Michael Janda reported this story on Wednesday, February 1, 2012 18:41:00

MARK COLVIN: A new Australian share index has joined the likes of the ASX 200 and All Ordinaries. It's the Islamic Australia Index.



The index's creators are the global financial information company Thomson Reuters and Islamic investment manager Crescent Wealth.



Thomson Reuters' global head of Islamic capital markets Dr Sayd Farook and Crescent Wealth's Talal Yassine spoke to Michael Janda.



SAYD FAROOK: We avoid investments predominantly in leverage, in what we call morally hazardous industries; armaments, pornography, alcohol etc and then we have some quantitative methods of screening out companies that have particular amounts of debt, or have particular percentages of investment in prohibited activities.



MICHAEL JANDA: So as a concrete example what Australian companies would be eligible and what Australian companies are ineligible for this index?



SAYD FAROOK: So you think about companies such as CSL, Woodside Petroleum, these kinds of resource energy stocks, such as AGL Energy, these would be eligible stocks. On the other hand stocks such as Amalgamated Holdings and the like that are in cinema and broadcasting, or …



TALAL YASSINE: Or a bank. The four majors are prohibited to be invested in because they're all about leverage and debt.



MICHAEL JANDA: And loaning money.



TALAL YASSINE: Loaning money, effectively.



It really means that we avoid all companies that have debt. In the Australian Stock Exchange 30 to 35 per cent of companies are in the financial sector, so it screens out that whole sector. And it means avoiding companies that are morally risky.



MICHAEL JANDA: Would that include things like gaming companies as well?



TALAL YASSINE: Aristocrat definitely out.



SAYD FAROOK: Most certainly.



MICHAEL JANDA: How big is this market for Islamic finance both globally and in Australia?



SAYD FAROOK: Globally currently most estimates suggest that it's $1 trillion and it's growing at a rate of 15 to 20 per cent. Locally, it's around the range of $8 billion.



MICHAEL JANDA: Is the size of Islamic finance largely driven by the oil money that's coming into the Middle Eastern countries?



SAYD FAROOK: Well certainly petrol liquidity makes up a significant portion of Islamic investment. That said a lot of the money is coming from institutional investors in places like Europe and in America. These are large asset managers who look to place a portion of their portfolio in Islamic assets because it makes sense to diversify from what have traditionally been risky assets.



MICHAEL JANDA: And on a global level do you find that it is mostly Muslim investors who engage in finance on Sharia principles?



SAYD FAROOK: You have a lot of expatriates and also other ethnic origins such as Chinese who are willing to take up Islamic finance because it makes more sense to them. The partnership elements of it, the fact that you are engaging in profit sharing relationship where you get to benefit while at the same time you're on an equal level playing field with the counter-party, the bank. It makes a lot of sense to them and they feel that it's more equitable.



MICHAEL JANDA: And this is as opposed to a loan model?



SAYD FAROOK: Yeah and that's essentially what makes it different and what we've heard from our research and also our customers, they've generally felt that when they've dealt with an Islamic bank they've been a lot more concerned with their wellbeing as opposed to a conventional bank which just looks at the loan and you've got to pay the interest - that's all.



MICHAEL JANDA: Is Australia particularly well placed to capture this market and if so why?



SAYD FAROOK: Australia is one of those unique outliers in the sense that it combines very strong financial markets infrastructure, very strong regulatory system, with a link to the growth story of Asia. Besides this you've also got the remoteness of Australia from some of the most volatile social political regions in the world.



As a growth story, in terms of the stability of the market, this is where people would want to invest, because no matter what happens in the world, this place always remains safe.



MARK COLVIN: Dr Sayd Farook and Talal Yassine speaking to Michael Janda.