Saturday, September 22, 2012

Would closer cooperation make the halal sector and Islamic finance worth more than the sum of the parts?

Dr. Humayon Dar said at a recent conference that a combined Islamic finance and halal industry could be greater than the sum of their parts, worth $3.5 trillion versus their current $2.35 trillion (I am assuming the article mistook billion for trillion).  While it is unclear exactly how he arrived at the $3.5 trillion figure, I think the general idea does have some merit. 

The two industries have developed largely separately and it is more common to hear people lament the lack of connection between the two industries than it is to hear about deals by Islamic financial institutions to provide financing for companies that serve the halal market.  This is an unusual gap, because it seems to me that, when considering whether to use Shari'ah-compliant versus conventional finance, the halal industry would naturally have a preference for Islamic finance.

The mechanism, therefore, for why the industries would be worth more working together than they are alone is that Islamic financial institutions would provide financing to companies serving the halal market, replacing conventional debt financing with a Shari'ah-compliant alternative, which would lead to growth in the assets of the Islamic financial institutions. 

I am not sure whether this would lead to greater growth for the halal companies, but it might since there are likely to be a portion who have growth with only equity financing, to avoid paying interest.  Why then, if they are not using conventional debt, would they turn to Islamic finance only if the industries combined?  There is not a clear answer except that Islamic finance has until now not placed a focus on seeking out companies serving the halal market, and have looked elsewhere to expand their financing.

The two industries should have a natural connection, and hopefully (if it is not already occurring) there can be growth of the two industries through greater interaction.  

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