Whilst Islam has yet to develop a significant footprint in Latin America, the possibilities for the implementation of Islamic finance in terms of infrastructure and project financing and the further development of Brazil’s booming Halal industry are great. REBECCA SIMMONDS explores the progress of Islamic finance in Latin America.
Indigenous market
Argentina and Brazil host the largest Muslim minorities in Latin America, with approximately one million Muslims in each. Accurate figures are not available as census data does not record religious affiliation, but surveys by Pew Research Center and the Association of Religion Data Archives estimate that almost 2% of the population identify as Muslim. In Argentina, an estimated 3.5 million people are of Arab descent. This is reflected in the population of Brazil with 12 million people identifying as Arab-Brazilian.
According to the OECD Latin American Economic Outlook 2014, after a period of relatively strong growth, the region is on the cusp of change, prompted by uncertainty over the US Federal Reserve tapering program, the slow recovery of the Eurozone and the slowdown of China’s economy, as many of the region’s economies are based on export. The World Bank provides a positive outlook charting predicted growth in the region at 2.9% in 2014, 3.2% in 2015 and 3.7% in 2016 — a leap from 2.3% of last year, with the region’s two most productive markets, Brazil and Mexico, projected to grow 2.4% and 3.4% respectively and regional exports predicted to grow from 4.0 % in 2014 to 5.4% in 2016.
Business and banking
Despite the comparable size of the Muslim population in Argentina, the majority of the Islamic economic industry in Latin America occurs in Brazil. Brazil holds the position as the world’s largest exporter of soybean (41% of global exports) and orange juice (55% of global exports) as well as 35% of global exports of raw cane and refined sugar-all of which are of interest to the market in the GCC in light of its aim to ensure food security (see cover story ‘Global food security: A ticking timebomb for the Islamic World’, Vol.11 Issue 18), but none as much as Brazil’s Halal meat industry. Trade between Latin America and the GCC is worth US$40.6 billion, and according to figures from the Arab-Brazilian Chamber of Commerce, in 2013, Brazil’s trade with Arab countries including Egypt, Kuwait Qatar, Saudi Arabia and the UAE reached US$14 billion, with Saudi Arabia attaining the top spot as the country’s leading importer, securing imports worth US$2.84 billion.
In October 2013, National Bank of Abu Dhabi (NBAD), which offers Islamic banking services, was granted permission to operate in Brazil. According to reports, the bank currently has approximately US$600 million in loans outstanding and plans to expand corporate loans in Latin America by 20% in 2014 with a focus on Latin American companies that do business in the Asia, the Middle East and Africa. NBAD has plans to offer services to other Latin American countries, including Peru and Chile out of its São Paolo office, with expansion of operations to Columbia and Mexico planned for 2015.
Halal industry
Central Islamic Brazilian Halal Food (Cibal Halal) is the operational arm of the Federation of Muslim Associations of Brazil (Fambras), the organization behind the development and implementation of the Brazil’s Halal industry, and has been in place since 1979. The Cibal Halal certification is recognized by various religious councils including those in Malaysia, Singapore and the Philippines and is considered one of the best in the world, generating revenues of around US$150 billion in the food market alone. The Halal beef industry accounts for 40% of the country’s total exports, with almost 40% destined for the GCC states.
In 2013, Shariah compliant investment house Abu Dhabi Equity Partners realized the potential in the Brazil’s agri-business industry and launched an inventory finance Wakalah and Murabahah program for an ethanol producer in the state of Mato Grosso do Sul — the country’s first — and at the start of this year, also introduced Brazil’s first Shariah compliant livestock financing program. Utilizing an investment of up to US$25 million to fatten 70,000 head of cattle, the transaction will allow the top 40 cattle feedlot operators to increase their capacity utilization in Goias and São Paolo. The company reportedly has over US$100 million-worth of identified physical cattle and sugarcane based transactions in the pipeline for 2014.
Legal and regulatory
Whilst there is no specific legal framework in place for Islamic finance in Brazil guaranteeing the enforcement of Shariah contracts and addressing the issue of double taxation, the government does support the use of Islamic finance contracts such as Salam, Murabahah and Mudarabah to structure financial instruments that are widely used in Brazilian agribusiness. In wider Latin America, there has been no documented move towards changing established legal frameworks to accommodate Islamic finance in anticipation of a boom in the industry’s development in this market; however the Cayman Islands, which are often associated with Latin America and the Caribbean, are a popular destination for Shariah compliant funds and Sukuk listings.
Outlook
In Brazil and in Latin America in general, an issue faced by many of the countries is a shortage of liquidity and reduced credit availability: a situation that lends itself to the facilitation of Islamic finance. Infrastructure and project development are areas that will be prominent in Latin America, as the region looks to secure its future, and represent opportunities in which Islamic finance could create aniche. Trade between emerging markets is also viewed as the future by many and Brazil, as a BRICS country and the seventh largest economy in the world, has the ability to trade with markets such as the GCC, with Islamic finance acting as a medium.