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The challenges of financing Halal food businesses
(News: 12-20-2015 )

Financing in the Halal food business has a number of challenges.Firstly, unlike other corporate sectors, the core product is one that is very visibly Halal and differentiated from conventional counterparts (for example, a car
is both conventional and Halal), thus the impetus to maintain Shariah compliant finances is higher. As such, there are only a handful of large global Shariah compliant Halal food companies.

Although the Savola Group from Saudi Arabia and TPS from Indonesia have successfully raised Sukuk financing, they are two large caps that are the exceptions to the norm. Shariah compliant financing remains a challenging task. Assetbacked financing is encouraged making general purpose borrowings more difficult, particularly the intangible nature of working capital. Bankers, although long excited about the Halal food sector, remain focused on large corporates and Sukuk markets.

Small ticket SMEs drive smaller volumes and hence attract less attention from the industry. While the Shariah compliant debt capital markets have evolved substantially over the decade, trade and corporate finance for SMEs is still at the development stage. Where Halal SME financing is available, it is often expensive, with Islamic banks often charging a premium for Halal financial products and services, often putting additional financial pressures on young companies.

Saahtain Foods is the first and only company that manufactures Halal readytoeat meals in the GCC where its AlGourmet brand is for Muslim travellers and its Tayyib brand is developed especially for Halal humanitarian and disaster relief, trying to bring a private sector solution to the challenges of food aid – a social enterprise. Saahtain Foods has strived to be fully Shariah compliant and (for example) have used forward inventory purchases from investors as a form of working capital. It has also utilized Takaful products for insurance needs. As a young SME, not many options are open to Saahtain Foods for Islamic debt financing thereby constraining growth. As Saahtain Foods hopefully grows from being a local UAE food manufacturing company to a more global player in Europe and Asian markets, it will need more capital to expand with access to increased
levels of capital and, very likely, Islamic debt financing.

As a producer of Halal readytoeat meals for retail and food aid products, it is important for Saahtain Foods to try to remain Shariah compliant in all aspects of its business. It is important for both Shariah compliant lending firms and the food industry to come together and develop products based on genuine risksharing and a better understanding of the global Halal food trade. Other challenges regarding Shariah ‘harmonization’ are similar – if not more difficult – than those in the Islamic finance industry. Just like in Islamic finance, there is a limited global consensus on what constitutes Halal certification, fragmenting the markets and increasing costs. This is a serious challenge facing the Halal food industry today that affects SMEs more acutely. Without an increased harmonization of Halal certifications, the industry will remain divided.