S&P sees boom in Islamic stock investing

By Sujata Rao

LONDON (Reuters) - Standard & Poor's is seeing huge demand for sharia-compliant versions of its main equity indexes, a testimony to growing interest in stock investing from wealthy Muslims, a senior official told Reuters.

S&P launched three sharia indexes in December 2006, versions of the S&P 500 .SPSHX the S&P Europe 350 .SPSHE and the S&P Japan 500 .SPSHJ and has since launched another 26.

"The initial launch was to test the water, to see if there is demand. We have been amazed at the response and the proof is we launched 26 indices in 14 months," said Alka Banerjee, vice president for global equities in S&P's index services division.

"Investors want a variety of indices, the market is becoming broader and deeper every day," Banerjee told the Reuters Islamic Banking and Finance Summit. Two sharia sub-indexes for Indian investors will be launched soon, she added.

Years of high oil prices have created a vast pool of wealthy investors in the Middle East, sparking an boom in Islamic banking, bonds, insurance and stocks. Sharia is Islamic law that forbids receiving interest and investing in firms profiting from alcohol, pork, gambling and pornography.

Islamic assets have been growing at 20 percent a year, reaching $900 billion in 2007, and are set to hit $2 trillion by 2010, accountants Ernst & Young estimated recently.

"The majority of investors are still in the Middle East, with a second hub in Southeast Asia. But what's developing, and it's still slow, is an audience in the United States and Europe," Banerjee said, citing the example of Western firms starting pension funds targeted at Muslim employees.

Sharia-compliant stock indexes are created by applying filters to existing indexes to remove stocks involved in products forbidden by Islam or which use high levels of debt.

S&P's sharia indexes now total 9,000 stocks, a number that will rise to 12,000 by the end of February, Banerjee said.

"FINANCIALLY SAVVY"

Each sharia index typically covers about 60 percent of the market cap of the parent index -- the S&P 500 sharia index, for instance, contains 276 stocks.

Banerjee said the indexes were vetted monthly to weed out firms that failed to meet sharia criteria. Most companies fall out because of their financial profiles, she said.

She explained a company cannot have over 33 percent of its market capitalization in debt, cash or interest-bearing securities while accounts receivable cannot be over 49 percent.

This means financials tend to be excluded but energy firms, with low debt, typically have a big weighting.

"When financials do badly, Islamic investments may outperform and vice versa. There is nothing to say they do better or worse than the parent index," Banerjee said.  Continued...