Halal Market Economy
Halal + Islamic Finance = Halal Economy?
By Kamarul Aznam, The Halal Journal
Aug 11, 2006, 18:24

Halal businesses and Islamic finance have integral roles to play in the development of a strong Halal economy. This new idea ensures Halal-related businesses are ‘100 per cent Halal’. Islamic source of funds also promote the growth of a global potential that is, in reality, in dire need of Muslim entrepreneurs.

“To ensure that the whole production process is Halal, the source of the financing should also be from a Halal source, i.e. using Islamic banking services,” said Daud Vicary Abdullah, managing director of Hong Leong Islamic Bank.

It is after all, what Islamic finance is all about – promoting justice and equity in transactions while abandoning usury. Islamic banking’s concept of sharing risks and returns could protect a fledgling Halal business, while it simultaneously nurtures the growth of the Halal industry.

Badlisyah Abdul Ghani, head of CIMB Islamic Group said, “Halal businesses cover a wide span of economic activities, from farming to manufacturing and processing of food, from selling food in stalls by the roadside to the import and export of commodities between nations, from car manufacturing to infrastructure building.”

“These activities rely substantially on the financial market to facilitate their transactions, and Islamic banking and finance industry is the only natural ally to all types of Halal activities,” he added.

Considering that the market size of total loans in Malaysia is worth well over RM560 billion as of February 2006, Islamic financing is indeed capable of capturing a significant percentage of that market. As it is however, Islamic financing represents only 12.1 per cent of total loans in the Malaysian banking system. The Malaysian central bank, Bank Negara has targeted that figure to increase to 20 per cent by 2010.

When one considers that the Muslim population in Malaysia is about 15 million, and 20 per cent of that would be the acceptable percentile for young and able Muslim banking consumers, a question arises: how long more until saturation point is reached?

University of Marburg president Prof Dr Volker Nienhaus provides the answer. “This ambitious target requires the conversion of customers from conventional banking to Islamic banking. It must be able to react on technical, conceptual and human resource needs of the Islamic finance and have the potential to anticipate forthcoming issues.”

Readily, the issues are aplenty. Halal funding in reality is actually small in potentially lucrative Halal-related sectors. Although no exact figures are available, guesstimates indicate that only 30 per cent of the RM71.5 billion total Islamic loans in Malaysia are actually being used by businesses in potential Halal sectors.

In Malaysia, the manufacturing sector uses the most of Islamic loans; with February 2006 figures amounted to RM7.7 billion or 10.7 per cent of the total Islamic financing. Wholesale, retail, hotels and restaurants formed RM3.6 billion (5 per cent) while agriculture, forestry and fishing constituted RM2.4 billion (3.2 per cent).

Minus the non Halal-related businesses and these percentages should significantly be much lower. Compare the end figure with the potentials that exist within a full blown global Halal economy and it suddenly becomes clear that Malaysia must work very hard to raise its share within the global Halal industry.

Once sorted however, the potential within it is truly immense. The world Muslim population in 2006 is estimated to be 1.6 billion. If every Muslim spends just USD1 a day on Halal food, the total would come up to USD584 billion a year.

Malaysia currently controls less then one per cent of this figure, 80 per cent of which is currently owned by non Muslims. In fact, one of the main reasons for the slow take-up rate of Islamic funds for Halal initiatives is the fact that the Muslims themselves, who should be making up the core of Islamic finance customers, are unaware of the potentials, hence staying away from any Halal venture.

This lucrative void is then replaced by the non Muslims, who make up the majority of Halal food manufacturers in Malaysia. While some note that the non Muslims are not seen as proactive enough to ensure full Halal compliance from every angle of production, including their source of funds, others are more receptive.

“At present, is it estimated that 80 per cent of the domestic market share of Halal foods and products is dominated by non Muslims manufacturers,” noted Muhammad Hisyam Mohamad, a fellow at the Malaysian Islamic Understanding Institute’s (IKIM) Centre for Economics and Social Studies.

“It is a paradox that such Muslim concerns are being capitalised on by non Muslim businessmen. By right, Muslim manufacturers should lead the industry to grab any available opportunities and make the most profit from Halal goods.”

Sarah Joseph, editor of emel, a UK Muslim lifestyle magazine said, “Personally, I welcome all products which benefit the Muslim community and facilitate their needs. There are those who worry about the authenticity of Halal products produced by non-Muslims, and there is a concern that if large companies use their buying powers this will adversely affect small Muslim businesses. We need to work through these issues and not ignore them, but I feel that these are not insurmountable obstacles.”

If one needs convincing on the benefits of funding Halal with Halal, consider Malaysian-based Alami Group as a prime example. Starting from manufacturing rubber products and exporting electronic instruments in 1987, the group has since successfully diversified into other areas, including commodities, downstream vegetable oils, telecommunications, travel, instrumentation, building of marine vessels, even water resource management, using solely Islamic financing.

Alami Group’s managing director Radwan Alami explains his reasoning behind this: “I think that regardless of whether in business or in life, Muslims should always seek the right path. We have been prohibited to seek what is damaging, so I believe in that.”

“I also realised that Halal financing limits the possibility to expand beyond our means. We are limited by our own capacity, expanding only with what we have and what the bank is comfortable in providing. When you are framed by this limitation, you can say that using Halal financing actually removes carelessness and greed by not rushing for the big bucks,” he added.

With the Malaysian government currently pushing for both Islamic banking and the Halal industry, further collaborations and ‘cross pollination’ between these two sectors are likely to become increasingly widespread.

“Yes, of course there will be more collaboration between the two as more SMEs that are going into the Halal industry will look for Islamic banking for their funding needs. There is a natural partnership. Both have their standards which can be deemed as a trademark,” said Mr K. Salman Younis, executive director of Kuwait Finance House (Malaysia) Berhad.

“There is a widening in understanding of the term ‘Halal’ as Islamic awareness increases. Finance products are now beginning to be grouped into the Halal market: ‘Halal financial investments,’ ‘Halal loans’ etc. And I believe that this trend will grow,” said Sarah Joseph.

As Islamic banks begin to understand the Halal industry better, increased collaboration will increase the availability of Halal funds within the local Islamic banking system, which in turn, will increase the number of Halal-related businesses, which will then compete to produce better and cheaper Halal products.

“We will see a big increase in the Halal business, due to the availability of funds for financing from Islamic banks. And due to the huge potential and demand for Halal-related businesses, more people will take the opportunity to venture into this (Halal) business,” Salman added.

Finally, if the relationship between the two sectors blooms stronger as what is starting to happen in Malaysia, Islamic banks with international presence such as Kuwait Finance House and CIMB Islamic will want to implement a similar model within their global boundaries.

“KFH is here to complement the products and services provided by the local Islamic banks. Should the Malaysian branch learn something new, yes, we will of course implement it in other branch openings,” added Salman Younis.

Developments in the Halal industry are also expected to spur development in other Halal market neighbours. “There is also a developing trend to look at the ethical background of products to see whether they are in the spirit of Islam not just within the law, for example organic products, ethical investments, environmentally friendly products, etc,” added Sarah Joseph.

The end result would be a win-win scenario for all parties involved - the Halal marketplace, the Islamic banking sector and the Halal consumers, even Halal market neighbours; simply by funding Halal with Halal.


© Copyright 2006 by halaljournal.com