Muslims make up just 1% of Brazil’s total population, but the country continues to punch above its weight as its status as world’s largest supplier of Halal beef to Muslim-majority countries drives forward its involvement in the Islamic economy. In the midst of preparation for the Rio 2016 Olympics and as the country’s economy anticipates over 2% growth in 2014, REBECCA SIMMONDS explores the opportunities for Islamic finance in Brazil.
Business environment
With the World Cup 2014 ready to kick off and the Olympics looming on the horizon, infrastructure and developmental works are high on the Brazilian government’s list of priorities, with commitments being made to multi-billion dollar investment in upgrades to infrastructure; the World Cup alone is thought to be costing the country US$11 billion. However, in terms of the niche in which Islamic finance is active in Brazil, agriculture and agribusiness are the main areas and they constitute almost a quarter of the country’s GDP, providing the potential for growth of the reach of the Islamic finance industry within their realm.
Banking and finance
At the start of 2014 Abu Dhabi Equity Partners (ADEP) followed on from its 2013 venture into financing of agribusiness, broking a US$25 million livestock financing program, fattening 70,000 head of cattle over three months and allowing a selected group of Brazil’s top 40 cattle ranch operators to increase their capacity utilization in Goias and Sao Paolo. The financing program incorporated a combination of Wakalah and Murabahah agreements allowing investors to purchase titles of traded cattle from a rancher and sell them on to Brazil’s key global beef processing companies at a principal plus agreed profit rate on a payment against delivery basis. ADEP has indicated that it has US$100 million-worth of identified physical cattle and sugarcane based transactions in pipeline for 2014.
At the start of June 2014, it was announced that Banco do Brasil, the largest Brazilian and Latin American bank by assets and third by market value, would be launching Brazil’s first Shariah compliant equity fund within the month. Managed by BB DVTM, the asset management division of the bank, the fund’s targeted investors are those from the UAE, Singapore and Hong Kong. The first Shariah compliant equity fund in Brazil will be managed by BB DVTM, the asset management division of Banco do Brasil, with marketing by partner brokerage houses in the Middle East and Asia. The fund will focus on investment in companies in commodities, energy, mining and retail, but details of the size and expected return of the fund have not yet been stated. The bank has been displaying an aim to expand into Asia as it also announced the opening of its first Chinese branch in Shanghai in June. Banks from the UAE have also shown interest in Brazil, with the National Bank of Abu Dhabi receiving a license to operate in Brazil in October 2013, encouraging investment from Brazilian banks in the UAE and GCC investors to invest in Brazil.
Foreign relations
Brazilian exports to Oman increased by 35.73% in 2013 and by smaller percentages to the UAE and Egypt, according to Apex-Brazil.
In May 2014 the Jebel Ali Free Zone (Jafza), conducted a seven-day roadshow and business seminar in Brazil, which included the signing of an MoU with the Arab Brazilian Chamber of Commerce in order to strengthen the ties between the two organizations and the UAE and Brazil. Apex-Brasil, the Brazilian trade and promotion agency which also supported the roadshow, has had a regional hub in Jazfa, promoting the presence of Brazil since 2009.
The roadshow served to promote Dubai’s initiative to become a global Islamic economy hub, with an emphasis on the plan to develop Halal Zones that will eventually become global hubs for Halal products — a particular interest for Brazil given its position within the Halal meat industry and the GCC being the country’s largest export partner for Halal meat products. Islamic finance was also on the agenda, with a seminar given on the Dubai Islamic Economy Development Centre.
Challenges and opportunities
Whilst the opportunities for Brazil’s continued success with the Halal meat industry can only grow, given the increasing need by Muslim majority countries in the GCC, which import up to 90% of their requirements, the challenges for the growth of Islamic finance within the country remain. Brazil’s regulatory and tax system still poses issues for the issuance of Sukuk, although the tax exemption for exporters does provide some leeway for the use of Murabahah structures if constructed appropriately.
The projected budget for the Olympics has increased to US$16 billion and government officials have stated that the majority of this will be coming from private investment and will be spent on much need upgrades to infrastructure such as sewage works, roads and transportation, with opportunities for Islamic investment still open as only 38% of the required works have been completed.
Outlook
As Dubai continues on in its bid to become the global Islamic economic hub, the outlook for Brazil’s Halal industry looks bright with relations between the UAE and Brazil being reinforced. The developing interest in Islamic finance in Brazil is happening slowly but given that it is occurring in areas of sustainable growth such as the agribusiness sector and investment funds, it could work to target those best suited to benefit from and therefore further invest in the development of Islamic finance in the country.