Halal Industry at the Crossroads
26/04/07 13:01
At The Cross-Roads
The Prophet, may Allah bless him and grant him peace, has reminded us that the fortunate one is the one who is able to learn from the experience of others. It is generally recognised that the Halal industry is poised on the brink of dramatic expansion, and as is always the case in times of accelerated growth, the likelihood of going off course also increases correspondingly. As the Halal industry develops, we would be well-served by looking at some of the experiences of our Shariah-compliant sibling, the Islamic Finance sector, to see what we can learn.
As an industry, Islamic finance is the older brother of the Halal industry. It began as a way to service the needs of the Muslims to engage in financial transactions, be it private, corporate or governmental, without getting involved in usury. This was, and indeed remains, the cornerstone of the entire industry.
It began as an idea espoused by a dedicated few, and slowly grew in popularity over 25 years to become the trillion dollar industry that it is today. It is an industry that every bank wants to be part of. However, when London and Singapore, both noted more for their expertise is interest-based activity rather than Islamic jurisprudence, express their intention to become centres of Islamic Finance, one has to question where the industry has arrived.
Because the industry from the beginning focussed so intently on banking per se, (as opposed to trading and business transactions) the entire industry was inevitably exposed to the dangers inherent in usury-based banking and the simple desire to make money out of money. What has resulted is an industry that is in reality little more than an annexe of conventional banking that is somehow, technically at least, slightly cleaner. But not much different.
One of the prime culprits for this sad reality is the technique known as ‘Commodity Murabaha’. I am not a banker, so let me simply pass on to you the way it was explained to me by a recognised expert and CEO of a leading Islamic bank.
You have a million dollars to invest, and you want to avoid usury. So you give your money to an Islamic bank, who encourage you to use a Commodity Murabaha that will ensure you, for example, a 5% return. The bank take your one million, and buy one million dollars worth of metal on one of the metal exchanges. They then sell the metal back through the a metal exchange for one million, give or take a bit. They now owe you one million, plus your 5%, but the money now technically belongs to the bank, via the sale of their metal. They are free to use that money in any manner they choose, and what they generally choose is make a guaranteed return (of more than 5%) from the usury-based financial markets. Your initial investment is returned to you, with interest…sorry, make that profit…and everyone is happy. The bank is happy because they have made easy money with no effort; you are happy because you think you have made an Islamic investment.
This is actually an exercise in what we might call ‘reverse money laundering’. It takes clean money and makes it dirty. And what began as a neat sleight-of-hand now accounts for approximately 80% of the trillion dollars washing around in the Islamic financial sector; eight hundred billion dollars that is thrown over the wall into the conventional banking sector, and never makes its way back again. It was described to me like a one-way filter; the money goes out and cannot flow back again.
How, you may ask, has this been allowed to happen in an industry regulated by Shariah scholars? The answer that I was given to this very question is that a small handful of handsomely-rewarded scholars, who sit on the Advisory Panels of all the major banks, have judged that commodity murabaha is acceptable. End of story.
At the point of massive expansion of the market, a line was drawn in the wrong place. The profit motive conquered integrity. The result is that millions of Islamic banking customers are – unknowingly - earning interest on their investment. It also means that there is a wasted 800 billion dollars that is supporting usury-banking rather than doing something useful, not to mention ethically sound or Shariah compliant. It is understandable, but hardly excusable.
Enough of that. What can we learn from this?
As the Halal industry grows, we can recognise that the key to sustained growth lies in issues relating to Halal standards, auditing and certification; Halal integrity in short. This is the foundation upon which this entire industry sits. Without Halal integrity, there is no Halal market, no Halal industry.
Compared to the food industry in general, the procedures of Halal certification are still in the dark ages before the industrial revolution. It is the bottleneck that is holding up the growth of the industry. It is the weak link in the value-chain, and it needs to be the strongest.
This is not blame, it is not criticism; it is market analysis. This is not an emotional issue, it is a procedural one. We, the members of this industry, need to make sure that as we ride the coming wave of expansion, investment and potential profits, we do not lose sight of the foundations on which this industry rests. We must strengthen our Halal Integrity.
Our standards and best-practices, our auditing processes and certification procedures must be strengthened. For the market to expand, there will, by definition, have to be vastly more Halal certified products, premises and facilities; the certification procedures will have to catch up with the production process in terms of speed, expertise and efficiency.
This is the biggest challenge facing the Halal industry today. It is a common challenge that is shared, regardless of country, race or even religion. However, the responsibility to get this right rests with the Muslims, despite our minority stake in this industry. We still have the majority stake in terms of responsibility.
We must ensure that the certification process takes a correct ‘middle way’; not too strict or no one will be able to be compliant, and not too lax or our food will not actually be Halal. We have to gear our certification standards to the realities of the market, the realities of consumer demand and the realities of the industry. The development of the Halal market must bring real benefits, create real wealth (not just money), be a tool to assist developing countries in the Muslim world. How the issue of Halal integrity evolves, as we stand at the door of expansion, is critical.
If you are one degree off-target when you launch the rocket, you may end up missing by a few miles. It could as many as eight hundred billion.
In this respect, we share common ground with the Islamic banking sector. However, if we reflect on this, we can see that our responsibility is actually even greater. For one thing, we have their experience right in front of us, as an example, and we must learn from it. Besides, not everyone has a bank account, but everyone eats.
Furthermore, from the perspective of Shariah compliance, the term ‘Islamic’ (as in ‘Islamic’ banking) is not a legal term under the Shariah. It is just an adjective, a description; it is not in itself a definition. Halal and Haram, however, are the key legal terms on which the foundations of the Islamic Shariah rest. So if we are going to call it Halal, we have got to get it right.
So, while we all gear up to develop capacity for production, manufacturing, exports, logistics, ICT and branding, we must ensure that the foundations of our industry are sound.
We have all arrived at a cross-roads; here we are gathered, meeting, greeting, talking and planning. We can see success in front of us. The direction we take from this point on – and who is leading the way – will determine what kind of success we actually achieve.
“Guide us on the Straight Path, the Path of those whom You have blessed, not of those with anger on them, nor of the misguided.” (Qur’an, Al Fatiha, 5-7)
Reproduced courtesy of The Halal Journal
The Prophet, may Allah bless him and grant him peace, has reminded us that the fortunate one is the one who is able to learn from the experience of others. It is generally recognised that the Halal industry is poised on the brink of dramatic expansion, and as is always the case in times of accelerated growth, the likelihood of going off course also increases correspondingly. As the Halal industry develops, we would be well-served by looking at some of the experiences of our Shariah-compliant sibling, the Islamic Finance sector, to see what we can learn.
As an industry, Islamic finance is the older brother of the Halal industry. It began as a way to service the needs of the Muslims to engage in financial transactions, be it private, corporate or governmental, without getting involved in usury. This was, and indeed remains, the cornerstone of the entire industry.
It began as an idea espoused by a dedicated few, and slowly grew in popularity over 25 years to become the trillion dollar industry that it is today. It is an industry that every bank wants to be part of. However, when London and Singapore, both noted more for their expertise is interest-based activity rather than Islamic jurisprudence, express their intention to become centres of Islamic Finance, one has to question where the industry has arrived.
Because the industry from the beginning focussed so intently on banking per se, (as opposed to trading and business transactions) the entire industry was inevitably exposed to the dangers inherent in usury-based banking and the simple desire to make money out of money. What has resulted is an industry that is in reality little more than an annexe of conventional banking that is somehow, technically at least, slightly cleaner. But not much different.
One of the prime culprits for this sad reality is the technique known as ‘Commodity Murabaha’. I am not a banker, so let me simply pass on to you the way it was explained to me by a recognised expert and CEO of a leading Islamic bank.
You have a million dollars to invest, and you want to avoid usury. So you give your money to an Islamic bank, who encourage you to use a Commodity Murabaha that will ensure you, for example, a 5% return. The bank take your one million, and buy one million dollars worth of metal on one of the metal exchanges. They then sell the metal back through the a metal exchange for one million, give or take a bit. They now owe you one million, plus your 5%, but the money now technically belongs to the bank, via the sale of their metal. They are free to use that money in any manner they choose, and what they generally choose is make a guaranteed return (of more than 5%) from the usury-based financial markets. Your initial investment is returned to you, with interest…sorry, make that profit…and everyone is happy. The bank is happy because they have made easy money with no effort; you are happy because you think you have made an Islamic investment.
This is actually an exercise in what we might call ‘reverse money laundering’. It takes clean money and makes it dirty. And what began as a neat sleight-of-hand now accounts for approximately 80% of the trillion dollars washing around in the Islamic financial sector; eight hundred billion dollars that is thrown over the wall into the conventional banking sector, and never makes its way back again. It was described to me like a one-way filter; the money goes out and cannot flow back again.
How, you may ask, has this been allowed to happen in an industry regulated by Shariah scholars? The answer that I was given to this very question is that a small handful of handsomely-rewarded scholars, who sit on the Advisory Panels of all the major banks, have judged that commodity murabaha is acceptable. End of story.
At the point of massive expansion of the market, a line was drawn in the wrong place. The profit motive conquered integrity. The result is that millions of Islamic banking customers are – unknowingly - earning interest on their investment. It also means that there is a wasted 800 billion dollars that is supporting usury-banking rather than doing something useful, not to mention ethically sound or Shariah compliant. It is understandable, but hardly excusable.
Enough of that. What can we learn from this?
As the Halal industry grows, we can recognise that the key to sustained growth lies in issues relating to Halal standards, auditing and certification; Halal integrity in short. This is the foundation upon which this entire industry sits. Without Halal integrity, there is no Halal market, no Halal industry.
Compared to the food industry in general, the procedures of Halal certification are still in the dark ages before the industrial revolution. It is the bottleneck that is holding up the growth of the industry. It is the weak link in the value-chain, and it needs to be the strongest.
This is not blame, it is not criticism; it is market analysis. This is not an emotional issue, it is a procedural one. We, the members of this industry, need to make sure that as we ride the coming wave of expansion, investment and potential profits, we do not lose sight of the foundations on which this industry rests. We must strengthen our Halal Integrity.
Our standards and best-practices, our auditing processes and certification procedures must be strengthened. For the market to expand, there will, by definition, have to be vastly more Halal certified products, premises and facilities; the certification procedures will have to catch up with the production process in terms of speed, expertise and efficiency.
This is the biggest challenge facing the Halal industry today. It is a common challenge that is shared, regardless of country, race or even religion. However, the responsibility to get this right rests with the Muslims, despite our minority stake in this industry. We still have the majority stake in terms of responsibility.
We must ensure that the certification process takes a correct ‘middle way’; not too strict or no one will be able to be compliant, and not too lax or our food will not actually be Halal. We have to gear our certification standards to the realities of the market, the realities of consumer demand and the realities of the industry. The development of the Halal market must bring real benefits, create real wealth (not just money), be a tool to assist developing countries in the Muslim world. How the issue of Halal integrity evolves, as we stand at the door of expansion, is critical.
If you are one degree off-target when you launch the rocket, you may end up missing by a few miles. It could as many as eight hundred billion.
In this respect, we share common ground with the Islamic banking sector. However, if we reflect on this, we can see that our responsibility is actually even greater. For one thing, we have their experience right in front of us, as an example, and we must learn from it. Besides, not everyone has a bank account, but everyone eats.
Furthermore, from the perspective of Shariah compliance, the term ‘Islamic’ (as in ‘Islamic’ banking) is not a legal term under the Shariah. It is just an adjective, a description; it is not in itself a definition. Halal and Haram, however, are the key legal terms on which the foundations of the Islamic Shariah rest. So if we are going to call it Halal, we have got to get it right.
So, while we all gear up to develop capacity for production, manufacturing, exports, logistics, ICT and branding, we must ensure that the foundations of our industry are sound.
We have all arrived at a cross-roads; here we are gathered, meeting, greeting, talking and planning. We can see success in front of us. The direction we take from this point on – and who is leading the way – will determine what kind of success we actually achieve.
“Guide us on the Straight Path, the Path of those whom You have blessed, not of those with anger on them, nor of the misguided.” (Qur’an, Al Fatiha, 5-7)
Reproduced courtesy of The Halal Journal