Islamic funds for Halal food…the next wave?

The halal industry is estimated to be worth US$641 billion, with the number of producers, halal ports and certification bodies growing at an impressive rate every year. Funds being managed in  Islamic Financial institutions has been estimated at around US$1 trillion, so why isn’t Islamic funding the staple diet of the Halal food industry.

Islam is a gestalt, meaning that it is a religion that should be taken in whole, without any sort of bifurcation. However, this sort of divergence is glaringly apparent in the halal industry, where recent reports have shown that only 5% to 10% of halal businesses utilize Shariah compliant financial services.

As at August 2008, less than 10% of those in the halal industry in Malaysia had adopted Islamic financing which has definitely shown its potential. This has left many to ponder why halal producers have not opted to create a complete halal supply chain from A to Z, beginning with its financing. Some producers deem halal financing a more expensive option to conventional financing. As one pointed out, “Sad to say, it all boils down to dollars and cents at the end of the day.”

According to industry sources, lack of knowledge and exposure to halal financing structures could be the main reason behind this perception, as some have argued that the provision of halal financing is indeed cheaper than conventional structures available to businesses and small and medium-sized enterprises (SMEs).

A banker from a prominent Islamic bank in Malaysia affirmed: “I came from a conventional banking background, and now my customers tell me that our (Islamic) facilities here are much cheaper. For example, conventional banks charge an overdraft commitment fee, but Islamic banks do not. Our financing is, for a fact, cheaper.”

Shariah compliant from start to finish
However, on a bigger scale, PricewaterhouseCoopers partner and global Islamic finance leader Faiz Azmi said: “Rightfully, all halal producers should only be seeking halal financing. This is to ensure that the whole chain is halal starting with capital.

“It depends on where the producer is. In some countries, the tax laws have not been changed to provide a level playing field for Islamic financing, so invariably it costs more. For example, stamp duties may be higher as several documents are involved in one financing structure,” he explained.

“Legal documentation also plays an important part due to its unique Shariah requirements and some countries do not have legal concepts that support these requirements, for example, trust law. In summary, the pricing reflects the relative difficulties in establishing working products. However, over time, this should resolve itself.”

The halal industry does not only comprise food, pharmaceuticals and nutraceuticals, but also encompasses rules regarding the transporting, packaging, labeling and logistics of foods, analysis of preparation procedure such as hazard analysis and critical control point (HACCP) and good manufacturing practice (GMP), and other recognized safety/quality standards and compliances.

These standards are applied to food processing, hotel operations, pharmacies, cosmetics, medical and many other businesses. Among the halal certification bodies across Asia are the Halal Industry Development Corporation (HDC) of Malaysia, Majlis Ulama Indonesia, Australian Halal Food Service, Brunei Halal and The Halal Standard Institute of Thailand.

Ironically enough, the biggest halal initiatives do not come from any of these countries but Europe, with the Port of Rotterdam in the Netherlands having committed itself to becoming a halal port in 2007, while Swiss-based Nestlé is one of the world’s largest halal producers.

Also taking its cue from the burgeoning halal industry was Malaysia’s Westports, which raised RM800 million (US$220.7 million) via Sukuk Musharakah in 2008.

Thailand zeroing in on halal set-ups
Industry talk on Thailand becoming the next halal hub, after Malaysia, has also been circulating, as Middle Eastern investors have reportedly been looking at the country to buy land for agricultural purposes.

Faiz commented: “Thailand has many of the advantages that Malaysia does. It also has one of the more advanced agro-food production industries in Asia, so producers may want to attain the halal status to capture the demand growth, particularly from the Middle East. Such buyers want to diversify their reliance on traditional markets as part of their food security plans.

“Thai businessmen have also been looking at how halal parks in Malaysia — such as the Tanjung Manis halal hub — are being set up and managed, especially those in the Northern Corridor like Perlis as well as in the Eastern Corridor, and to see how they can supply the ingredients for the halal food products made in these parks. This interest shows that there is potential for growth.

“There are potential synergies between Islamic banks and halal producers, as one is a capital allocator and the other is a seeker of capital. This can be seen in the increasing number of SMEs which are entering the halal industry, and are looking to Islamic banking for their funding needs. The majority of the local and foreign Islamic banks in Malaysia do offer financing facilities to SMEs.

“As at March 2008, the banking and development financial institutions had approved RM13.3 billion (US$3.66 billion) to more than 38,000 SME accounts under the National SME Development Blueprint 2008. For example, in February 2009, a foreign Islamic bank in Malaysia opened a new branch at the Tanjung Manis halal hub to support SMEs in this market,” Faiz added.

Whatever the outcome of the adoption of halal financing by halal players, what is most important in mobilizing this are the initiatives by the standard setting bodies, government and Islamic banks on a collaborative scale.

In Malaysia, for example, HDC has signed a memorandum of understanding with CIMB Islamic for the provision of halal financing to halal industry players and financial aid to projects involved in the halal sector which include SMEs.

Incentives in the form of investment tax allowance or exemption on statutory income from export sales can also help mobilize the halal economy. If the merger of both industries proves successful, the halal industry as a whole will definitely be more liquid, profitable and, most importantly, sustainable.