Tag Archives: Finance

Halal certification is fast-growing hard currency for trade in halal products

Author: Blake Goud, Thomson Reuters Islamic Finance Community Leader

Trade is important.  Just look at the attention paid to the depreciation of global currencies. The falling Ringgit, the depreciating Chinese renminbi and the newly free-floating Kazakh Tenge.  The fight for competitive advantage in trade is impacted significantly by the value of the currency in countries where goods are produced and where they are consumed.

For trade in halal products, there is another unit of currency—the halal certification—which also affects the value of a halal product differently in the country where it was produced (and certified) and where it will ultimately be consumed.  The value of the certification for the producer determines how wide the market is for their product.  For example, Malaysia, whose halal certification is widely recognized and whose halal exports reached RM 10.8bn ($2.6 billion) in the first quarter of 2015, the halal industry is well connected globally within the Islamic economy for food, cosmetics and pharmaceuticals.

The success of Malaysia in capitalizing on the Islamic economy for economic growth has led other countries to seek similar opportunity.  Pakistan, which has a small but growing meat export industry, hopes the recently launched Pakistan Halal Authority will improve the ability of meat exporters to be the source of food imports into the Gulf Cooperation Council countries which are geographically close but where much of the meat comes from the far more distant Brazil.

The growth in intra-OIC trade is a specific priority for the Organisation of Islamic Cooperation (OIC) which targeted 20% intra-OIC trade by 2015.  Its standards organization, SMIIC, has been promoting a unified halal standard to reduce the barriers to intra-OIC trade in halal products.  A recent effort to promote the adoption of the OIC/SMIIC halal standard was led in Gambia by The Gambia Standards Bureau (TGSB) which highlighted the opportunity that halal trade provides for SMEs.

Efforts like TGSB focused on producers, traders, exporters and importers primarily in food and agricultural products but not all countries are just looking to halal food.  Pakistan’s PHA is not limiting its standards to just meat, where the opportunity is the clearest.  It will also focus on food (including processed foods), cold drinks, toiletries, cosmetics and pharmaceuticals.

This wide-ranging focus on the core sectors as well as products structurally affected by Islamic values (broadly referred to as the Islamic economy) makes for a huge market, a large share of which occurs on a cross-border basis.  The Thomson Reuters State of the Global Islamic Economy Report estimated that the Islamic economy grew 9.5% in 2013 and will grow 10.8% annually through 2019 when it is expected to reach $3.7 trillion.

While not all of that growth occurs within the OIC countries, and not all of that market is traded across borders, a large proportion of it is and that is why countries as diverse as The Gambia, Malaysia and Pakistan are focused on setting up the infrastructure so that their halal brand is valuable with all of their potential trade partners.


The first Thomson Reuters State of the Global Islamic Economy report was released in 2013 at the Global Islamic Economy Summit and the most recent one was released last year.  Join us at the Global Islamic Economy Summit from October 5-6, 2015 in Dubai, UAE for the release of the third State of the Global Islamic Economy report.

Islamic financial institutions must boost transparency to meet AAOIFI governance standards and address critics

A key difference between Islamic and conventional financial institutions is the legal rights of depositors. While in practice, institutions treat their (profit-and-loss-sharing mudarabah) depositors as if they were conventional deposits, they are subject to losses as if they were equity instruments (the depositor as rabb al-mal shares profits with the bank but remains subject to losses).

Despite being on the hook for losses from the mudarabah assets in a similar way as the equity investors are to the overall institution’s losses, mudarabah depositors are not permitted to vote and can effectively only vote with their feet by withdrawing their deposits if they believe them to be at risk of loss or can find a higher return elsewhere. In this regard, mudarabah depositors (or as they are usually called — profit-sharing investment account holders or IAHs) do have priority over equityholders in the liquidity they are granted, which, in normal situations, entitles them to withdraw their deposits without any loss.

All of these factors contribute to the need to develop standards on the governance within Islamic financial institutions (IFIs), which AAOIFI instituted in 2005. The particular standard that focuses on corporate governance issues begins by outlining the underlying principle for the management that ensures they are “held to the highest fiduciary standards since they are accountable not to the equity-holders who appointed them but also for the safety of all key stakeholders as well as the community the IFI serves”.

The governance standard is that — just a standard — so it doesn’t prescribe certain methods for ensuring that an Islamic financial institution must do certain things as a result of its fiduciary standard; that is left up to the individual institution. However, it does outline some principles that are of interest to IAHs and how the financial institutions ensure what is referred to as “equitable treatment of fund providers and other significant stakeholders”.

Without really laying out what these principles are, it does provide specific context about the transparency responsibility of IFIs towards ‘fund providers’ (which includes the IAHs): “An IFI should ensure equitable and unbiased treatment of fund providers and other significant stakeholders and associated investments as well as in relation provision of adequate financial and non-financial information to allow them to take appropriate decisions regarding their dealing with the institution.”

Many IFIs provide at least the minimum transparency to IAHs that they do to their equity investors in the form of interim and annual reports available on their public websites. They also have specific presentations for investors that cover some of the information that depositors (or those who advocated on behalf of depositor protection) would need to identify the strength and stability of the bank and trends in the payout.

The investor presentations (for the institutions that produce them) and annual reports (to shareholders) provide details on the stability of the institution and its ability to generate profits to share with depositors. This is a good step towards transparency (and banks should be required to make their annual reports available if they take deposits from retail depositors), but this information does not address the underlying conflict that the governance standard asks banks to meet.

By not creating a report that addresses the conflicts of interests inherent in managing a financial institution where management and those whose funds they are managing (like IAHs) can diverge, it leaves the goal of the standard unfulfilled. More importantly, it leaves the process of generating profits as a ‘black box’ that makes it easy for critics to suggest that there is no difference between Islamic banks and conventional banks and that the statements of profit-sharing between the banks and their deposits is artificial. Greater transparency would help cut through these arguments and encourage better practices by Islamic banks.

Find out more information about the governance standards which are now accessible through the Legal & Shariah section of Zawya Islamic.

2nd Islamic Economy Awards nominations now open

Author: Blake Goud – Islamic Finance Gateway Community Leader

The Islamic economy is too often characterized around its biggest silos: the multibillion dollar banks recycling petrodollars across the world and the expansion of global and regional conglomerates into the halal food market as their indigenous market growth slows to a crawl. SMEs are always either the next big thing in the $1.1 trillion halal food market and $1.35 trillion Islamic finance market, or the acquisition target, but they rarely get recognized in between.

In the future, the evolution of the Islamic economy will be dictated by not just small and medium-sized enterprises (SMEs) but microbusinesses that start with an idea and end up creating and capturing a niche market. The Islamic Economy Awards is looking to find these idea-driven SMEs. Last year, the awards highlighted, among other winners:

• Tanamera, a small natural products manufacturer in Malaysia
• Saffron Road, an American halal food producer that equally values the sustainability of its products for a broad consumer base
• TimeZ5, which designed and manufactures the first physiological prayer mat offering pain relief and improved posture

The Islamic economy awards cover eight categories including media, hospitality & tourism, waqf and endowment, SME development, Islamic arts, food & health, finance and Islamic economy knowledge infrastructure. Apart from food and finance, many of these markets are filled with ideas but few established companies, which provides a huge opportunity for people with an idea to meet market demands.

As entrepreneurs know, it is important to find a niche within the market that the bigger companies are not able or not willing to serve and the Islamic economy offers many, both within the established sectors like halal food where specialty producers can tap into consumer demands more rapidly than multinationals or in Islamic finance where the big banks have not found an effective way to tap the base of the pyramid. There are also opportunities in the less developed areas of Islamic art and design and media where a shortage of offerings, highlighted in the Review Report from the 2013 Global Islamic Economy Summit, has constrained growth of entire sectors within the Islamic economy.

The employment crisis facing majority Muslim countries can be solved in part by bringing local ideas to meet local needs, which is always something the SME will be better at than the multinational. But the Islamic economy is not limited to Muslim consumers. As Saffron Road showed with its frozen food offerings, moving beyond just the basics of being halal or sharia-compliant can win consumers among the wider base of customers who are searching for companies that slow down the wheels of production to make sure things are done the right way, in accordance with their values.

The Islamic Economy Awards are searching for the next product that is halal and which can disrupt existing markets and offer consumers something more closely aligned with their values. Nominate yourself or a company you respect in 1 of 8 Islamic Economy Awards. Hurry, the deadline is October 7, 2014!

Microenterprises sidelined in MENA SME Islamic banking report

Bank financing plays a key role in many businesses expansions that lead to rising employment needed to help create the millions of jobs to cash in on the demographic dividend in the MENA region. As the past decade has shown in countries with governments supportive of Islamic banks, the sharia-compliant financial sector can play a role alongside conventional banks.

The International Finance Corporation (IFC), the private sector arm of the World Bank, released a study about the potential for sharia-compliant SME bank financing in 9 countries in the MENA and South Asia (MENASA) region – Egypt, Iraq, Jordan, Lebanon, Morocco, Pakistan, Saudi Arabia, Tunisia and Yemen. One of the major themes in the study was the idea that SMEs rather than microenterprises, and particular SMEs in capital intensive sectors, should be the primary focus for Islamic banks.

The challenge with this focus is that it ignores a much bigger share of companies that employ a large number of people in the MENASA region because not all SMEs are in capital intensive sectors and the threshold for small enterprises is relatively high in many countries. The study provided a detailed ‘to do’ list for governments and banks in each country to open up financing for SMEs, but it puzzlingly reflects an unfriendly attitude towards microenterprises and the sectors in which they account for a large share.

The opening section of the report’s executive summary states that “very small enterprises […] generally operate in the trade and commerce sectors, which have low economic potential, as they serve local markets and do not add significant value to final products”. This is in contrast to the description of SMEs which “operate in high economic impact sectors such as manufacturing and construction”.

Capital intensive SMEs ‘more value added’ than microenterprises

On its face is the idea that businesses that are more capital intensive and generate more value added will benefit an economy, particularly if the markets in which they compete are made more inclusive by allowing SMEs to access markets where large firms have dominated. It also reflects an attitude that by encouraging a country to move up the value chain and focus on export-led growth SMEs can more successfully develop, to the benefit of its population. These are certainly examples where the oil importing countries in particular can benefit from greater development of their export sectors but the bias towards these sectors seems disproportionate to their importance in employment creation. Other countries with large oil exporting capacity will face challenges developing export-facing businesses because their oil exports, as in the cases of Iraq and Saudi Arabia, can make their other exporters uncompetitive.

Continue reading the analysis on the IFG Briefing to know more about Conventional v Islamic financing considerations, the Report recommendations and the Non-financing opportunities.