Has India finally reached an inflexion point for Islamic finance or will this be another trial balloon bursting before achieving the right altitude?

The recent launch of an Islamic equity index by the Bombay Stock Exchange (BSE), TASIS Sharia 50, received more media coverage globally than India Islamic indexes from the index providers.

A Google search of "Islamic index India" provides 279,000 results, comparable to "Islamic index Malaysia" (270,000), Pakistan (274,000), Saudi Arabia (272,000) and Turkey (259,000), and almost ten times more than the GCC (36,500), at the time this article was written.

The Kerala High court also recently "…dismissed a petition challenging the state government's plans to co-promote an Islamic 8 finance institution…the court observed that although the institution was based on the principles of a religion, its motive was not to propagate the religion, and the state's participation in it was purely based on commercial prospects. Therefore, there is no need to object the state's participation in it," reported the Times of India.

Levelling the playing field

Assuming the matter is resolved and no further appeals are filed, the real work now starts of levelling the regulatory and tax playing fields for Islamic finance for consumers, and the corporate financing and investing sides. If there is no financial cost to being a Muslim, meaning financing or investment returns are conventionally competitive, then Indian Muslims and non-Muslims should gravitate towards Islamic finance.

It will take time to have an authorised deposit-taking Islamic bank in India.

Appropriate authorities should be studying the experience of non-Muslim countries, like the UK, Singapore, France, Hong Kong, Luxembourg, among others which have achieved prominence as wholesale Islamic finance hubs.

In addition, a study is also required into the experiences of Muslim majority countries like Malaysia, Bahrain and the UAE — as these are retail markets with participation by non-Muslims.

Today, the low hanging fruit for Islamic finance in India is Islamic funds, as it faces fewer regulatory hurdles and is easier to explain to the bankable "man on the street" than financing products. The involvement and support of the BSE adds immense credibility and provides a home-grown solution for the potential build-up of the Islamic asset management industry in India.

Madhu Kannan, Managing Director/Chief Executive of the BSE, said: "This [TASIS Sharia 50) ]index will create increased awareness of financial investments among the masses and help enhance financial inclusion."

This may be the usual cheerleading by another actor, but it may also be the beginning of a non-bank banking approach to Islamic finance in India. As with any new geographic entrant in the Islamic finance space, a level playing field is only the beginning; a holistic approach must be undertaken for traction.

However, the situation in India for Islamic investing is more complicated because of the precedence of repeated scams in the field. The combination of financial illiteracy and ignorance about Islamic investing principles among Indian Muslims has made them easy prey to such scams.

The Indian Islamic fin-ance lobby needs to understand and appreciate the expected tepid interest among Muslims for Islamic funds of the TASIS Sharia 50. There are lessons here about education, marketing, public relations, distribution channels and customer service from places where Islamic funds have had success, such as the US, Saudi Arabia, and Mal-aysia.

Although the TASIS Sharia 50 index generated much interest globally, the promoters may have made life more difficult for themselves by labelling it as a "Sharia" index.

In secular India, they may have actually made its acceptance and cross-sectional appeal (to non-Muslims) more challenging. They should have studied the recent launch of an Islamic index in secular Turkey — where it was called the Participation Index.

A Sharia index by itself is a nice academic exercise.


- The writer is Global Head of Islamic Finance at Thomson Reuters. Views expressed here are his own and do not reflect that of his organisation or of Gulf News.