I wanted to take a sukuk break, as the last few months seem to be only about sukuk default, restructuring, conferences/seminars, etc. Islamic finance is not sukuk, its much bigger than an instrument. I wanted to look at an area that Islamic finance (IF) has not been linked to: the $640 billion (Dh2.3 trillion) halal industry (HI). There is a link, but it's associated with IF ignoring HI!
The halal industry believes that Islamic finance has long ignored its little ‘halal-half' brother, because it either does not understand the business model or its financing needs.
Islamic finance continues to have expected ‘challenges' with standardisation, and the halal industry, the issue of certification and certifying bodies appears to be even more nascent. In IF, we have generally accepted guidelines on accounting (AAOIFI and Malaysia), prudential regulations (IFSB), ratings (IIRA), hedging (IIFM), but what and where are the leading HI standard bodies; Malaysia (Jakim), Brunei (Brunei halal), but there are more ‘bodies' in OECD than OIC countries. Query: is the certification process accepted outside the home country?
The GCC countries are major importers of billions of dollars in foods/products, projected to touch $53 billion in 2020. Now, what if large importers like Saudi Arabia or the UAE impose ‘their' halal certification criteria for exports from these countries, including G20 countries like Australia (red meat) and Brazil (chickens)? Because of the GCC's volume of imports, could there be a risk of back-door certification via the GCC? However, if GCC countries do not have certifications or it's not yet harmonised, then halal exporters still have time to establish certification before externally imposed.
In Islamic (equity) investing, we have Sharia-compliant screening from the five index providers plus AAOIFI and Malaysia, however, what criteria, if any, for investing in listed halal companies. Meat or poultry [and food] companies should have their products according to Quranic guidelines, "O mankind! Eat of that which is on earth, lawful and good…" 2:168.
Although a Sharia-compliant food-only index may not yet exist, S&P has, as of March 30, 15 Sharia-compliant food companies in the GCC (15 Saudi and one in each Oman and the UAE) and 123 global Sharia-compliant food companies from China, Taiwan, Japan, Korea, Mexico, the US and others.
Is it correct to assume that GCC public listed food or meat or poultry companies' offerings are halal, because large local populations and percentages of the expatriate communities are Muslims in these Islamic countries? Assuming correctly, then the Halal Index is possible with ensuing Halal Funds/ETFs off of such indexes.
Thus, two sets of indexes: Sharia-compliant and Halal index, but what about Sharia-compliant Halal Food Index? Would this be a ‘low-debt non-financial social-ethical counter-cyclical halal index? This could benefit ‘investors of conscience and appetite.'
The reality is the halal industry needs to establish an initial screening methodology for publicly listed companies in the halal industry globally, as the Sharia-compliant screens may not capture them. The present awkward situation is: one can consume the food or products of listed halal companies, yet cannot invest in them because they may fail the present Sharia screening!
Islamic banks (in the GCC) have traditionally financed the chain of ‘borrowers' associated in real estate industry, commercial and residential, as they allegedly better understand the business model, risk, and recourse. The banks have stayed away from halal companies, possibly ex-Al Islami, hence, the latter has relied on the ‘friends and family finance' (upstarts) and traditional interest based loans (established companies).
There are halal funds set up, but they are more for acquisition than financing. It would seem the fragmented global halal industry, in OIC and G20 countries, would be ripe for a consolidation strategy, hence, no different than the often heard quest for a big balance sheet Islamic mega bank created via consolidation.
Thus, financing of viable halal companies via roll-up acquisition strategy? Surely, more must be done, otherwise we may continue to consume halal products or meats financed with Riba-based finance companies!
The halal industry needs to get (1) its act together on process, auditing, and certification, and get into the face of Islamic banks and better explain the (2) inter-relatedness of the sectors, (3) better explain the business model, risk and its mitigation, (4) better explain that it establishes the foundation for diversified lending, and increased investor options for Islamic banks' customers, and (5) allow Islamic finance to talk the talk of a $2-trillion ‘niche' market in the making!
The writer is the Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer and cannot be attributed to his organisation.