United halal-Islamic finance sector to build USD4trn empire

Rushdi Siddiqui's passion for Islamic finance radiates through his columns, his conference speeches and his relentless pursuit to take the industry to its next level.

Having worked for two of the world's most well-known financial media giants Thomson Reuters and Dow Jones as their chief Islamic finance go-to guy, Siddiqui has earned the stripes and experience to forge his own path.

As early as 1998, he introduced the concept of Islamic indices at Dow Jones, and has since pushed the idea of Islamic investing at the governmental level and with many stock exchanges across the Muslim world.

As global head of Islamic Finance and Organization of Islamic Countries at Thomson Reuters , he led the team that established the world's first Islamic equity index, first sukuk index, first Islamic sustainability index, first halal food index, and first Islamic interbank benchmark rate (IIBR).

He also participated in the world's first Islamic Exchange Traded Fund (ETF) in Turkey and France, Malaysia and the US, led the index provider to be the first to have licensed Islamic assets under management of USD 7 billion, and led the team to establish the world's first comprehensive pre-trade, multi-asset Islamic finance platform.

But there is much more work to be done, and Siddiqui has ventured out on his own to launch Azka Capital.

As co-founder and managing director of the private equity advisory firm, he is focused on halal industry initiatives with Islamic financing, which he believes are industries that have much in common, but hardly communicate with each other.

He remains an advisor to Thomson Reuters on Islamic finance, the halal industry and OIC countries.

In an interview with alifarabia.com, Siddiqui outlines his hopes and frustrations for the industry he has helped to nurture.

What was your primary motive to start your own PE advisory firm, Azka Capital, and what are your key areas of focus?

In travelling to over 35 Muslim and non-Muslim countries over the span of last 15 years, one sees many challenges on financial inclusion, youth unemployment, access to capital, and so on, i.e., the Arab Spring moment in waiting. The challenges are really disguised opportunities in waiting, so it's really about being able to see it, grab it, and run with it.

I wanted to do something global and impactful with like-minded people for Muslims, but it had to be something 'compliant.' Once in the Islamic finance space for a period a time, like 15 years, the default thinking is 'compliance,' hence, employment in the conventional space was neither an option nor welcomed in that space.

I've worked for great companies like Dow Jones and Thomson Reuters and have learned so much, so it was time to put it all together and possibly start the process of building the next 'Dow or Thomson' with the right people - as chemistry is key to success.

I've always been interested in private equity, but there are not many pure-play compliant PE firms with the dedicated focus for the triple bottom line: returns to investors, society and man on the street. Furthermore, the area of focus had to be about building and growing something linked to the real economy and less financial engineering play.

What's interesting about the Islamic private equity space is the financial ratios we started in with Dow Jones Islamic Market Index (DJIM) in 1999 are used here, hence, come full circle!

In 2011, working with Idealratings, I led a team to launch the world's first Halal Food index, Socially Acceptable Market Investments (SAMI), with the former prime minister of Malaysia, Tun Abduallah Badawi, a people's prime minister! We expanded the conversation about halal, a USD 2.3 trillion industry, into an asset class from just about ingredients, certification, etc.

Halal is not just about meats/foods, but also about pharmaceuticals, cosmetics, logistics, etc., all linked to the real economy, yet very unstructured and fragmented. Combine it with food security, [it becomes] a national security issue in, say, GCC, this is what I will (Insha'allah) return to with my colleagues.

Who is your target market?

It comes down to creating risk-adjusted portfolio value for, say, GCC investors who have traditionally invested in real estate, oil/gas, and healthcare. The halal sector is: (1) easy to explain (one has to eat); (2) it's a consumer non-cyclical, hence, its bandwidth of volatility is less than real estate; (3) it's about intra-OIC and inward OIC investing (mandate of the Islamic Development Bank); (4) it's about making consumer investors of halal products into stock investors (eventually), and (5) it's about creating a Muslim 'Fortune 50' company inorganically.

Thus, strategic investors include family offices, high-net-worth individuals, sovereign wealth funds, food companies, Western investors looking for the next BRICS story in the emerging markets, etc.

How different is it to venture out on your own, compared to working with one of the most recognized media companies in the world?

There are many lessons learned from Dow Jones and Thomson Reuters , and probably the most important ones are about leadership/vision, motivating, budgeting, brand building/protecting, business development, etc.

Obviously, managing costs is paramount to survival, I have seen first-hand [over the years] 'Islamic start-ups' that have burned their investor money on large salaries, first- class travel, five-star hotel, client entertainment, etc. You must manage investor money as if it's your own, and have to think three times before spending.

Do you think the industry is living up to its potential? What more would you like to see for the industry to flourish?

The simple answer is 'no, not yet.' The industry captains have been dropping the 1.8 billion Muslims, but how many are bankable? How many has Islamic finance touched? Today, it seems Islamic finance is only about the bankable. But, the Islamic bank has a fiduciary duty to maximize shareholder value, and does zakat and purification address their CSR [corporate social responsibility] obligations beyond the deposit taking community?

Furthermore, the industry is relying too much on the debt capital market and structured products (less now) for providing solutions and addressing growth. For example, look at the business model or Islamic leverage used by ArCapita, Gulf Finance House, Gulf Investment House, Investment Dar, etc., where are these companies now?

Where is (Islamic) venture capital? Micro-finance? SME financing? These areas (small companies) employ the largest amount of people, contribute the largest percentage of GDP, and are the foundation of knowledge-based economies yet access to risk capital is minimal. For example, I'm involved in an Islamic crowd funding initiative in Egypt called www.shekra.com, and it's a good beginning. Where is the Islamic development bank on crowd funding?

Sukuk and syndicated Murabaha loans are not entrepreneurial capital, the pre-requisite for knowledge-based economy, hence, the equity part of the Islamic capital market is the developmental need of the hour. For example, how has sukuk directly benefitted the man on the street, I have yet to see/hear conversation [about] agricultural sukuk for farmers in, say, the post-Arab Spring North African countries.

The first order of business for the IDB and countries that are true Islamic finance hubs, like Malaysia, is to establish an industry body for the Islamic equity capital market as there is minimal coverage from AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and IFSB (Islamic Finance Services Board).

This would actually establish the foundation for Shariah-based investing, hence, a blue print for the compliant financing side.

You have discussed halal as a key area of focus in many of your columns and work, do you think that is a way for the Islamic finance industry to enter the mainstream, as in business to consumer segment?

Yes, period. Prohibition against interest and encouragement of lawful or 'halal' food are mentioned in the same chapter of the Holy Koran, yet, these two' inter-related industries,' amounting to about USD 4 trillion, do not speak to each other.

Halal is about the real economy, much like real estate, hence, it is the heart of Islamic banking: collateral based financing as there are hard assets (factories, warehouses, etc), consumable products (repeat business), and customers (demographics or Muslims). Furthermore, Muslims do not control the halal food supply chain, hence, integrity risks are slowly cropping up in Europe, where pork DNA found in halal food.

Thus, Islamic finance can reduce concentration risk associated with real estate by expanding into a less volatile real economy linked sector: halal.

Do you think Islamic finance has managed to capitalize on the conventional financial sector's weaknesses in the aftermath of the global financial crisis?

At one level, the answer is no, as Islamic finance institutions are not cropping up in Europe or US since 2008. However, no new initiatives will be launched during damage control period.

The question that comes to mind is: What is the message the industry needs to convey to Western jurisdictions about Islamic finance?

1. It's beyond prohibition against interest and pork;

2. Its focus should not be about USD 1.3 trillion or USD 1.6 trillion or 15-20% growth per annum or sukuk issuance reached more the USD 100 billion in 2012;

3. It's not about religion (though accountability to a higher authority), but business and financing based upon transparent rules;

4. It's about collateral-based financing within manageable levels of debt;

5. It's about investment returns linked to asset-backed financing with resorting to derivatives to [generate] returns

6. It's about another level of (Shariah) compliance, where the product offering is as advertised/promoted, i.e. no hidden surprises.

The credit crisis, l and ll, flushed an important point: investors had more risk than they thought as the credit rating agencies and regulators were not seeing or refused to see the telltale signs of a bubble about to burst, producing global systemic risk to the financial system.

Dubai has unveiled plans to become a Islamic hub? Bahrain and Malaysia tried to do the same, but both have had mixed results. Do you think Dubai can succeed and what does it need to do to ensure success?

Sheikh Mohammad's announcement about positioning Dubai as an Islamic economy, led by Islamic finance and halal, is now taken very seriously because his grand vision and sheer will (plus some leverage) made Dubai a global brand in a short period of time.

For Dubai to become an Islamic hub for, say, sukuk, it needs to establish an enabling infrastructure with the appropriate stakeholders to offer a 'Euro-bond' platform of the 1960s/70s. So, it's not just about benchmark-size sukuk, contract modalities, league tables, etc., but a platform for issuers to bring compliant paper into market efficiently and expeditiously to take advantage of credit pricing.

For the halal industry, Dubai should not attempt to focus on research, academic papers, ingredients, stunning debate, and even certification as these issues are being raised in Malaysia, Brunei, and elsewhere. There is minimal value added in repeating and recycling on Dubai brand, instead focus should be on: Halal as an asset class to address food (cum national) security. The food, agriculture and land bank funds that have been launched have yet to meet expectations for a number of reasons, from political sensitivities to not understanding food supply chain and entry wedge with appropriate investment vehicle.

[Also,] building a global 'go-to' information platform on USD 2.3 trillion halal industry, much like what we did at Thomson Reuters with the Islamic Finance Gateway (IFG). Today, as the world is hyper-connected and quality information starved, access to credible and continuously updated information is key to surviving (including against fraud in halal sector) and eventually thriving. This actually builds the foundation for a transaction portal, B2B2C2G, for halal, much like Alibaba.com.

Today, Dubai does not house an industry body for Islamic finance, as AAOIFI, IIFM, IIRA and CIBAFI are in Bahrain and IFSB is in Malaysia. The time is ripe and right for Dubai to house the world's first industry body for the USD 2.3 trillion halal industry and modeled after Islamic finance bodies but with the Dubai flair! This is something we, at Azka, have started to map out.

I believe enough time has been spent on thinking about Islamic economy (in the ivory tower by academics), it's now time to bring it to the ground level and execute by stakeholders of practitioners.

There is still skepticism about IF even in Islamic countries. What can the industry do to change it?

Islamic finance must address the 'what's the difference (to conventional finance)' question. For example, many Muslims do not understand why there has to be sale/purchase of, say, copper to buy a house/car in a compliant-manner. Thus, if they don't understand it, they will not participate.

Second, Islamic finance needs to have the courage to deploy the mountain of liquidity we hear about towards risk capital in selected Muslim countries. Thus, as a trial balloon it will 'win over' the hearts and minds and lead conventional finance.

Finally, Islamic finance must fit in, but, more importantly, stand out as a value-added proposition to challenges of Muslims and those with aligned values. It's not just about compliant-financing for financing sake, but development finance, holistic consumer approach, CSR (beyond zakat), etc.

Which area (sub-sector or country) of Islamic finance do you think is most promising?

A. The most promising area is the most undeveloped area: Islamic equity capital market (iECM). Today, Islamic finance is heavily debt bias, led by the sukuk poster child, and as one can be conventionally over-leveraged, one can be Islamically over-leveraged. There is no 'divine put,' hence, defaults and bankruptcies exist in Islamic finance.

The development of the iECM will bring balance to today's Shariah-complaint (debt bias) Islamic finance. It will move the industry towards Shariah-based finance, and financial inclusion of the under-banked and non-bankable. It's the equity capital markets that develop countries and diversify economies, and raise the standard of living.

For example, look at the assets under management (AUM) to bank deposit ratio or stock market capitalization to GDP ratio, and one will see G20 non-Muslim countries having higher ratios (for both) than Muslim countries. Thus, Islamic finance, at one level, captures the depositor money play, but it does not get circulated beyond real estate.

(Zawya / 09 July 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com