$640b Halal Industry Needs to Align with $1tr Islamic Finance Sector

April 15, 2010 by · 1 Comment 

By Rushdi Siddiqui, Gulf News

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 harmonized, 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.

Global market

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.

12-16

Upgrade: Islamic Finance 2.0

April 1, 2010 by · Leave a Comment 

By Rushdi Siddiqui, Gulfnews.com

sharia_finance_dollar Future of Industry lies in move from sharia-compliant to sharia-based approach

Dubai : We are at an important crossroads in Islamic finance and banking, and I want to explore, in this column, the future of Islamic finance.

We hear about 1.5 billion Muslims, but has Islamic finance benefited the ‘man on the street?’ What is so ‘Islamic’ about Islamic finance?

Have we simply been putting an Islamic wrapper around conventional structures and products and placing a blessing them?

I’ve been in Islamic finance for more than a decade. This inaugural article will set the non-technical tone for the important areas I want to explore in the future, and I encourage the readers to comment as the Islamic finance community’s collective psyche, experience and insight will benefit the industry.

We in Islamic finance want to see a group blueprint of the industry going forward, including the building of two-way bridges — be it with South-east Asia or with Group of 20 (G20) countries.

Islamic finance is, at one level, for all those interested in “boring finance”, asset or project backed/based financing and non-turbo-charged investing (without derivatives and excessive leverage) in selected real economic sectors.

Islam does not necessarily have a monopoly on ethics because these are common shared values with other religions and philosophies. However, the former has ‘codified,’ via scholars, screens and structures into financial contracts having links to permissible real economic activities.

Sharia compliance

Among the 57 Organisation of Islamic Conference (OIC) countries, not one Muslim country in the last 40 years has ‘Islamised’ its economy for general acceptance; not Sudan, Pakistan or Iran.

The $1 trillion (Dh3.67 trillion) industry operates in a world economy of inter-connected interest rates, debt and other similar factors, hence Sharia scholars have allowed a permissible amount of impurity as long as the industry moves towards removing such impermissibilities.

Put differently, scholars, as Sharia gatekeepers, are seeking progress and prosperity, which is different from modernisation. Thus the reference rates in Islamic mortgages, syndicated loans, sukuks and other financing are the efficient cost of capital credit of the London interbank offered rate (Libor) and/or the Treasury.
However, where is the industry with a methodology for an Islamic interbank offer rate (Ibor)?

There are over 555 Islamic funds with $35 billion (Dh129 billion) of assets under management, and, if we focus on Islamic equity funds, the question that comes to mind is this: ‘What is the link between a Sharia-screened company from any of the five index providers to Islamic finance or a Muslim country?’

The screening results in a universe that can be deemed as a style of investing — ‘non-financial, low debt social-ethical investing.’

Thus, some of the Sharia-compliant companies include Microsoft, BP Amoco, Pfizer (with a bias towards energy, health care, and technology), yet what is their link or connection to Islamic finance?

Could such companies and, in the aggregate, present day Sharia-compliant Islamic indices, be deemed an economic indicator of Islamic finance in a Muslim country? We now need to look at Sharia-based Islamic indices.

IFIs and sukuks

We hear and read about 300 Islamic financial institutions (IFIs) in 75 countries, and the need for larger balance sheets to compete against the ‘big boys’ on the project finance deal table for instance, hence, a call for the consolidation or the creation of established Islamic mega-banks.

A concern with such an Islamic mega-bank revolves round whether it poses a systemic and confidence risk in the home country as concentrated exposure without many compliant-hedging mechanisms?

Is there a need to think about safety nets and stress tests before central banks allows for an Islamic mega-bank?

The sukuk market, roughly equated to Islamic bonds, is now worth over $107 billion, having been the locomotive of Islamic finance during the petro-liquidity spike.

However, recent bankruptcies, defaults, and restructuring exercises, have been portrayed by western media as the beginning of the end of Islamic finance.

In an embryonic industry, like the 40-year-old Islamic finance, these growing pains are welcomed and will actually strengthen the industry, as precedents become known and down-side risk is better understood.

Sukuk growth and development appear to be following the ‘path’ of the Eurobond market, and the International Finance Corporation (IFC) and General Electric (GE) sukuk issuances in late 2009 underline the merits of such financing in turbulence.

Contribution factor

We have a number of Islamic finance conferences, and a number of Islamic finance awards.

It is often strange to see or read when different conference organisers or magazines have, for instance, a ‘best Islamic bank’ award, and each names a different bank.

It has been said in certain quarters that some of these awards are driven by sponsorships rather than actual votes or, ideally speaking, real contribution to the industry.

At this stage in Islamic finance, awards should emphasise ‘contribution’ and not ‘best,’ as that latter implies mature and connected Islamic financial institutions globally.

The foremost contribution to Islamic finance has been made by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Governor Zeti Akhthar Aziz, and, obviously, the real Sharia scholars, regulators like the United Kingdom’s FSA, central banks like the Central bank of Bahrain, and conventional banks with windows and subsidiaries.

Shaikh Mohammad, a standalone stakeholder, raised the profile of Islamic finance globally via the Dubai brand before oil reached $140 a barrel, and Zeti, as a globe-trotting ambassador, made her a separate asset class in Islamic finance.

They have established the awareness and macro framework, and now the industry has to move towards Islamic finance 2.0.

Pulse of Islamic finance

One of the serious issues the markets are tackling is to how to find an effective, overall pulse of Islamic finance. In most instances, numbers such as $1 trillion and the like are used to demonstrate the awesome potential of this industry.

However, how can we really gauge what’s happening to the industry on a daily basis?

The path to Sharia-based Islamic finance is expected to have speed-bumps, pot-holes, diversion road signs, construction vehicles with signs such as ‘do not follow’, but lets raise the issues from Sharia-compliance to get to the destination of Sharia-based.

The writer is the global head of Islamic Finance & OIC Countries for Thomson Reuters. The views expressed in this column are his own and should not be attributed to his organisation.

12-14

Mumbai Terrorist Attacks Awaken Bollywood

December 31, 2008 by · Leave a Comment 

The India film stars dictate fashion and customs, but they usually aren’t politically active. The recent killings seem to have changed that.

Courtesy Anupama Chopra, LA Times

Reporting from Mumbai — Amitabh Bachchan slept with a gun. On Nov. 26, as 10 terrorists orchestrated mayhem at Mumbai’s landmark hotels and train station, Bollywood’s most enduring superstar pulled out his revolver.

The following day, he wrote on his blog: “As an Indian, I need to live in my own land, on my own soil with dignity and without fear. And I need an assurance on that. I am ashamed to say this and not afraid to share this now with the rest of the cyber world, that last night as the events of the terror attack unfolded in front of me, I did something for the first time and one that I had hoped never ever to be in a situation to do. Before retiring for the night, I pulled out my licensed .32 revolver and put it under my pillow. For a very disturbed sleep.”

As the bloody face-off between the terrorists and Indian commandos continued for three days, Aamir Khan, another major star and avid blogger, wrote: “Terrorists are not Hindu or Muslim or Christian. They are not people of religion or God . . . an incident such as this really exposes how ill equipped we are as a society as far as proper leaders go. We desperately need young, dynamic, honest, intelligent and upright leaders who actually care for the country.”

A few days after the attack, Shah Rukh Khan, who is known to Hindi film viewers as King Khan and routinely described as more famous than Tom Cruise, told a leading television channel, “I have read the Holy Koran. It states that if you heal one man, you heal the whole of mankind and if you hurt one man, you hurt the whole of mankind. . . . There is an Islam from Allah and very unfortunately, there is an Islam from the mullahs.”

This impassioned, unflinching outburst is rare for Bollywood. Mumbai’s Hindi film industry produces 200-odd films each year for an estimated annual audience of 3.6 billion. Bollywood and its stars dictate fashions, language, rituals and aspirations for millions of Indians and non-Indians around the globe. In Britain and the U.S., Bollywood box office is largely driven by Indian immigrants, but in countries such as Malaysia, Poland and Germany, even locals are avid consumers. Hindi films vary from fantastical entertainers to realistic, low-budget urbane dramas that usually appeal to more educated audiences. Bollywood is one of the few film industries globally that has withstood the Hollywood goliath. In fact, Hollywood is pushing for a piece of the booming Bollywood pie; studios such as Sony and Warner are producing Hindi films.

But despite its cultural clout, Bollywood has largely been an insular, apolitical space — columnist and author Shobhaa De, more acerbically, described it as “apathetic.” Unlike their Hollywood counterparts, stars here have rarely aligned themselves with causes. Even those who join political parties usually serve an ornamental function.

Like much of India’s elite and middle class, the film industry has preferred to disengage from politics and the invariably messy functioning of the world’s largest democracy. “Most Bollywood actors claim their job is to entertain the masses — nothing more, nothing less,” De said. “It is the Republic of Bollywood movie stars owe any allegiance to.”

But the terrorist attacks, which claimed 164 lives (plus those of nine gunmen), have forced the film industry to abandon its customary neutral stance. In blogs, media, petitions and peace marches, Bollywood has come forward to denounce the attacks and demand better governance. Most significantly, many leading Muslim stars who until now rarely delved into the controversies of religion have condemned the attacks as “un-Islamic.” They have, as Gyan Prakash, professor of history at Princeton University put it, “reclaimed their religion.” In an interview, actor Anil Kapoor, now appearing in “ Slumdog Millionaire,” called the attacks “a tipping point,” adding: “I think things will be different now.”

The film industry can play a prominent role in India’s post 26/11 citizens’ movement, not only because of its cultural cachet but also because Bollywood is and always has been inherently secular. India is home to about 151 million Muslims, the third-largest Muslim population in the world after Indonesia and Pakistan. The majority Hindus and minority Muslims share a long and tragic history, and politicians of every hue have exploited this divide. Hindu-Muslim relations are usually in a state of simmer, and the decades-old distrust routinely boils over in riots, murder and more recently terrorism.

Intriguingly, Bollywood has largely managed to resist this communal caldron. Through the decades, Hindus and Muslims have worked together without any palpable friction. In fact the biggest stars in contemporary Bollywood are Muslim (this includes the reigning superstar trinity of Shah Rukh, Aamir and Salman Khan). In “Maximum City,” his bestselling book on Mumbai, Suketu Mehta described the Hindi film industry as having “the secularism of a brothel.” “All are welcome,” he wrote, “as long as they carry or make money.”

Among Bollywood’s earliest stars were Australian-born Mary Ann Evans, known to her fans as Fearless Nadia — a whip-wielding, iconic action heroine in the 1930s; the Jewish Florence Ezekiel, known to her fans as Nadira, a legendary vamp who seduced with her smoldering looks in the 1950s; and the Anglo-Indian-Burmese Helen, who from the 1950s to the 1970s was Bollywood’s most famous dancer.
Box office is king

Writer-lyricist Javed Akhtar, president of an organization called Muslims for Secular Democracy, disapproves of Mehta’s brothel comparison but agreed that in the 40-odd years that he had been working in Bollywood, he had never encountered bias. “There is a method in the madness,” he said. “People in films — from the biggest stars to the smallest — know that their survival is in the success of the film. When you go to the racecourse, you cannot not bet on the winning horse because the jockey is of some other religion. You want to win the race so you cannot afford to be communal.”

Bollywood’s reigning deity is the box office. Consequently, Akhtar pointed out, even actors and technicians who are high-profile members of the right-wing Hindu Bhartiya Janta Party will behave “in a totally separate manner within the industry.”

Attempts to divide the industry on religious lines have found little support. In July, a little-known terror outfit called the Indian Mujahideen issued death threats via e-mail to leading Muslim actors, urging them to stop acting in movies or face the consequences. The industry collectively denounced the mail and Saif Ali, one of the actors threatened, responded in a newspaper saying that he would “rather be shot than not do a shot.”

Eight years ago, a Hindu actor named Hrithik Roshan became an overnight sensation with his debut film, “Kaho Na Pyar Hai” (Say You Love Me). As the film ran to packed houses, a right-wing Hindu magazine, Panchjanya, ran a cover story insisting that Roshan was the Hindu answer to the Muslim Khan supremacy in Bollywood. The claim was resoundingly ignored. These contrived divisions also have little meaning in Bollywood because many of the leading stars have had interfaith marriages.

Even at historic turning points such as the 1947 partition, when Hindu-Muslim relations were violently fraught, the film industry has remained impervious to religious bias. In the 1940s and 1950s, the industry was also less self-focused and inward-looking. Cultural groups such as the Progressive Writers’ Assn. and the India Peoples’ Theatre Assn. exerted a great influence on the leading writers, actors and directors of the time. The filmmakers and their films reflected an awareness and engagement with social causes.

But by the 1970s, a disconnect had set in. Prakash pinned it on “the Amitabh Bachchan phenomenon.” After the actor had a string of successive hits, the media labeled him “a one-man industry.” According to Prakash: “The Bollywood space changed then and became about celebrity.”

Star-driven culture

This celebrity has only amplified in recent years. The post-liberalization media explosion and consumerist culture have converted actors into brands and they are constantly “on,” whether in cinema halls, television shows or newspapers and magazines. Hindi cinema and especially its stars dominate India’s cultural landscape, enjoying a super-size visibility. Media doggedly report on the minutiae of their lives, from love affairs to diet to favored hair stylist. Political parties have often attempted to turn this visibility into votes by using stars to campaign for them, but Bollywood stars in politics have largely been, in De’s words, “a monumental joke.”

Prakash agreed. “Unlike Hollywood, Bollywood has became a space only for stardom,” he said. “Politics is problematic, and it’s not conducive to stardom. It only gets in the way.”
Aamir Khan discovered this the hard way in 2006, when he joined activists demanding the rehabilitation of farmers displaced by the construction of a dam in the western state of Gujarat. The government demanded an apology. When he refused, multiplex owners in Gujarat refused to screen the actor’s film “Fanaa” (Destroyed). Though the film eventually became a blockbuster, losses from the Gujarat ban — deemed unconstitutional by Prime Minister Manmohan Singh — ran into the millions. Not surprisingly then, silence and insularity are the preferred mode here.
Actress Preity Zinta, one of the industry’s more outspoken stars, said the prevailing silence also had to do with the quality of leadership. “Where are our icons?” she asked. “Give me one inspiring leader and I will not even think twice before offering support. Look at the political class abroad. I jumped as high as anyone in America when Obama won.”
Terrorism has provided the impetus that politicians could not. Zinta was among the thousands of people who gathered Dec. 3 at the Gateway of India (opposite the Taj Mahal hotel) to protest the attacks and demand better security. The gathering, organized spontaneously through e-mail, text messages and Facebook, was described in leading newspapers as unprecedented.
Farhan Akhtar, Javed Akhtar’s son and a filmmaker-actor, was also at the Gateway. When the firing started Nov. 26, Farhan was shooting the first episode of a “Saturday Night Live”-style television show called “Oye It’s Friday.” Farhan, who hosts the show, and his producers stopped work because, he said, “we were too depressed to continue.” But a few days later, they regrouped to rewrite a part of the show. The first episode now included several biting comic lines about politicians and their legendary incompetence. “There has been no event of this magnitude, nothing this drastic to get people polarized,” Farhan said. “But now people have had enough. We’re not going to take it lying down anymore.”
The big question is: How long will the anger last? Skeptics like De don’t envision a more politically sensitized Bollywood, but many such as Zinta and Farhan believe and hope that a sustained involvement will follow. But even if the current activism dilutes with time, the Hindi film industry, an inclusive, successful global brand, will remain a symbol of unity in a deeply fractured country.
Chopra writes frequently about Indian cinema. Her books include “King of Bollywood: Shah Rukh Khan and the Seductive World of Indian Cinema.”