Islamic Finance

With few halal investment options India’s Muslims resort to creative ways for wealth management

Photo: Muslims offer prayers inside a mosque during the holy fasting month of Ramadan, in Srinagar June 13, 2017. REUTERS/Danish Ismail

An absence of Islamic banks and few halal investment options in the country force the largest minority community into creative ways to make their wealth grow

Mohammed Ali, a Mumbai-based retired employee of the Comptroller and Auditor General’s office, found his haj plans in jeopardy when the Indian government announced its demonetisation drive on November 2016, overnight declaring 500 Indian rupee and 1,000 rupee currency notes invalid unless they were deposited into a bank account before the end of that year.

While most of Ali’s savings and pension are parked in public sector banks in India, where savings accounts by default earn about 4 percent interest and fixed deposits earn you anywhere between 7 and 10 percent, he had set aside what he terms ‘halal cash’ to go on haj.

“I didn’t want to use money that had earned interest,” he told Salaam Gateway.

Ali calculated that it would cost him about 300,000 rupees ($4,714) to go on haj from India. He was halfway to saving for this goal when demonetisation forced him to deposit all the cash back into the bank or risk losing his nest-egg altogether, since the notes would soon be worthless. Now he has restarted his personal haj fund, withdrawing from his pension before it earns any interest.

Ali’s dilemma is illustrative of a majority of India’s 172 million Muslims, many of them self-employed, who are forced to find other ways to manage at least some of their finances due to a combination of religious and social factors.

Many, like Ali, have savings bank accounts—mandated to provide interest, instead of interest-free current accounts that are generally reserved for business use—but use them minimally, instead trying workarounds and alternative routes to managing their wealth.


Many choose to donate the interest earned on the savings account, under guidance from religious institutions. This means while the principal amount is saved, the savings do not grow. Some growth comes from familiar channels such as property and equity investment, the latter made very carefully along Shariah lines. Others come from unconventional means structured to provide a halal form of wealth management for Muslims.

Mumbai-based chartered accountant Naveed Mulla told Salaam Gateway that over half of his Muslim clients follow conventional means of investment, while steering clear of interest-earning options. 

“About 50 to 60 percent of them invest in instruments such as mutual funds, equity linked schemes, capital markets and shares. They’re okay with everything except direct interest. About 30 percent don’t invest in anything or plan their finances. In contrast, 90 to 95 percent of my non-Muslim clients will have some form of structured financial planning – buying an insurance policy or something,” Mulla said.

Some experts say, however, that India’s Muslims are among the least financially savvy segments of the population and their concerns about Shariah are not the only reason they remain outside the financial mainstream.


To start with, Muslims as a socio-economic sub-group in India comprise 13.4 percent of the population, but have fewer bank accounts and loans compared to the rest of the population.

According to the Sachar Report of 2006, the latest available, by the Prime Minister's high-level committee on Social, Economic and Educational Status of Muslims, they had only 7.4 percent share in the total bank deposits and only 4.7 percent of the total loans disbursed by banks. The report is still being debated among India’s parliamentarians.

Zafar Sareshwala, a businessman from the western Indian state of Gujarat with interests in the finance and automotive sectors, told Salaam Gateway: “A majority of Muslims don’t even have a bank account. They don’t have a Permanent Account Number card [issued by the Income Tax Department], and they don’t file income tax returns. It’s not that they don’t want to get into the banking system due to the presence of interest or riba. The awareness is not there.”

Apart from eschewing structured routes of wealth management via instruments such as insurance, fixed deposits and public provident funds, which are the norm for urban educated Indians, most of Mulla’s Muslim clients who fall within the tax bracket (earning more than 250,000 rupees ($3,928) a year, baulk at taking loans and thus forfeit the tax rebate that comes with these loans.

“Even with a net income of approximately 1 crore rupees (10 million rupees, $157,120) a year, which is the highest among my clients, about 80 percent do not have any listing under Section 80C.” This Section of the Income Tax Act allows tax deduction for money invested in public provident fund, tax-saving fixed deposits, equity-oriented mutual funds, national savings certificates and senior citizens’ saving schemes, among others, most of which earn interest.

“They don’t have fixed deposits, insurance or education and housing loans but they may have a car loan, which is not exempt [under Section 80C],” he said. Car loans offered by Indian banks are not interest-free, nor are they or structured as murabahah or ijarah contracts.

Insurance is frowned upon, too, and not a usual means of investment. “Because there is confusion, at times people don’t want to get into details of what kind of insurance [is Shariah-compliant]. They are completely closed to any products that come their way. They are not willing to even discuss whether it can be done or not. They simply say, ‘I don’t want to discuss any insurance or mutual funds’,” said Mulla.

In one example, a person asking a question about an insurance scheme designed to benefit small artisans in the handicraft sector was told by the Darul Uloom – a school that teaches the revealed Islamic sciences according to the Hanafi school of jurisprudence – that the scheme is haram, since it “contains interest as well as qimar (gambling)”.

A quick look at fatwas issued by the Deoband-based Darul Uloom, one of the oldest institutions of Islamic learning in the country, throws up examples of petitioners being told that fudging sales records to avoid tax is acceptable, or supporting another’s decision of quitting a bank job, and cautioning against earning commission as an insurance agent.


So how does wealth generate wealth for India’s Muslims?              

Workarounds include buying gold, investing in rental property and entering profit-sharing arrangements. “Most of them will have gold in the form of jewellery for the women in their family, instead of bars, which are more suitable as investment. They will keep buying gold jewellery, which is sold when there is a requirement for capital in the household,” Mulla said.

Gold jewellery has traditionally been a preferred means of investment in India across communities. According to the World Gold Council’s Gold Demand Trends for Q1 2017: “The sector remains heavily influenced by India and China, which together account for over half of the market (56 percent in Q1).”

The investment in rental property is often not as simple as buying a property and giving it on rent. “Among those that are renting there is a system locally known as ‘heavy deposit’ where they pay the landlord a lump sum at the beginning of the contract and then forgo paying rent altogether. Once the rental agreement is over, they get back their principal amount,” said Mulla.

While some choose to follow this route of renting for their own use, some others take more than one house on ‘heavy deposit’ and then rent them out to others at a profit.


The Sachar Report of 2006 says Muslims are also more likely to work in self-owned proprietary enterprises – about 61 percent of the total Muslim workforce, as compared to about 55 percent of Hindu workers. In urban areas, this share is 57 percent for Muslims and 43 percent for Hindus.

“I have also seen that the Muslim small business community has a cash system. They don’t raise invoices or maintain records. In a country where compliance is strict, they would have a tough time,” said Mulla.

The cash economy is indeed a strong one in India, cutting across religion and economic classes. It is run by complex interlinked communities who use their own systems to manage their businesses effectively.

India’s shadow economy was estimated at 20.7 percent of GDP in 2007, compared to 13.4 percent in OECD countries and 37.6 percent in Sub-Saharan Africa, according to the World Bank.

Mulla gives one example of untaxed, high-return investment. “Many invest in their own business, increasing working capital. Another practice is to give it to someone else and get profits after three months on as much as a 40 percent margin,” he said.

“For instance, an export container going to China may be worth 10 million rupees. It’ll return in two months and the imported goods would be sold. The exporter may not use his cash or may not have it so he works on a profit-sharing model where some people each chip in 200,000 rupees. They pool in 10 million rupees and share the profits,” Mulla said.

However, these non-mainstream channels are neither scalable, nor transparent, or based on any best practice. “This leaves people open to fraud. That also happens,” said Mulla.

“Recently, many of my clients have invested in a company which claims to deal in gold and promises to almost double the investment in two years. I have advised them against it. People want more returns and they say it’s being run by a Muslim woman who must be doing the right thing. My point is that there is no tax deduction at source, no dividend distribution and neither has the company listed its shares. It’s completely non-transparent but it has spread because of word-of-mouth.”

(Additional reporting by Syed Ameen Kader)

($1 = 64.07 Indian rupees)

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Financial exclusion
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Shalini Seth, White Paper Media