Investing the Islamic way

For a devout Muslim making investments that attract the element of interest is considered 'haram' -- something not permitted under the tenets of Islam, and this is perhaps the one major reason why not many Muslims invest in stocks or in insurance, or for that matter, even seek housing finance.

But things are changing. Ahmedabad based Parsoli Corporation Ltd, which has been involved in providing tailor-made financial products to Muslims, now offers an option where Muslims can invest in Shariah-compliant stocks, or avail of a housing finance scheme where there will be no element of interest or even help them cover themselves under an insurance cover – takaful -- that is within the accepted norms of Islam.

Talha Sareshwala, chief financial officer, Parsoli, said, "It is a huge, an enormously huge, market that needs to be tapped. Whether it is insurance, or stock trading or availing housing finance, Muslims have lagged behind. We intend to change that now with our Islamic Wealth Management System."

He added that the main aim of Parsoli is to create a new market segment of independent financial advisors. "For example, in the UK, IFAs are the link between the people and the product and IFAs are highly regulated in the UK. That is what we intend to replicate in India."

It is generally accepted by Muslim jurists that the operation of conventional insurance involves the elements of uncertainty in the contract of insurance, gambling as the consequence of the presence of uncertainty and interest in the investment activities of conventional insurance companies, which violate rules of the Shariah.

Takaful is the alternative form of cover which a Muslim can avail himself against the risk of loss. Most Muslims do not avail of housing finance schemes provided by banks and housing finance companies because there is a hidden element of interest that is involved in such transactions and that this is not permitted by the tenets of Islam.

However, Parsoli is now in preliminary stages of talks with housing finance companies to structure their products in such a way that they can be Shariah-compliant.

"India now needs an Islamic equity index, so that it can act as a benchmark for non-resident Indian money. To cite an instance, the Dow Jones came out with an Islamic equity index and this has been doing great," said Sareshwala.

Parsoli, in collaboration with IBF-Net, had in 2003, compiled Parsoli-IBF.Net Equity index, India's first and only Islamic Equity Index, comprising the most liquid stocks of Shariah-compliant companies that are registered on the National Stock Exchange and the Bombay Stock Exchange.

"For the moment though, the PIE is for our customers, but in future, we intend to make this available to all investors," said Sareshwala.

About 80 per cent of the 1,200-odd customers of Parsoli use the PIE to invest in Shariah-compliant scrips as of date.

The companies are screened every fortnight to determine their Shariah compatibility.

The parameters that Parsoli applies to ensure that companies are Shariah compliant are that its debts to market cap ratio should not be more than 33 per cent, the cash recoverables are less than 45 per cent of the net worth of the company, the main income of the company is not from interest and these companies are not into manufacture of alcohol, leather or are not connected in any way to gambling.

Parsoli is almost single-handedly working in the segment of providing Shariah compliant financial services to Muslims.

According to Sareshwala, companies like Mumbai-based Barkat Investments and Al Falah Investments of Delhi, which was also into stock broking and a member of the NSE.

"Then there is also the Bangalore based Al Amin Investments, which has branched out into the co-operative banking sector. But by and large, these companies did not fare well and the faith of the Muslim investors had been shaken to an extent," said Sareshwala.

Where Muslims can park money

Stocks: Parsoli is in talks with the NSE to start an Islamic equity index that will enable Muslims to invest in stocks that are Shariah compliant. Parsoli has already launched the Parsoli IBF.Net Equity index a couple of years ago, and acts as a facilitator as of now

Insurance: In January, the company approved the formation of Parsoli Takaful Pvt Ltd. Takaful is the Islamic form of insurance. A few insurance products of existing companies have been identified, which can be Islamically acceptable with a few changes

Housing finance: Parsoli has initiated talks with housing finance companies to introduce a housing loan scheme where Muslims do not have to pay interest. Rather, the product is structured in such a way that the interest element is eliminated