Islamic Finance in Tamil Nadu
With an average growth rate of 7.5 per cent, Tamil Nadu has emerged as the second largest state in India in terms of their economy. During a panel discussion at the WIEF Roundtable Chennai 2018, five speakers discussed the opportunities in Tamil Nadu and boasted about its well-developed industrial, social and physical infrastructure, among other things.
India stands out as a major emerging market economy with an average growth rate of 7.5 per cent with Tamil Nadu as the second largest state in India in terms of its economy. This state is well-developed in its industrial, social and physical infrastructure with good quality manpower, but they’re calling for more especially investments in infrastructure through alternative finance.
Dr Shariq Nisar, Professor at the Rizvi Institute of Management Studies and Research in India, moderated the session on investment opportunities in Tamil Nadu at the WIEF Roundtable Chennai 2018. Four other speakers at the panel discussion shared their experiences and business opportunities in Tamil Nadu, the areas of interest for foreign investments, including the government policies and incentives involved.
Economic Overview of Tamil Nadu
K. Gnanadesikan, IAS, Additional Chief Secretary of the Government of Tamil Nadu, explained Tamil Nadu’s present economic strengths and it’s opportunities. The facts and numbers clearly stated its competitive advantages. It ranked first in the number of factories in India and number of workers employed in the sector. It’s also first in terms of the urbanisation rate, renewable energy capacity and generation, and arrival of domestic and foreign tourists. It was second in terms of its state investment potential index in 2018, according to the National Council of Applied Economic Research (NCAER), and second in overall economic development index, according to Frost & Sullivan. It also ranked third in its gross industrial output and new value addition in the factories sector.
Tamil Nadu is no doubt the investor’s choice in India, because of its constant GDP growth rate. It has large presence of export-driven industries like textiles and garments, leather goods, automobiles and components, hardware and software. ‘Tamil Nadu is a very mature industrial economy, it’s not a flash in the pan. We have been very strong in textiles, engineering and leather, for the last 20 years,’ he said. Tamil Nadu is now becoming a global hub in automobiles and its components. ‘We are the second largest export hub in software services and IT applications and we have more than 600,000 IT professionals working in Chennai, and we are able to export 17 to 18 billion US dollars’ worth of software,’ he said.
The Legal Framework
K.A. Najmi, who is a partner at the Legal Link India Law Services in India, listed down some of the statutes. ‘The statutes that are gaining traction, are of course, the companies act and securities and exchange board. The securities exchange board of India is also a regulator of the equities segment,’ he said. He also referred to the stamp act and the major role it had to play in the sale and lease backed transactions.
The other statutes that got attention was the central act and income tax act, and presently the government service tax (GST). It also played a role in lease financing, but was more relevant for the general investments from abroad. ‘According to the finance investment act, any investment made by a person outside of India is considered a foreign company and is allowed to open wholly owned subsidiaries in India and to carry on the activity or get in touch with a local entity to create a joint venture,’ Najmi explained. This could be used for the purpose of equity investments.
The Bank of India also dealt with regulations that facilitated investments and dealings with equity. ‘In India, banks have been delegated all the powers to consider such an investment request. Though, there are a few conditions, such as a limited amounts allowed for investment. So, if it exceeds a certain amount, the government needs to be sought for approval,’ he said.
Sherif Kottapurath, managing partner of Mount Judi Ventures LLP in India, thought this was the right time to get into alternative financing in India. About six years ago, Sherif started the Lifeline Foundation Trust to serve people who were below the poverty line. They used a bottom-up approach and set up groups to carry out micro-lending activities. Sherif was concerned about the need for some sort of disintermediation. ‘There has to be people who can evaluate the business and whether or not it can give us the right cash flow and whether this business projection is correct,’ he said.
The venture capital fund, Mount Judi had a vision for community development and societal progress. Sherif explained how their venture capital was running. ‘After due diligence, and a decision of being able to invest in a business was made, the investors’ money would be given back in a fair way,’ he said. For example, the operating lease only allowed the payment to start when machines were installed and operational. If, however, the equipment failed beyond the control of the person who had taken the equipment, there would be no charge or rental costs on the idle machine period. ‘This removes scepticism from people because it is absolute risk sharing,’ Sherif said.
Mount Judi is currently looking to raise funds for their venture capitalist fund. What made them different from other VC funds was that they partnered with professionals, advisors and mentors who looked closely at financial returns of a company. ‘This helps the company that we’ve invested in to grow to a stage where we can exit and help the business and investors make money,’ he said. 30 per cent of their first fund went to operating lease and 70 per cent to equity. ‘We’re also looking at a large biofuel plant which converts rice to pellets to replace coal. This would help the pollution problem in Delhi coming from farmers burning rice straw,’ he said. They’ve also looked into semi-organic vegetable farming and providing affordable housing.
Dr Rahmatullah Abdul Ahad, managing director of Janaseva Co-operative Credit Society Ltd. in India, urged more discussion on loans, insurance and waqf. ‘The Muslims in India have three basic problems. They want to get rid of interest. They want to meet their needs for general or business purposes. The third is the investors who have worked with surplus with them, they want to add halal profit,’ he said. That’s why Dr Rahmadullah started one of the largest cooperative Islamic finance institutions in the cooperative sector in India, to ensure shariah-compliancy among cooperatives. They are currently working in nine states and have license to operate in 12 states in India.
Janaseva had a modelled inflow and outflow plan to mobilise the funds. One was a general demand deposit, where Janaseva guaranteed that the respective risk and cost of whatever deposit had been given will be given back. The second was Janaseva Member Investment Fund (JMFI), where a deposit was given and indemnity from the depositors is taken for a profit-loss sharing system. ‘We’ve got other systems known as security deposit and we’re granting total cost free loans to our members,’ he said. Their funds were divided like a banking system. ‘Around 10-15 per cent of the demand deposit we keep for liquidity, 10-20 per cent we use as statutory liquidity ratio (SLR) and the rest we use in three avenues,’ he said. The three avenues were cost free loans, service charge based loans and business purpose loans.
Despite all these efforts in Islamic banking some obstacles remained in the Indian society and the speakers agreed that the solution was teamwork. ‘The greatest roadblock to Islamic banking or finance in India are Muslims. When they want loans, they come to us and when they want to deposit, they go to banks. Unless this changes, Islamic finance will not catch hold,’ Sherif Dr Rahmatullah said. Dr Rahmatullah had seen many institutions face the same social and legal hurdles and hoped Muslims could do something to help Islamic finance grow. ‘We are not going to be able to do it by ourselves,’ Sherif concluded.