Islamic finance and food sector need convergence

The two Sharia-compliant industries could work together for their mutual benefit
Dubai’s recently unveiled strategy to be the capital of the Islamic Economy brings with it a range of exciting opportunities as well as some interesting challenges.

Islamic finance and food sector need convergence

Islamic finance and food sector need convergence

Food and finance are the two most emergent opportunities. Islamic finance has excess liquidity and limited Sharia-compliant investment opportunities; the expanding Halal food sector is under-supplied and in need of capital. So what is stopping these two from working together for their mutual benefit?
Over the past decades, the Islamic finance and Halal food industries have developed in separate, isolated silos. Despite having common roots in the Quran, (and specifically even in the same chapter, Surat al Baqarah) there has been very little interaction between these two Sharia-compliant industries.
On the one hand, there are continued reports of excess liquidity in the Islamic finance sector, albeit mostly related to institutional funds that are looking for fixed-income investments opportunities. According to data from Thomson Reuters, Islamic finance assets reached $1.32 trillion (Dh4. 8 trillion) at the end of 2012; average growth over the past four years has been at 19 per cent and sukuk market is growing at 10 per cent.
Overall, growth is 50 per cent faster than conventional banking in many of the core markets and, yet, somehow there is the feeling that something is missing; engagement with the real economy has not been achieved.

Islamic finance and food sector need convergence

Islamic finance and food sector need convergence

The food sector, on the other hand, struggles to keep up with demand from increasingly aware Muslim consumers who are becoming more vocal in terms of what products they want, as well as what they do or don’t consider to be Halal.
Level of traction
One glaring difference between the two is in terms of engagement. Over 70 per cent of the Muslim world is still “un-banked” in any shape or form, let alone with an Islamic bank. Islamic finance does not have much traction with the average man in the street, and most would not be that familiar with the technical terms.
In the food sector, it is a totally different story. Not only is the average Muslim fully engaged with the Halal food market, they also have strong opinions about what constitutes Halal compliance. Indeed, the expansion of the food sector is driven from both the consumer and producer ends, as consumers become more aware and vocal, and producers look for new opportunities in increasing saturated markets.
Another point of divergence is that in the Islamic finance industry, Sharia scholars tolerate minor amounts of interest or impermissible income, and the investment can still be considered compliant. In the food sector, any minor trace of haram ingredient would be rejected out of hand by the overwhelming majority of Muslim consumers. While there is zero tolerance among informed consumers, there is, paradoxically, a considerable degree of tolerance of the prohibited among educated Islamic finance scholars.
The Islamic Finance industry is largely controlled by Muslims, by scholars and senior executives. Yet, the common complaint within the industry is that a high percentage (one bank CEO stated as much as 85 per cent) of Sharia-compliant funds get re-invested in the mainstream interest-based markets to earn the profit that is later returned to the investor as being “Sharia-compliant”.
In direct contrast, the Halal food industry is largely in the hands of non-Muslim controlled companies, and yet the majority of them are very aware and respectful of the need to be compliant, and will convert their production lines to being 100 per cent Halal in order to secure the trust of the consumers.
As these two sectors expand, we can expect to see more avenues of convergence over the course of time. Following the example of Saudi dairy giant Almarai, major corporations in the food, personal care and pharmaceutical sectors could issue sukuk for expansion, and at the same time increase their credibility in the Halal marketplace.

Job creation
Given the real employment shortage within the Arab world — it is estimated that 60 million jobs will be needed by 2020 — one would hope the increasing focus on the Islamic Economy will be a catalyst to create more overlap between the twin pillars of food and finance. However, until there is greater awareness by governments, more transparent regulatory frameworks in the food sector, and more adventurous capital in the finance sector, one suspects that the silos may remain in place for some time yet.
From the perspective of the Islamic economy, these two sectors clearly belong together, but it will take time and some imaginative, bold moves to bring them closer together.
One gets the feeling that when and where that happens, there will be a real engine of growth kicking into gear.
CREDIT: The writer is an advisor to Thomson Reuters on matters relating to the Islamic economy.

Almarai Acquires Argentina’s Fondomonte for $83 Million

Dec. 21 (Bloomberg) — Almarai Co., Saudi Arabia’s largest food producer by market value, acquired Fondomonte SA, a company that owns and operates three farms in Argentina, for 312 million riyals ($83 million).

The Riyadh-based company financed the transaction from its cashflow and Islamic banking facilities, Almarai said in a statement to the Saudi bourse today. Almarai is expanding its supply chain and access to feed for its dairy herd and poultry business, “in line with the Saudi government’s trend to secure supplies and preserve local resources,” the company said.

Saudi Arabia, the Arab world’s largest economy, is encouraging food companies to invest in Africa and Asia to reduce local grain production and conserve water. The government is seeking to end the cultivation of water-intensive crops, including wheat, in the country by 2016.

A group of Saudi Arabian investors said in October 2009 they planned to establish the International Agriculture and Food Investment Co., a 2 billion-riyal company to invest in agricultural projects. Savola Al-Azizia United Co. said in October it agreed to buy 78 percent of two Egyptian food companies for 556.5 million Egyptian pounds ($93 million).

Almarai is expanding outside the Arabian Peninsula’s most populous country to meet rising demand for dairy and poultry products. The company plans to raise 1.5 billion riyals next year from the sale of Islamic bonds to fund growth, Chief Financial officer Paul-Louis Gay said on Nov. 30.

“We estimate that feedstock comprises some 30 percent of Almarai’s direct input costs, so any savings will translate into attractive gains in margins,” said Asim Bukhtiar, an equity analyst at Riyad Capital. “The key risk with the transaction is further correction in agriculture commodities, which could erode benefits.”

Almarai’s shares rose 1.3 percent to 98 riyals at 11:06 a.m. in Riyadh, giving the company a market value of 22.5 billion riyals. The stock has lost 12.8 percent this year, compared with a 4.5 percent loss for the benchmark Tadawul All Share Index.

Saudis invest $6bn to train professional elite

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Saudi Arabia has spent $6bn this year on foreign study scholarships for almost 250,000 students and family members, its finance minister said, part of a huge public spending programme being rolled out amid turmoil in the wider Middle East.

Ibrahim al-Assaf, finance minister, said the education investments, while expensive, could help transform Saudi society by giving a needed boost to its cadres of trained engineers, lawyers, doctors and information technology specialists.

The largesse comes as the oil-rich kingdom grapples to implement an estimated $130bn spending package announced after – but not, officials say, in response to – the uprisings in the Arab world.

Saudi Arabia has not experienced mass revolts but it has faced protests in its eastern region, a youth unemployment problem and attacks by activists on what they say is the slow pace of political reform.”

Mr Assaf said in an interview that he did not “think the comparison is even there” with Arab countries where people have risen up against their leaders, partly because of economic grievances.

“The wealth [in Saudi Arabia] has been spread over the population … when it comes to housing, when it comes to welfare, when it comes to free education, free health, scholarships outside for all citizens,” the minister said.

Mr Assaf said the number of students on an overseas study scholarship named after King Abdullah, the Saudi monarch, had grown from a few thousand some years ago to about 120,000 this year, accompanied by about the same number of dependants. The minister said the spending – averaging about $25,000 per person this year – covered not just tuition fees but also other items such as living allowances, medical insurance and flights to and from home.

The scholarship programme was aimed at correcting a past failure to focus “on the right skills and the right education”, Mr Assaf added.

Some observers say the scholarship programme could have a big impact on the country’s political direction when the students come home.

The programme runs alongside large new investments in infrastructure and social benefits announced early this year whose long-term cost is unclear. A programme to build 500,000 houses is expected to begin next year.

One foreign businessman eager to be involved in the new projects said: “There is a feeding frenzy of companies and princes working out how the money will flow.”

Unemployment benefit payments of 2,000 riyals a month are due to be implemented after the start of the Islamic new year this week, while public sector workers have received a bonus equal to two months’ salary.

Economists say the kingdom also faces other significant drains on its finances, such as its notoriously heavy domestic energy consumption. Subsidies keep petrol so cheap that residents can fill the tank of a small car for as little as $10.

The largesse has led some analysts to forecast that even a country as oil-rich as Saudi Arabia, the world’s largest exporter of crude, would need international prices to stay near current highs of about $100 a barrel to sustain the spending boom.

The break-even oil price the kingdom requires to balance its budget will jump from $68 a barrel last year to $88 this year and $110 in 2015, according to estimates in March by the Institute of International Finance, a leading industry group.

Mr Assaf said estimates of a future budget break-even price of $80 a barrel or more were “not accurate”, adding that this year’s spending was “abnormal” because of the investment announcements. Analysts say Saudi Arabia also enjoys a huge cushion from it massive foreign exchange reserves.

Paul Gamble, head of research at Jadwa Investment, a Saudi bank, said: “They are going to last a decade comfortably – over which time they can change policies.”