Islamic finance, as we all know, has its foundations in the real economy. But in this ever-shifting environment of increasingly sophisticated technology and terminology, what does ‘real’ actually mean? While bricks and mortar have been the traditional investment of choice for the Islamic market, new opportunities online are gradually redefining the landscape of retail and consumer goods financing — and bringing a tempting new selection to the table. LAUREN MCAUGHTRY looks at where Islamic finance could take its next big step – and asks if the industry is missing a trick.
The online retail sector is one of the major growth stories of the last few decades, and in the last few years this evolution has reached emerging markets to offer appetizing opportunities to countries keen to catch up with their developed counterparties. The growth potential of e-commerce in growth economies — especially in leading OIC countries — is vast, and offers an irresistible opportunity for investors ever seeking the next key trend. According to eMarketer, over 40% of the worldwide internet population made a digital purchase last year, and in western countries the penetration rate is around double that (87.2% for the UK, 80.8% in Germany). Growth estimates suggest that e-commerce sales reached US$1.5 trillion in 2014, up 20% on the previous year.
“The lightning-fast pace of change in the digital landscape has ushered in a consumer mindset that is both adventurous and exploratory when it comes to online shopping,” said John Burbank, the president of strategic initiatives at Nielsen. “Consumers everywhere want a good product at a good price, and the seemingly limitless options available in a virtual environment provide new opportunities for both merchants and consumers. The market for fast-moving consumer goods is no exception.” Nielsen recently conducted an e-commerce evolution survey which found emerging markets, unsurprisingly, to have some of the highest growth rates in the sector — especially Asia Pacific, which has the highest online buying (as opposed to browsing) rates of any region in the world.
Conversely, the Middle East has lagged behind so far, although this is beginning to change. “Lower-than-average online percentages can largely be attributed to opportunity—or lack thereof,” said Burbank. “In a region where disposable income is low and shopping for daily needs is the norm, online shopping is not a priority. But that will change as more consumers continue to move up the socio-economic ladder.”
This outlines an exceptional opportunity for the Islamic economy to move in and leverage its real economy strengths. “E-commerce constitutes a new way of doing something people have been doing all along — trading in products,” explained Arshad Ahmed, the managing director of US-based private equity firm Elixir Capital. “Internet and mobile technology allow for this trading to be done with fewer barriers and with greater efficiency. We see amazing opportunities all along the value chain — from product categories to adaptive marketing, from efficiency gains in warehousing, distribution, delivery to customer service.”
The Muslim consumer market is estimated to be worth as much as US$1.5 trillion and this could double by 2020, and multiple areas of growth are now attracting interest from international players. For example, the market for Islamic fashion was estimated to stand at US$224 billion in 2012 (according to the 2013 Global Islamic Economy Report by Thomson Reuters and DinarStandard) and is expected to reach US$322 billion by 2018 — accounting for 11.2% of the estimated global expenditure of US$2.9 trillion. The recently launched Islamic Fashion Design Council (IFDC) in Dubai notes that: “Collectively, this clothing consumer market is only second to the largest global market — the US.”
Muslim consumer clothing consumption is led by Turkey at US$25 billion per annum, followed by Iran, Indonesia, Egypt, Saudi Arabia and then Pakistan. “The global Muslim population is expansive, young, and growing rapidly. With the population expected to rise to 2.2 billion in 2030, the projected growth rate of 1.5% will support the predicted 2018 Muslim fashion spend,” said the IFDC.
And of this, online portals represent a key channel. DinarStandard estimated that fashion e-commerce expenditure was worth US$4.8 billion in 2013 and this is only expected to grow. A report from payment solutions provider Payfor suggests that regional e-commerce sales in the Middle East could reach US$15 billion this year, from just US$9 billion in 2012 — driven by competitive pricing, convenience and online promotions to build an online purchasing population of around 4.43 million in the MENA region, led by the UAE with 3.6 million.
Exciting new projects
So who is taking advantage of this boom — and where is the growth actually coming from? As the figures become more compelling, a plethora of new businesses have emerged to drive forward the trend. For example, the World Islamic Economic Forum in Dubai last November saw the launch of Zilzar.com, an Amazon-style e-commerce platform offering a global dashboard for Halal products across sectors including Halal food, Islamic finance, fashion, innovation and media, travel and tourism, medical and pharmceuticals, cosmetics and logistics. Announced by Malaysian prime minister Najib Razak in a speech that claimed the Halal consumer sector was “crying out for connectivity”, the new site has also tied up with Mastercard through an Islamic partnership provided by Hong Leong Islamic Bank in order to enable safe payment processes. Eweey, a Lebanese web agency, is another firm pushing the boundaries of e-commerce trading in the region. The group this month announced the launch of a new module enabling e-commerce traders to accept bitcoin payments.
On the fashion side, Turkish online store Modanisa is one of the region’s most successful start-ups, seeing over a million orders from 50 countries last year. Indonesian Muslim fashion store Hijub has 44,000 registered members and Youtube views of over 12 million; while in the UAE Islamic fashion brand Citra Style is seeing 50% site traffic from the US and 25% from the UK, demonstrating the increasingly global appeal of Islamic online retail. This is also translating into interest from leading global brands keen to get a piece of the action — last year DKNY entered the market with the launch of its inaugural Ramadan Collection in its Middle East stores.
Of course, the fundamental issue in any Islamic transaction is its compliance with the Shariah — and while there remain exceptional opportunities, it is vital to ensure that compliance is carefully examined. A number of issues have already been raised in terms of Islamic e-commerce: including concerns over contracting. “From a purely commercial perspective, Islam has provided its followers with general guidelines which must not be ignored or infringed. Intentionally, the door is left open for market activities to be ruled on according to what the most suitable and beneficial approach would be, based on prevalent trade practices and customs,” explained Abdulrahman Alzaagy, the author of ‘The Islamic Concept of Meeting Place and its Application in E-Commerce’. “Since the early phase of Islam, comprehensive efforts have been offered to regulate the Islamic commercial sector. However, in the case of electronic commerce there remains a need for further examination by Muslim jurists and appropriate Islamic rules are required for the development of this new phenomenon,” he warned.
One major issue is that the ‘meeting place’ or ‘sitting place’ where the contract is agreed holds a vital and unique place in the Islamic legal system. In the case of e-commerce, this physical location is obviously removed, which causes a question in terms of the interpretation of Shariah. One definition (article 181 of the Othman Justice Rules Magazine) defines the meeting place as “the meeting that is convened for contract making”. However, this is clearly impossible in an e-commerce transaction. Abdulrahman offers another definition, which explains the principle as: “The time span during which the involving parties are together to engage with the forming of contract without being busy by something else not related to the negotiated bargaining by any of them,” which makes the options for e-commerce more inclusive. “To enable the necessary connection to take place, the meeting place is regarded as one unit of time,” he continued. “As such, the offer is deemed to be in existence so long as the contracting parties continue their commercial engagement.”
A study of e-commerce under the law of Islam in March 2000 at Al-Azhar University in Cairo found that: “After thoughtful observation, that this new kind of trading known as e-commerce is absolutely conformable with general principles and rules of Islamic law. Accordingly, it is permissible to carry out all types of trading activities through cyberspace so long as it is not in contradiction with some key aspects of Shariah”. Scholar Al-Ebraheen Muhammad also concluded that: “Instantaneous methods of communication should be regarded as similar to the contract while both parties, in reality, face each other, even though they are not physically together,” suggesting that despite the unique complexities of e-commerce the process is not excluded by Islamic law.
An expensive venture
So assuming e-commerce is generally acceptable to Islamic investors, where then is the money coming from to fund these new ventures?
The concern is that although the opportunities appear compelling and the success stories are impressive, it is in fact harder to make money from e-commerce than you might think. Start-up costs can be expensive, long-term viability uncertain and short-term profitability challenging. Costs are often underestimated, while to achieve economies of scale can be difficult. For example Souq.com, a successful Gulf-based e-commerce platform with over 23 million visitors a month and over six million registered users, is reported to employ over 1,800 people — a vast number for a web-based business, and one which dramatically pushes up costs.
And while e-commerce may be a buzzword bandied about with enthusiasm, when it comes to parting with cold, hard cash banks are often less than enthusiastic, with a limited track record of lending to online entrepreneurs.
Given the dearth of traditional lending channels, the sector is increasingly seeking financing from alternative sources such as private equity, driving a solid growth in regional activity and raising interest from major international players as well as driving new opportunities for domestic firms. With many of the major Muslim economies such as the GCC and Malaysia making a determined push to move towards knowledge-based economies and encourage cross-border trade, Islamic investment firms now have an exceptional opportunity to leverage this interest to move forward in the market.
However, so far this has failed to translate into action. Most investors have been from the big conventional firms and US banks – players used to taking on risk and keen to capitalize on the growth in these regions. As they muscle in on the market, are domestic players and Islamic firms losing out on opportunities?
Souq.com saw the bulk of its funding (US$75 million) come from South Africa media group Naspers. Namshi.com, a UAE-based designer shopping portal, obtained US$20 million from JPMorgan Chase and Blakeney Management, while in March last year US hedge fund Tiger Global Management bought Cobone, one of the biggest daily deals sites in the Middle East and US private equity giant Warbug Pincus recently bought a majority stake in aviation IT firm Mercator. Although interest is growing from local players — last September Saudi’s STC Ventures invested US$1.7 million in UAE-based online chauffeur service Careem — they face being crowded out by flush foreign players keen to make a quick buck.
However, the area perfectly correlates to Islamic investment, and despite strong competition the trend is gradually moving in this direction, especially as the private equity market picks up. “We have started taking equity positions in winners throughout southern Asia, already in Turkey, Malaysia, and Indonesia,” confirmed Arshad. “Our platform, TransAsia E-Commerce, is also looking to expand into India, Bangladesh, Thailand and Vietnam.”
In fast-growing Islamic economies such as Turkey, the opportunities are compelling. “E-commerce in Turkey reflects 1-2% of all retail sales, whereas in the EU or China, it is around 10%,” Arshad pointed out. “If you believe, as I do, that Turkey will normalize to that global level, the right question is how long will it take, not will it happen.”
Elixir Capital recently put its money where its mouth is, with a US$4 million Shariah compliant investment in Annelutfen, Turkey’s leading e-commerce business for baby and mother products. The investment will help Annelutfen expand its online reach at an accelerated pace using mobile products, big data strategies, and original customer-centric content. “Following examples set by Diapers.com and The Honest Company, Annelutfen’s platform brings technology-enabled solutions to an underserved market throughout Turkey and the Middle East. There are seven million babies born in this region every year, and internet usage among parents continues to surge,” said Roys Gureli, CEO of Annelutfen. “Accelerating growth in change-intensive markets continues to be a core principle underlying Elixir’s global e-commerce vision, with Annelutfen forming a cornerstone in our TransAsia E-Commerce multi-market platform,” agreed Arshad.
Given the urgent need for financing and the compelling growth prospects for the sector, what other opportunities are available to online entrepreneurs seeking investment?
“Crowdfunding is a good opportunity for the mass market to bypass gatekeepers at banks and financial institutions,” suggests Arshad. “However, it is predicated on whether market regulations allow it and whether the appetite is there for the types of risks that private equity entails. An attitude of risk-seeking must be there, but it needs to be an educated risk-seeking, not just a ‘me-too’ attitude. I would love to see it happen however.”
Private equity, venture capital, entrepreneurship, innovation. These are all key concepts that, if brought together, have the potential to remake the Islamic consumer market: allowing enterprises to join together supply and demand in order to efficiently exploit the endless possibilities available. If the Islamic finance industry is truly prepared to leverage its claim to risk sharing, the profits would surely follow. The question is — will the sector play the game and provide new solutions based on its stated principles — or will it play it safe and allow the big conventional firms to take the cake?