Opinion: Halal industry offers scope for investment

| 10/02/2015 | Reply

rushdiRushdi Siddiqui (Participating Finance/Banking) Khaleej Times

But, what is halal investment and how is it different from today’s Shariah-compliant investment of equity funds and private equity?

Gulfood, the Davos of food events for the Muslim world, is taking place in Dubai and Tuesday (today) is dedicated to halal investment.

But, what is halal investment and how is it different from today’s Shariah-compliant investment of equity funds and private equity?

I will be discussing business opportunities in the $1.1 trillion worth halal marketplace. In short, the halal industry is a Brics story — with growth potential — but there is much work to be done if expectations are to be met.

But, first, here is an overview of some of the challenges faced by the halal industry:

Muslims do not own or control the halal food supply chain, hence, raising integrity risk issues. Muslims today are consumer investors of the halal industry’s growth, how can they become financial investors? The producers of halal goods have minimal, if any, connection with Islamic finance and takaful. Hence, one can consume their products but could not invest in such companies as many violate the rules of, say, the Dow Jones Islamic Market Index.

Perceptions

Today, food security (for many Muslim importing countries) is a national security issue. Today, halal is a domestic phenomenon for many SMEs and the objective is to make it a cross-border phenomenon. Today, there are over 300-plus halal certification bodies, yet only 57 Muslim countries. Today, halal has a perception problem as there is halal hysteria in Australia much like the anti-Shariah movement in the US.

The investment world is now looking for new geographic growth markets. The emerging and frontier markets, including all Muslim countries, is where the growth lies.

Second, they are looking at economic sectors that are not saturated, unlike countries in the developed world. Third, markets should have a rising per capita income.

Finally, in these markets, as a whole, they want to reach young, savvy and socially connected customers and the middle class, where there is a rise of internet penetration and (smart) mobile phone connectivity.

The $2.4 trillion Muslim lifestyle market, comprising eight sectors from halal (largest) to logistics (smallest), is a Brics opportunity, but one must understand the rules of engagement if the offering must gain traction.

The Muslim lifestyle is part consumer (food, pharmaceuticals and cosmetics), part leisure (travel/tourism), part fashion (fashion/clothing), part obligatory financial (Islamic finance), part recreational (media), part not glamourised (logistics), but all connected to the real economy.

Companies like Nestle, Cadbury, KFC, Tesco, Donna Karan, Pepsi, Ogilvy, Marriot Hotels, Fairmont and other Western entities are making nice margins from Muslim consumerism.

Islamic finance, one of the eight verticals, has been focused on real estate, hence, the resulting concentration risks impacted many Islamic banks during the financial crisis, although such entities did not have exposure to exotic financial instruments.

Now, it’s time for Islamic finance to expand its exposure to investment/funding to Muslim consumerism.

The $1.6 trillion Islamic finance market, wanting to diversify from the risk concentration of real estate and Murabaha, would naturally want to fund the seven sectors of the Muslim lifestyle space.

For example, asset-backed sukuk may be utilised in refinancing the balance sheet of halal-producing companies. Hence, conventional debt is within the acceptable financial ratios of Islamic indexes.

This results in a favourable outcome of not only the permissibility of consuming a company’s halal products (signed off by a recognised certification body), but also investing in the same Shariah-compliant company (now in an Islamic equity index).

Furthermore, who would not want to see more sukuk, especially from a compliant sector, for establishing corporate yield curve, investing and facilitating secondary market trading.

Now, Islamic leasing may be utilised to refinance conventionally financed equipment, plant and vehicles that make and transport halal products while takaful can be utilised to insure conventionally insured plants, equipment, machinery, vehicles and family.

Diversifying portfolio

Finally, as SMEs join the halal super highway, Islamic trade finance is growing in size and becoming a standalone asset class and part of diversified portfolio.

Thus, a convergence that is based upon the real economy sectors encourages privately held companies with halal products to list on exchanges, add to local stock market capitalisation and so on.

In making or positioning halal as an asset class, we start the process of Muslims owning and eventually controlling the halal food supply chain.

The concept of a halal hub makes sense, but the parameters need to be redefined so that Muslims, notwithstanding the rules and roles of certification bodies, are more of participants and less bystanders. It’s time Muslims begin investing in Halal Brics.

The writer is a co-founder and chief executive of Zilzar. Views expressed are his own and do not reflect the newspaper’s policy.

 

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Category: Finance & Investment, Halal Integrity, Middle East & Africa, Opinion

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