of companies complying to the Shariah laws, Indiaoffers a large economic opportunity for Islamic investors, who follow Shariah investment and thereforecan't invest in interest-based ventures or in Islamically unethical ventures like tobacco, alcohol, fashion,gambling, vulgar entertainment and conventional finances like banks and non-banking financialinstitutions.Realizing the growing need of Islamic investments in India, the Indian government has recently taken anumber of steps in this direction. First, a high-level committee appointed by the government to prepareIndias future financial structure recommended interest-free banking for inclusion of Muslims in thefinancial sector. The Report draws its significance from the fact that this is first time an Indian finance


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committee has said something on the issue, which hitherto was considered quite sensitive in politicalcircles. This is a good sign for Islamic finance in India.Recently the financial crisis in the West and the drought of liquidity in this region has made Indian policymakers look for other alternatives of financing. The recent visit of the Indian Prime Minister, although atthe fag end of the tenure of the present government, to a couple of GCC countries assumes moresignificance in this regard. The Indian Prime Minister visited the region along with his Chief EconomicAdvisor Professor Raghuram Rajan who had earlier recommended Islamic banking in his report to thegovernment.Taking a cue from these gestures, Indian corporates have also started placing themselves to capitalise onthis big opportunity.To measure in detail the scope of Islamic investment opportunities in the Indian stock market, it isimperative to examine stocks which conform to the norms stipulated by the Islamic Shariah principles.A study on Shariah Compliant stocksAccording to the Dr. Shariq Nisar, the number of Shariah-compliant stocks in India is much higher than inIslamic countries put together, thus providing immense scope of parking money by Islamic investors.Out of the 1269 stocks listed in the NSE on which relevant data is available, 265 are Shariah compliantand out of the 491stocks listed in the BSE on which relevant data is available, 125 are Shariah compliant.The table below gives the number of Shariah compliant companies in India and their contribution to thetotal market capitalization for the last five years.

Year 2004 2005 2006 2007 2008

BOMBAY STOCK EXCHANGE (BSE)

Data available for BSE 500listed

companies465 474 484 494 491

BSE 500 Shariah Compliant

companies116 132 138 123 125

BSE 500 Shariah Compliantcompanies

116 132 138 123 125

% Shariah compliant market cap of

total31.61 44.01 41.37 28.46 20.14

NATIONAL STOCK EXCHANGE (NSE)Data available for NSE

listedcompanies1238 1272 1301 1310 1269

NSE Shariah Compliant companies 297 329 331 312 265

% Shariah compliant market cap of

total33.53 45.60 42.92 31.84 20.41

Source: TASIS ResearchWhile examining the Shariah investment opportunity in India, it may also be interesting to understand thetop sectors that contribute to the Shariah market capitalization in India. Below is a table giving details onthe top Shariah compliant sectors, the number of companies in each sector and their contribution to thetotal Shariah Compliant market cap -

BOMBAY STOCK EXCHANGE (BSE)

Top Sectors Number of CompaniesComputer Software 45

Drugs & Pharmaceuticals 12

Automobile Ancillaries 11

Industrial Construction 8

Contribution of these top 4 sectors to total Shariah

compliant market cap34.69%


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NATIONALSTOCK EXCHANGE (NSE)

Computer Software 19

Drugs & Pharmaceuticals 6

Cosmetics, Toiletries, Soaps & Detergents 5

Industrial Construction 4Contribution of these top 4 sectors to total Shariah

compliant market cap40.07%

Source: TASIS Research (As on November 30, 2008)The above study on Shariah compliant stocks and sectors in India is screened by TASIS (anIndian Shariah advisory firm, which has tied-up with Dar al Shariah of Dubai). Dr. Shariq Nisar added thatTASIS norms are very conservative in comparison with other screening norms.ConclusionDr. Nisars research suggests that with hundreds of Indian companies complying with the economic lawsof Shariah, India has now become an attractive destination for Islamic investments. Islamic financialinstitutions and Shariah conscious domestic investors are finding the Indian stock market a good place toinvest. The research further suggests that the Islamic options available in India are wider than those inmany Islamic countries. This shows the vast potential that India can tap in the field of Islamic Banking and

Finance.We are not soliciting any action based on this material. It is for general information. This material is not anoffer to sell shares in any fund and does not provide detailed information on the funds managed by theKotak Group companies, for which reference may be made to the constitution and placement memorandaof the funds. For further information please contact Kotak Mahindra (UK) Limited, Portsoken House, 155-157 Minories, London EC3N 1LS, Phone: +44-207-977-6900. This material should not be construed asan offer to sell or the solicitation of an offer to buy any security.Emerging markets securities may be less liquid and more volatile and are subject to a number ofadditional risks, including but not limited to, risk of losing some or all the capital invested, variable marketliquidity, currency fluctuations, political instability, changes in the tax regime and restrictions oninvestment activities of foreign investors. You should consult your professional adviser before you decideto invest in emerging market securities.

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Scope if if in India