A Noor Bank branch on Shaikh Zayed Road. The bank will offer its clients a basket of 20 chosen Sharia-compliant European equities, with weights fixed and constant for the index at 5 per cent per stock. Image Credit: Pankaj Sharma/Gulf News

Dubai: Noor Bank is all set to launch a Sharia-compliant and Sustainable Equity Index-linked investment, targeted at the bank’s high-net worth and priority banking customers, the bank’s treasurer Damian White told Gulf News in an interview.

Under the new index, the bank will offer its clients a basket of 20 chosen Sharia-compliant European equities screened for sustainability measures. The 100 per cent capital protected investment offers a fixed coupon for the first two years and the uncapped index performance at maturity at the end of three years.

The format of the investment is through an Islamic structured deposit, which is like a regular deposit that gives exposure to this equity-linked underlying. The return of the deposit is not a fixed one, or an anticipated return like the wakala or the savings account, but it will be linked to the performance of this underlying — and the underlying is European equities.

The investment product offering is based on a stock-picking process that involves an analysis of Sharia compliance, sustainability and advanced financial risks, which aim to reduce the risk associated with market downturns.

“The underlying equities will have to be fully Sharia-compliant and anything defined as ‘prohibitive’ under the Sharia law would not fit into our index,” White said. “We will also pay keen attention to a sustainability index.”

Potential to outperform peers

A sustainability index’s screening looks at the practices companies have in place in terms of their compliance with environmental, social and corporate governance (ESG).

“Researches have shown that corporations that incorporate these responsibilities within their business, over a period of time, have the capability to outperform their peers,” he added.

Under Noor Bank’s stock selection process, weights are fixed and constant for the index with 5 per cent per stock and 20 stocks in the basket adding up to 100 per cent. The allocation will stay fixed.

The bank keeps the underlying stocks in the index to 20, because after its multi-layer screening, it expects to find only about 25 to 28 stocks that are likely to qualify.

By keeping the number down to 20, the bank wants to have some flexibility in rebalancing the basket.

The index is reviewed and rebalanced on a monthly basis to maintain sustainability, Sharia compliance and low volatility, he said.

The new Sharia index basket will have diversification distributed among industrials, materials, telecommunications, consumer, information technology, health care and include names such as Amadeus Holding, Ericsson, Novo, Compass, Reckitt Benckiser, Roche Holding, BAE Systems, Nestle and Danone.

White said European markets look attractive as they are likely to benefit from further quantitative easing (QE) whereas in the US, the programme has come to an end.

The new index, created by the Treasury team of Noor Bank, would be offered to the bank’s own high-net-worth and priority clients.