India's Bombay Stock Exchange launched a share index of sharia-compliant companies on Monday in an attempt to open stock-trading to more Muslims.

The BSE TASIS Shariah index consists of the 50 largest and most liquid Shariah-compliant stocks within the BSE 500 Index. It comprises Indian companies such as: Reliance Industries, Tata ConsultancyServices, Maruti Suzuki and Bharti Airtel. It will allow investors to buy stocks without violating Islamic investment guidelines.

Islamic law doesn’t permit Muslims to invest in companies that derive significant benefits from interest, since usury is considered sinful in the Islamic faith, or from the sale of goods and services that are deemed sinful within the Islamic faith, like alcohol.

The index can be used for the construction of Shariah-compliant financial products, such as mutual funds.

Despite being a trillion-dollar industry worldwide, Shariah finance is only at a nascent stage in India, which has one of the largest Islamic markets in the world. Muslims constitute close to 15% of the population.

India’s Muslim population is close to 175 million—roughly even with the entire population of neighboring Pakistan—and 60 per cent of the community is under 25 years of age. Over a third of India’s Muslims live in cities, according to a study by KPMG consultants and the Taqwaa Advisory.

A November 2006 report by a committee headed by Justice Rajender Sachar reported that almost 50 per cent of the community’s population is excluded from the formal financial sector in India.

Another report by the Reserve Bank of India puts the credit-to-deposit ratio among Indian Muslims at 47 per cent against the national average of 74 per cent. That means that compared to what they save, Indian Muslims are borrowing money that could be used to start a business or purchase assets at a far lower rate than the general population.

It isn’t yet clear how much the Shariah 50 will go towards fixing that situation, or whether it’s more likely to function as a way to make India an attractive destination for foreign Islamic finance.

Source: Wall Street Journal