Marrying Islamic finance and halal

By A. Stephanie

Despite the global halal market’s massive US$2 trillion size, few efforts have been made to marry it to the US$1.66 trillion Islamic finance market – until now. An e-commerce marketplace touted as the Muslim equivalent of Amazon and Alibaba plans to do this, but it will have to navigate standards and accounting transparency issues prevalent in the dominant halal food sector.

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The food trade accounted for 65% or US$1.3 trillion (RM4.8 trillion) of global halal expenditure in 2013, according to the Global Islamic Economy Report 2014-2015 by Thomson Reuters and advisory firm DinarStandard.

However, the report noted that many of the companies within the halal food supply chain are still small and fragmented, presenting investment opportunities to the synergistic Islamic finance industry.

However, Islamic bankers face the same issues in extending credit to halal food businesses as conventional bankers do with food and beverages (F&B) enterprises.

Lack of transparency, governance

The country’s largest Islamic banker, Maybank Islamic, is one of the main proponents of this convergence, having customers from farm-to-fork, as well as those producing halal pharmaceuticals.

However, Maybank Islamic executive vice president and syariah management head Muhd Ramadhan Fitri Ellias said, “A lot of F&B players are family-owned business and not listed. Some refuse to disclose their real financial statements, causing problems for Islamic banks to assess their creditworthiness.

“So we have problems giving them credit facilities, and we cannot advise them whether they are more suited to our products or equity-based funding solutions due to lack of transparency and proper governance,” he remarked.

A 2010-2011 survey by the Halal Industry Development Corporation (HDC) found that less than 5% of halal players registered with the Malaysian agency utilised Islamic finance, CIMB Islamic executive director and CEO Badlisyah Abdul Ghani noted.

He said a working group would be established to figure out how to connect small and medium enterprises (SMEs) in the halal industry with Islamic finance providers.

“This doesn’t mean they are using conventional finance; some of them just don’t do financing,” he remarked, adding that he has requested a new survey from HDC for updated numbers.

Both banks derive the majority of their income from Malaysia, which is supposedly leading the world in bringing Islamic banks and halal players. Yet utilisation remains low, despite developmental institutions such as Perbadanan Usahawan Nasional Bhd (PUNB) offering Syariah-compliant credit facilities to halal entrepreneurs.

Private equity failure

Five months ago, Zilzar, from the Arabic word for “earthquake”, was launched in Kuala Lumpur, boasting RHB Islamic founder Vaseehar Hassan Abdul Razack as its chairman.

Marketing itself as a Muslim lifestyle e-commerce marketplace, its American co-founder Rushdi Siddiqui is not a new face to Islamic finance and halal players.

A man with fingers in many pies, he helped establish several global firsts: Islamic equity index, sukuk index, Islamic sustainability index, halal food index, and Islamic interbank benchmark rate.

He also contributed to the world’s first Islamic Exchange Traded Fund in Europe (Turkey and France), Asia (Malaysia) and US, and led the index provider to be the first to have licenced Islamic assets under management of US$7 billion.

But Siddiqui has had mixed results in the halal sphere. In 2013, he and Darhim Hashim, then-CEO of International Halal Integrity Alliance, founded Azka Capital, with a US$500 million private equity fund focused on global halal opportunities.

Azka was focused on sellers in the SME space for the halal sector, mostly located in Singapore, Thailand, Malaysia and Indonesia.

What Siddiqui and Azka were not prepared for was the same lack of transparency and audited financials that have stonewalled bankers. Azka was put on hold.

In an interview with KINIBIZ, Siddiqui remarked, “Azka really never had the opportunity to take off, for the sheer reason that we did not have access to proprietary deal flow. We had companies that were shopped around for months, and were not making money on that.

“If you’re doing private equity in the halal space revolving around privately-held companies, getting financial information is very difficult – the same reason banks find it difficult to lend to halal SMEs. They don’t have a lot of audited financials,” he said.

Azka did not even take off, but one of Rushdi’s other ventures launched a year earlier did. The Egypt-specific Shekra crowdfunding platform did, with Syariah-compliant funding for startups primarily in the tech sector.

Where does Zilzar come in? Siddiqui sees a linkage between private equity, the e-commerce platform and crowdfunding. “What I would like to speak about is a holistic approach to the halal ecosystem – if you’re not interested in this, there are opportunities you should look at,” he said.

Low-hanging halal fruits

ilzar’s e-marketplace is gunning for one million vendors by 2020, which Siddiqui believes will be driven by halal players in the fashion, cosmetics and travel sectors as they are easier to understand, and where different halal certifications do not prevail as they do for the F&B sector.

Siddiqui believes SMEs in these low-hanging fruit sectors are most likely to utilise the Muslim lifestyle marketplace Zilzar touts itself as, and capitalise on the growing spending power of the world’s 500 million Muslim youths below 30.

He opined, “Catalysts for growth in the Muslim lifestyle space are the same as those in China that helped Alibaba take off: rising per capita income, increased Internet penetration, lower broadband cost, as well as better security for online payment and mobile commerce.”

But the bulk of untapped business lies still in the largely fragmented F&B halal play, and there are 137 halal certification bodies globally. These differing standards are what impede streamlining of the farm-to-fork halal chain globally, and he is none too aware of that.

Integrity and differing standards

How then does Zilzar expect to get halal F&B players on board?

“As halal for SMEs is a domestic play, Zilzar will be looking at certification bodies on a local angle, Jakim (Malaysia’s religious regulatory body) certification for Malaysian entities, for instance. There may be a number of certification bodies, but those who have been utilised by more vendors gain more credibility.

“We are working with HDC, but companies are also putting themselves on board to be vetted. Vendors are primarily located in the Asean region, Australia and New Zealand, while the buyers are in the Gulf,” he said.

With 85% of meat and live animals currently being imported into Organisation of Islamic Cooperation (OIC) member countries, tremendous opportunity exists in streamlining the hundreds of fragmented suppliers in this value chain to gain halal integrity in chain and scale.

Perhaps the way forward is not a single global halal standard to ease trade, but a multi-tier system modelled after Jewish kosher certification, as proposed by Rizvan Khalid, director of Euro Quality Lambs – the largest Muslim-owned lamb slaughterhouse in Europe – in the Global Islamic Economy report.

“Unlike some market participants, I do not favour one halal standard but rather a small finite tiering that allows customers to buy on a scale between standard halal and Sunnah halal.

“An existing model already operates in kosher, with standard kosher and Glatt kosher, and works well. It allows consumers who have a higher Taqwa the ability to buy meat produced to a higher halal status … rather than having a ‘my-halal- is-better-than-your-halal’ attitude,” he remarked.

Siddiqui meanwhile believes market liquidity will solve the problem, as fixed standards would stifle innovation.

While halal and Islamic banking standards gain harmonisation on the macro level, the possibility of a regulated waqf (trust fund) market will be bringing more issues in standards and governance to the Islamic finance table.

Yesterday: ‘Much more than risk sharing’

Tomorrow: Waqf – the Islamic trust fund