May 11, 2007
A relatively new concept a decade ago, Islamic banking and finance has seen explosive growth in recent years. This can be attributed to the fact that many predominantly Islamic nations have seen an increase in financial wealth mainly due to a surge in exports and high oil prices. This increasing income is fuelling an increasing demand for Shariah compliant offerings along ethically-aware Islamic principles as an alternative to western banking and investment products.
While Islamic compliant investment avenues are now becoming available in most countries, India has not seen large scale development. Other than a handful of Shariah compliant funds, currently India offers limited options for investors looking at Shariah compliant investing. However, this should not go to undermine the scope for Shariah compliant investment opportunities in India.
Post the 1991 liberalization reforms, India’s GDP has consistently grown at over 5% and has now crossed the 8% mark. This figure as compared to the US figure of less than 3% and European growth rate of 2% on a 10 year average is remarkable.  Infact, with its population qualifying as a huge yet untapped consumer market and relatively cheap labour, India is expected to be one of the world’s two largest economies by 2050.  The huge capital inflows in the country mirror the confidence of foreign investors in the Indian economy’s ability to match this expectation. Foreign Institutional Investor flows have shown a consistent upward trend with the total for current financial year (ending March 2007) being USD 7.99 billion as on 29th December 2006. 
India’s institutional framework is well suited for the world economy. Corporate India has been performing well. This, coupled with strong macroeconomic fundamentals, growing industrial and service sectors provides great potential for investment in the Indian economy. Infact India ranks higher vis-à-vis other BRIC nations (Refers to the countries Brazil, Russia, India and China which are rapidly developing and are expected to eclipse most of the current richest countries of the world by the year 2050). in the World Economic Forum’s Global Competitiveness report. India has scored well in innovation, sophistication of firm operations and adoption of technologies. 
India has amongst the most developed and organized markets in the world. Two of India exchanges are amongst the five largest in the world. India has almost 10000 listed companies, a number second to none. Asia’s oldest stock exchange, the Bombay Stock Exchange (BSE) is India’s biggest in terms of listed companies (4853) and market capitalization (USD 797 bn) [30th November 2006]. 
By number of transactions, the National Stock Exchange (NSE) and BSE are the third and fifth largest in the world respectively. 
The India benchmarks – the BSE Sensex and the Nifty have given annualized returns of 57.30% and 67.05% respectively for December 2005 – November 2006. Between March 2001 and December 2006 BSE market capitalization has recorded a jump of over 600 percent, whereas the same for NSE has been over 589 percent. 
Such strong numbers only go to confirm that it is the ‘ideal’ time to take a call on the India-story.
To gauge the scope of Islamic investment opportunities in the Indian stock market, it is imperative to examine stocks which conform to the norms stipulated by the Islamic Shariah principles. A thorough study was conducted by Dr. Shariq Nisar, an eminent personality of Islamic Finance in India. 
Below are a few facts from the study that go to prove that there is huge potential for Islamic investing in India.
‘Out of the 1000 NSE listed companies, 335 are Shariah compliant. The market capitalization of these stocks accounts for approximately 61% of the total market capitalization of companies listed on NSE. This figure is higher even when compared with a number of predominantly Islamic countries such as Malaysia, Pakistan and Bahrain where share of Shariah compliant market capitalization is 57%, 51%, and 6% respectively of the total market capitalization.  In fact, the growth in the market capitalization of these stocks was more impressive than that of the non- Shariah compliant stocks.’
‘The software, drugs & pharmaceuticals and automobile ancillaries sector were the largest sectors among the Shariah compliant stocks. They constitute about 36% of the total Shariah compliant stocks on NSE.’
On examining the BSE 500 (Mostly India’s Fortune 500), the market capitalization of the 237 Shariah-compliant companies hovered between 48% – 50% of the total BSE 500 market capitalization during the period of Dr. Shariq Nisar’s study.
The table below indicates the number of Shariah compliant companies in India during the period of study.
Mar-02 Mar-03 Mar-04 Mar-05 Dec-05
Total number of companies listed 988 988 988 988 1000
Shariah compliant companies 115 137 185 237 335
Total number of companies listed 500 500 500 500 500
Shariah compliant companies 95 112 164 196 237
Author Source: Centre for Monitoring Indian Economy (CMIE)
There are a few Shariah compliant investment vehicles available in India for foreign investors. The Kotak Indian Shariah fund is one such fund which endeavours to achieve capital appreciation by being invested in the shares and equity-linked instruments of companies which the Investment Manager believes are Shariah compliant as per the Shariah supervisory board.
India is expected to see stellar macroeconomic performance in the coming years. The Indian Equity indices have risen around 49% (Sensex)  in the past one year on the back of a strong domestic growth story, improving global competitiveness of Indian companies and robust Foreign Institutional inflows into India. The huge spread of listed Shariah compliant companies gives the fund managers a wider spectrum and flexibility to identify and invest in future growth sectors and companies. Investors from across the world, who are looking at Shariah compliant investment opportunities, could find India as an attractive destination. In fact Indian markets may throw wider options vis-à-vis many Islamic countries. This is what differentiates the Indian markets. Also as an investor, one would be investing into a billion people country with a GDP growth rate in excess of 8% and corporate earnings growing in excess of 15% predominantly out of domestic consumption rather than export dependence.
There is a strong likelihood of a substantial increase in the funds available for Shariah investment as a result of growing wealth in Islamic countries and communities. Complementing this is the fact that India is becoming extremely important for investors’ portfolios and long-term Shariah investors will find this story a difficult one to ignore.
 BRIC report – 2003
 Economic survey 2004-05 ministry of finance, GOI 2005
 Dr. Shariq Nisar holds a PhD in Economics with a specialization in Islamic Finance. He is investment advisor to Idafa Investments Pvt. Ltd, a Shariah compliant investment management firm in India.
 Islamic Capital market products: Developments and Challenges, Islamic Research and Training Institute, Islamic Development Bank, 2005.
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