Dr. M.Y.Khan

Islamic Equity Investment

Interview with Dr. M.Y.Khan (Former- Economic Advisor to SEBI and Senior Director Reserve Bank of India)

Q1. How do you react on Islamic equity stock market?

Dr. M.Y. Khan: There are very few stock markets that are functioning on the basis of Islamic Shariah. However Islamic stock market and other intermediaries associated with such markets have to function on the basis of Shariah principles, such as prohibition of interest in financing their business like broking, underwriting in case of IPOs, merchant banking, private equity financing, etc. Other principles are such as not to trade in the companies with the business of alcohol, pork related products and non-halal food production, and interest based finance companies like banks and NBFC etc. Islam prohibits investments in entertainment (Music, Gambling etc) also.

Islamic investment is superior to other investment since the trading in the securities do not involve insider trading, manipulating the market and any kind of monopolization of the market. Shariah principles on a global scale have been catalyzing the flow of savings by Muslims to productive industries. As a matter of fact, the Islamic Shariah can create a wide, fair and transparent stocks market even in case of IPOs.

Q2. In our country very little work has been done on Islamic investment or Islamic finance. What prompted you to launch Shariah PMS?

Dr. M. Y. Khan: I agree that there has not been much done in the field of Islamic Investment and Finance. But the fact is that the Indian equity market offers incredible avenue for Shariah compliant investments. At present, it offers the best alternative, perhaps the only alternative to the Indian Muslim investors (Rabbul- Mal) who would like to invest their savings in Shariah manner rather than depositing their savings in the bank. The Indian equity market, with its enormous potential for growth, can compete  favorably with global portfolio managers and attract high net worth individual investors. The domestic funds of Muslims are waiting to be invested in large magnitude. At present population of Muslims can be estimated as much as 160 Million. Thus there is considerable scope to get a large number of muslim investors in India. Having considered Islamic Investment as potential market, we decided to launch a Shariah fund as “Bonanza-Pragmatic Shariah Fund”.

Q3. Can you cite some benefits of Shariah PMS being launched?

Dr. M. Y. Khan: Our Shariah PMS is an opportunity for Muslim investors to employ their savings in superior companies with the angle of social welfare and not making heavy interest payment compared to other companies. Thus, it is because our sample of companies has been designed to eliminate those companies which can produce socially unwanted interest. As such their profits will be sounder than the profits of interest paying companies and they would be more fruitful to augment the wealth of investors. However, equity market needs several measures such as to minimizing the risk, correct accounting standards and compliance of disciplines of the stock market.

Q4. Shariah restricts investment in many industries and has prescribed debt ratios and interest income rules to be followed. Do you think there are enough Shariah compliant companies in Indian stock market? Can you share your comments on these aspects?

Dr. M. Y. Khan: Selection of Shariah stocks is based on specific screening norms as per the Islamic principles. Investment in the companies with the business of alcohol, pork related products and non-halal food production, interest based finance companies like banks and NBFC etc is not permitted. Islam prohibits entertainment (Music, Gambling etc) also. Once companies are selected by using the foregoing principles, the same companies are further screened on the basis of level of debt, cash, and interest bearing securities and receivables which is used separately as a ratio of average market capitalization which should not exceed 33%. If impure income and interest exceed 5 percent of total their income, investment should not be made in such companies.

The Pragmatic Wealth Management Pvt. Ltd. has screened nearly 5000 companies listed on Bombay stock exchange and sample of 900 companies on the basis of Shariah indicators as specified above was prepared. This sample accounts for 60 percent of market capitalization of listed companies on Mumbai Stock Exchange and out of this we have further selected 251 companies spread in nine sectors. The Indian stock market thus provides big enough universe of large, mid and small Shariah compliant companies for investment.

Q5. What is your assessment or outlook for stock market for next few years?

Dr. M. Y. Khan: According to our assessment India offers a very positive scope from the angle of economic growth and domestic savings. India's GDP growth is likely to be in the range of 6 to 7 percent and domestic savings may rise to 37 percent of GDP during the next 5 year period. India's stock market is very viable and healthy from the investment and trading activity point of view. We have a good compliment of other intermediaries in stock market, so there is a very good scope for Islamic investment.

Q6. What is the scope and potential of Islamic investment in India?

Dr. M.Y. Khan: India is home to over 160 million Muslims, which is a large number. With the economic growth Muslim population of India has sizeable income at their disposal.  The middle class Muslim is rising.  At present they don’t have an alternate and suitable investment product from Shariah point of view and their participation in equity market is very low. The launch of this Shariah PMS will open doors for investments in equity markets in the Shariah way. It will give them a much needed alternate to bank fixed deposit and other non Shariah investment. Hence this product has good scope in equity market.

Q7. Since activities in stock market are complicated, is there any arrangement or efforts to set up such institutions?

Dr. M. Y. Khan: Yes players in the stock market have to be highly skilled and expert in their work. At present there are a very few institutions which are offering training relating to activities of stock market. As regards Islamic Finance, there are only one or two institutions which are offering courses on Islamic banking but there is no institution which offers training in capital market functions. We in PWM are making some efforts to solve this issue.

Q8. How Islamic finance or services are helpful for economic development faster than other financial institution?

Dr. M. Y. Khan: Economic development needs a number of factors like finance, plants and machinery, raw materials, trained and skilled working force, good planning, managerial skills, etc. As regards finance, Islamic institution's finance is linked with physical asset creation so it leads to direct capital formation. As delivery of goods is important to complete the transaction in Islamic finance, there is a less scope of diversion of funds and creation of black money. Naturally the economy which adopts Islamic financing, can achieve higher economic growth provided all above cited factors are favorable.

Q9. Islamic funds were less affected by the global recession, do you think the same will hold true Shariah PMS as well in the market?

1 It has been observed that the in the economic downturn Islamic investment tends to perform better because of its strict screening norms followed as interest based debt is concern.  Stock of companies with high leverage (debt) is not part of our investment. It has been observed that the bottom-line of these high leveraged companies shrinks in economic slowdown.  It has been also observed that Shariah complaint stocks shows resilience in down turn and we have observed that Shariah Compliant funds world over have performed better than the conventional funds, this is also reflected in the model portfolios constructed by our research team & fund managers.