1. Session 4: Halal as an Asset Class?
There is a huge market waiting to be tapped by Islamic finance away from the real estate focus that
has been successful in facilitating the industry’s development, but which makes it vulnerable to the
high volatility that was made evident in the recent financial crisis. It is the halal food and lifestyle
industries that are a key part of the Islamic economy and an area that can transform halal into an
asset class rather than just a group of sectors all focusing on compliance with sharia rules.
While these industries have grown alongside Islamic finance and share a concern for compliance with
sharia, they have developed separately and despite many calls for greater convergence, have
remained as the twin industry, separated at birth from Islamic finance. This was the focus of the
discussion in the most recent and final focus session organized by the Thomson Reuters Islamic
Finance Gateway community with Rushdi Siddiqui, Managing Director of Azka Capital, a private
equity advisory firm that focuses on halal industry initiatives.
Siddiqui spoke of the halal food sector as a bridge industry for the convergence between Islamic
finance and the halal sector. At $1.1tn, it is the largest segment of the halal industry, according to the
State of the Global Islamic Economy report to be released at the Global Islamic Economy Summit on
November 25-26, 2013.
In analysis of the food production index and other conventional and Islamic indices, Siddiqui said that
the food production index was better performing and had a higher yield than either of the alternatives,
but spoke of the difficulty of investing in the halal segment because the largest players are either
global multinationals that also operate in non-halal segments or private companies.
Many of the companies that are available for trading and have large enough free float for inclusion in
a halal index are multinational food processing companies that also have non-halal and haram food
production, and so they are not available for investment due to failing the AAOIFI screening
requirement for non-permissible income. Of the companies that produce only halal food, there is in
many cases too much (interest-based) debt for Islamic investors to buy the equity of these
companies.
The easiest place for Islamic finance to start with is to focus on refinancing the conventional debt of
halal industry producers, which will make them available to investment by Islamic investors and
increase investor exposure to these sectors. This can come from Islamic banks or through sukuk
offerings like the recent issue from Almarai, the Saudi-based dairy firm.
To further develop the investment universe for halal food and other companies like halal travel,
lifestyle and pharmaceuticals, Islamic investment banks can manage the stock offerings (including
IPOs) for private companies. One of the current roadblocks to this is that Islamic banks and funds
rarely have members of their credit or investment committees with solid understanding of the potential
of the halal industry. Siddiqui suggested this alignment could be a first step in the process.