Opinion: Islamic Finance Must Lead Halal Industry

HalalFocus Interview with Rushdi Siddiqi, Global Head of Islamic Finance, Thomson Reuters after his presentation at the 5^th International Halal Market Conference held in Brunei Darussalam on the 5-6 June 2010

What guidance can Islamic finance provide to the Halal Industry?

Chapter two of the Holy Quran, Surah al-Baqarah, makes direct reference to permissibility of trade and prohibition against interest (2:275-79), and consumption of ‘lawful and wholesome foods’ (2:168), yet, like ‘twins’ separated at birth, and now reuniting 1400 years later. In the past 40 years, Islamic finance has become a global brand, ‘sophisticated and organized,’ any lessons for the more fragmented and less structured Halal Industry.

Is this the need of the hour?

When presenting at the 5^th IHMC International Halal Market Conference in Brunei I highlighted the convergence between Islamic finance and the Halal Industry (HI).  However, what was more interesting was getting a first hand view from experts of industry on country developments in Brunei, Thailand, UAE, Philippines Singapore, UK, and Bosnia & Herzegovina. What struck me about the HI industry is the massive potential, possibly bigger than Islamic finance (IF), but the industry has to get its act together on a number of fronts. And, its here that IF can provide some guidance.

What are some of the major areas where IF can provide guidance?

Five areas for consideration are:

One: it can be said that IF became more focused and structured with the birth of AAOIFI (1991) and IFSB (2003), as they have established guidelines for Islamic financial institutions. Now the Islamic and non-Islamic institutions have a beginning point for better understanding on accounting and auditing, governance, prudential regulations, etc. The Halal Industry has a huge number of certification bodies worldwide. One speaker at the event mentioned 24 in their country alone, hence, causing more confusion than providing guidance. The industry does not have an equivalent of an AAOIFI or IFSB, and it is a need of the hour.

The world has accepted Malaysia as an IF hub, and the country also calls it self a Halal hub, hence, Bank Negara Malaysia (BNM), an important foundational member of both AAOIFI and IFSB, needs to look into establishing a respected international industry body to take the lead for establishing guidelines, beyond JAKIM and HDC.

Two: In IF, there are non-Muslim country IF hubs, UK, Singapore, Hong Kong, and now Luxembourg, and also France and Australia. All these countries have an established Muslim minority population. Now, what if London, with two million Muslims and a number of certification bodies and western franchisees offering Halal food, also declares itself a Halal Hub. There would be a number of benefits, most important an injection of formal ‘regulations’ by a G-20 country and maybe pass-portability to EU.

Three: During the IHMC presentation of Peter Vogt, MD for Nestle Malaysia, he spoke of 55 factories where their Halal food is ‘manufactured.’ My thought, initially, was how was it financed? Maybe not relevant to some, but the bigger point is, what an incredible opportunity for bridge building between Islamic finance and the Halal Industry. This type of factory and its offerings are truly asset backed, so why not the company issue a Sukuk Ijara (leasing) for its next factory where Halal products are produced. If GE can issue a $500 million Sukuk Ijara in the financial turbulence of late last year, and list on Bursa Malaysia, why not, say, Nestle Malaysia undertake a similar initiative.

Thus creating a potential new source of supply of corporate sukuks, beyond sovereign, and for the Halal industry, a new and acceptable source of financing its hard assets.

Four: As in Islamic finance, the Halal industry has issues with lack of SME financing. The IHMC speakers presented on it as the need of the hour, but very little gets done after conferences are over.

The lack of SME financing was flushed out during the last session, where Fazal Bahardeen, the founder of Crescentrating, an internet site rating travel/hotels for ‘halal friendly’ options, stated an inability of accessing financing for growth of companies in the Halal sector.

Alongside the IHMC, on the lead up to the IHPE (International Halal Products Expo), a competition called ‘Cooking from the Heart’ was organized by the Brunei Halal brand office Ghanim International. Locals submitted their recipes and the winners who submitted their recipes received prizes and their recipe was served at a three course Award Dinner. Two of the winners will be sent to a top hotel in Australia for one week’s training in their restaurant with a top chef. The top forty recipes will be printed in a Cooking from the Heart Cookbook to be available later in the year.

Five: Now, apply the recipe competition concept for SME financing, as the Islamic banks and maybe the country SWF set aside a few million dollars, including purification moneys, into a fund. Then announce a competition for financing innovative ideas and established products for development of the Halal industry, like date cola, and the judges are a mix of an enlightened Islamic finance person, scholar, official from Department of Agriculture, Halal industry proponents like Abdalhamid Evans, Founder HalalFocus, and a company executive from somewhere like Nestle. Hold competitions regionally, and the final presentation made at a Halal event, where the delegates and television audience choose the top 10 winners. A stakeholder approach to insights and jump start SME financing.

How do you present the Halal industry as an investment fund opportunity?

Working with IdealRatings, we identified 246 publicly listed ‘Halal’ companies with market value of $99 Billion (April 2010) from 15 Muslim countries, and then back-tested against DJ Titans Food 30 Index from April 2009 to April 2010. The Halal food companies had 42.47% performance v. 38.98% for the DJ Food Index. We did not apply Shariah screening, as that’s a conversation for another day. Obviously, indexes are the basis for investable products like unit trusts, mutual funds, etc., hence, now Halal companies may be considered as an investable asset class.

Today, we start the journey of convergence between Islamic finance and the Halal industry, as the former is looking for compliant opportunities and the latter is looking for compliant financing and presenting itself as an investment opportunity. A nice reunification after 1400 years!