The launch over the last few weeks by the Bombay Stock Exchange (BSE) and the Istanbul Stock Exchange (ISE) of their debut equity indexes which comply with non-interest based Islamic investment principles is potentially a major development for the Islamic capital market and asset management industry.
India with the world’s largest Muslim minority of between 150 million to 200 million and Turkey with a population nearing 70 million, are both untapped markets for Islamic investment funds especially equities, exchange-traded funds (ETFs), exchange traded commodities (ETCs) and index-linked equity funds. These funds of course are not only aimed at Muslim investors but also at those interested in alternative ethical and socially-responsible investment products. Indeed, in India other faith groups including Hinduism, Buddhism, Sikhism and Christianity also share with Islam some of the views relating to usury, wanton speculation and market greed.
However, both the BSE Tasis Shariah 50 Index launched on Dec. 27, 2010 and the ISE Participation Index KATLM launched on Jan. 6, 2011, are merely the beginning of an initiative to promote ethical funds as a niche offering on both stock exchanges. Any euphoria that these indices will open the floodgates to a spate of offerings of Islamic mutual funds, unit trusts, ETFs and ETCs should be dispelled immediately because Islamic asset management has been slow to take off globally compared with say sukuk (Islamic securities) and real estate financing. The global Islamic asset management business ranges between $30 billion to $50 billion, which is a drop in the ocean compared with the multi-trillion dollar conventional fund business.
Turkish bankers such as Meliksah Utku, assistant general manager of Albaraka Turk Participation Bank, and Avsar Sungurlu, assistant managing director of BMD Securities, which in 2006 launched the first Islamic exchange-traded fund (ETF) in the world off the Dow Jones Islamic Marker (DJIM) Index, have long been predicting that Islamic capital market instruments will eventually take off in Turkey.
In the past Turkish participation banks were constrained as to the types of business lines they could get involved in compared with their conventional banking counterparts. Following the introduction of the Banking Act 2007, the country’s four participation (Islamic) banks — Albaraka Turk, Kuveyt Turk, Turkiye Finans and Asya Finans Participation Banks — were brought under the same provisions of the above act, which meant that the regulatory regime was exactly the same as for the conventional banks.
In a recent interview with the writer, Durmus Yilmaz, the governor of the Central Bank of Turkey, confirmed that the country’s participation banks are part of the Turkish financial system and are “on the same footing as other financial institutions in Turkey, and can conduct asset management and capital market business. The only constraint is that their transactions do not involve interest”.
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