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  Islamic Finance Activities in India: A Report  
Dr Shariq Nisar


Islamic finance is a system of finance based on Islamic law, or Shariah. It aims to achieve economic and social justice in all financial matters. In contrast to conventional finance, Islamic finance takes into account the moral consequences of financial transactions, ensures that financial contracts are fair and equitable, and guarantees that financial rewards are correlated with the level of risk and responsibility borne by all parties – Islamic finance is commonly known as “ethical finance” or “participatory finance” for this reason.

An industry on the horizon, Islamic finance has seen rapid growth in the past three to four decades. This growth can be attributed to a growing Muslim population, which is also the fastest growing consumer market, and the fact that Muslim-majority countries endowed with natural resources have very high liquidity. Islamic finance has also attracted and benefited from other groups such as international institutions that helped develop its regulations and improve its products and services. With the recent financial crisis, Islamic finance is gaining even more attention world-wide as an alternative financial system.

Last two years have been remarkable in many ways for Islamic finance in the country.There have been at least half a dozen important developments including the launch of BSE TASIS Shariah 50 Index and the permission for shariah compliant operation of an Islamic Finance company promoted by the Kerala State Industrial Development Corporation (KSIDC) of the government of Kerala. In the paragraph below we shed more light on these two and some other developments related to Islamic finance in the country.
The launch of BSE TASIS Shariah Index has been one of the most happening news from India. Hardly any worthwhile publication of the world, be it from Australia or America to a small Island in the South of the Indian Ocean to the hinterland of China, could afford to miss this news.The important highlights of this Index areits methodology and performance in comparison with those of its peers. TASIS Shariah screening norms are most conservative and despite that index’s performance has been superior. The third notable feature of this index is the 8% cap assigned to its constituents. This is India’s first cap weighted Index. Hence it is expected to display a reduced volatility.
Source: BSE TASIS Shariah 50 Index; Note: The performance given is this diagram is till the end of October 2011.
Kerala State Industrial Development Corporation Allowed to Start Islamic Finance Operations through Al Barakah Financial Services Ltd
This has been another very important and significant development as far as Islamic finance in India is concerned. To give a proper perspective we start with the sequence in which the developments unfolded:
1) KSIDC takes interest in starting anorganisation that proposes to comply with Shariah rules and regulations as well beside complying with Indian regulatory norms.
2) After the feasibility study a company named Al-Barakah Financial Services Ltd was incorporated on November 30, 2009 under the Indian Companies Act.
3) State government of Kerala decided to retain 11% stake in the company and remaining stake was offered to different businessmen drawn from various communities.
  4) A Public Interest Litigation was filed against the state on the ground that forming a company proposing to follow Islamic rules “is a clear instance of the State favouring a particular religion”.
  5) After hearing the arguments of all parties involved the Honourable High Court of Kerala dismissed the petitions filed against the company. Now the company has been permitted to carry on its activities by taking approvals from relevant regulatory authority.  
Other Developments relating to Islamic Finance in the country
1. National Spot Exchange of India Ltd has received Shariah Compliance Certificate from TASIS for its platform for electronic trading of Gold, Silver and Copper on Spot Basis. Considering the preference of a vast majority of Indian investors for investment in gold and silver, it is expected that the shariah compliant trading of these commodities will further deepen the market in India.
2. General Insurance Corporation of India (GIC) has successfully completed first year of its operation in Shariah compliant Re-insurance (Re-Takaful). The company has started Retakaful operations from Malaysia and UAE.
3. Taurus Ethical Fund (TEF), India’s first shariah compliant scheme in the Mutual Fund sector has outperformed India’s best indices once again. As on 31st January 2011, TEF has given an absolute return of 15.07% in one year as against the return of 7.71% by the Benchmark Index (S&P CNX 500 Shariah) and Ranked 20th out of 64 funds in the Open-end Equity Mid and Small cap category (Value Research) in 1-year time frame.
  4. Pure Stock Pension Fund (PSPN), this is India’s first shariah compliant scheme under the regulation of the IRDA. This is the only scheme in India which is regularly audited by a Shariah Board. This scheme has performed very well.
  5. Reliance Wealth Management has launched a Shariah compliant PMS Scheme based on BSE TASIS Shariah 50 Index.  
  6. Taurus Asset Management Company (TAMCO) in association with Multigain Shariah Investment has launched a Shariah compliant PMS scheme named TM Shariah Strategy.
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