Reuniting the ‘twins separated at birth’
April 4, 2011
QUESTION: How did the idea of a halal food index come about?A:I was looking to expand the bandwidth of Islamic investing, and saw the industry looking at Islamic hedge funds and other turbo-charged instruments which the “Muslim man in the street” can neither relate to nor access. The question to answer was: is there an asset class that can be explained in a 30-second elevator pitch, where the same “man” would understand immediately and want to invest in?I saw a brochure on a halal industry conference and sessions on ingredients, stunning, certification and US$640 billion (RM1.94 trillion), but nothing on halal as an investing asset class. At that point the light bulb went on and I was transported back to 1998, when we came up with the idea of syariah-compliant indexes. An index for halal food from companies!Why not create a halal food index that captures those companies and have it available for all investors of the world? April 4 2011 is deja vu to February 9 1999, when the first Islamic index was launched.A halal food index would build bridges to Muslim investors, sukuk issuance for financing halal food companies and promote inward investing as the money stays in Muslim countries for building halal food industry development!Q: What is the role of IdealRatings in this halal index?
A: Researching for halal companies is as complex as syariah-compliant companies. Our partner, IdealRatings, is among very few companies that has real world experience in syariah-compliant screening. They have earned a reputation in providing quality data for many global institutions, including those in Saudi Arabia, and they are powering the SAMI Halal Food Index. The index consists of publicly-listed halal food companies from 15 Muslim countries with a total size of around US$100 billion (RM303 billion), and broken down to six areas.
Q: You have said publicly about an anomaly between Islamic equity investing and halal companies, can you explain?
A: One financial ratio test of syariah screening removes highly indebted companies, and if we look at Muslim countries, an equity culture does not exist yet. The halal food companies in the Muslim countries have been unable to access Islamic financing (for a number of reasons), hence, have accessed conventional bank financing.
Thus, as Muslims, we can consume their halal products, yet many of these companies fail the debt ratio, hence, cannot invest in such companies!
Q: Why don’t we see Islamic finance taking greater interest in the halal industry?
A: I have stated that the US$1 trillion (RM3.03 trillion) Islamic finance and the US$640-billion halal industry are “twins separated at birth” and now need to be reunited for mutual benefit of growth and development.
The halal industry has failed to convey its business model to Islamic finance in the language the latter understands: financing real estate, tangible assets, etc. Instead, Islamic finance, with its own issues on the lack of standardisation hears repeatedly about halal issues like ingredients, stunning, lack of certification consensus, etc. i.e. controversy!
Q: How does sukuk fit into the halal industry?
A: I’ll talk about two ways, but there are many more. First, companies with factories producing halal products, how were the factories financed? At a halal event last year in Brunei, a senior representative from Nestle said halal foods are manufactured in 55 of their factories … what an incredible opportunity for, say, Ijara Sukuk. If GE can issue a US$500 million (RM1.52 billion) sukuk in the height of a credit crisis, November 2009, well, let’s just say it can be done if the will and vision are there.
Second, as mentioned above, some of the halal companies fail the debt syariah screening, hence, on blacklists. Thus, here company issues a sukuk, which does not count as part of a conventional debt, and use the proceeds to refinance the conventional debt to the maximum allowable threshold of one-third of debt/asset or debt/market capitalisation. This has been done in Malaysia by companies like PLUS!
Q: What does the SAMI Halal Food Index mean for Malaysia?
A: It would allow Malaysia to present halal holistically, and show the convergence with Islamic finance, as Malaysia is a globally recognised Islamic finance hub! For example, Tanjung Manis Halal Hub in Sarawak, presents an incredible opportunity to a Global Halal hub, but they must realise its not just about agriculture, aquaculture, and having companies set up shop by offering incentive packages and having an infrastructure. Other jurisdictions are offering comparable incentives and benefits.
Initially, targeting companies in this global halal index, offering them compliant financing, seed moneys, establishing the world’s first halal fund for investing and connecting them to the many Islamic banks in the country, etc.
And using sukuk and Islamic syndicated loans to build infrastructure for the halal companies, hence, end to end halal/syariah-compliant. This is just a beginning of the build out on the convergence. Now, that excites me!
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