Halal Trade Finance and Global Well-Being: Here Come the Millennials

Abstract

The growth of the young Muslim population is escalating. According to the State of Global Islamic Economy Report (2016/17), by 2030, 29% of the global young population is projected to be Muslims. This young population is, also referred to as Millennials (born between 1984 and 2000) are expected to play a vital role in the global economy. Characterised as a unique and affluent segment of the population and at the same time having attributes such as brand loyal, affluent, brand loyal, tech-savvy and demands instant access to information, the millennials are expected to form a new demographic customer base. This study seeks to examine the issue of well-being and how the landscape of global well-being via Halal trade finance is expected to change with the emergence of the Millennials as a new market segment. In addition, through library research and reviewing existing literature on Millennials, the study seeks to shed some light on whether Halal trade finance is ready to offer services that meet the needs and demands of this technology-driven generation.

Appendices

Appendix 1: Trade Finance Products, Description and Market Size

Segment	Description	Global Market Share of export activity in 2016 (55% of total)	2016 Market Size (Export activity)	Global Market Share of Import activity in 2016 (45% of total)	2016 Market Size (Import activity)
Letters of credit	Issued by a bank to a seller on behalf of a buyer; bank pays a seller against the letter once seller delivers the product in agreed upon conditions and collects the fees from the buyer Typical term of financing: 3–6 months	55%	$3.7 trillion	47%	$2.6 trillion
Open account/supply chain finance (SCF)	Used when buyers have a reliable and verifiable credit history and involves the seller obtaining financing from the bank either against the purchase order (from the buyer), or the invoice Typical length: 3–6 months	17%	$1.2 trillion	17%	$0.9 trillion
Collections	Sellers use collections to collect payment for their goods by delegating this function to banks, who collect funds from the buyer’s bank before the delivery of goods Typical length: 13 months–3 years Buyers and sellers use bank guarantees when working with overseas counterparties who they do not know well	17%	$1.2 trillion	14%	$0.8 trillion
Guarantees	Shipping guarantees involve the buyer indemnifying a shipping company, enabling the shipping company to release the indemnified goods to the buyer without a bill of landing. This allows the goods to be collected without the shipping documents, enabling the buyer to reduce delays and save on storage costs Typical length: 3–6 months Other trade financing instruments, such as banker’s acceptances	8%	$0.5 trillion	18%	$1.0 trillion
Other	A bankers acceptance is a promissory note that a bank guarantees and accepts, and is usually used for short-term financing of 6 months or less. It states the amount, date and person who should receive payment, and is typically made based on a deposit at the same bank Typical length: 3–6 months	3%	$0.2 trillion	4%	$0.2 trillion
Total global trade finance market size			$6.8 trillion		$5.5 trillion
Total market size		$ 12.3 trillion

Source Thomson Reuters and DinarStandard, State of the Global Islamic Economy Report 2016/17

Appendix 2: Select Key Providers of Shariah-Compliant Trade Finance

Bank		Headquarters	Year of Founding	Focus and Key products	Net Assets (2016)	Total Operating Income (2016)
1.	Standard Chartered Bank	London, UK	1969	∙ Focus: Known for its strength in commodity trade finance ∙ Key products: Islamic letters of credit, bank and shipping guarantees, and islamic local bits discounting	$48.6 billion	$14.1 billion
2.	Maybank	Kuala Lumpur, Malaysia	1960	∙ Focus: Known for its strong capabilities in Sharian-complaint trade finance. Especially strong in the Asia-Pacific region ∙ Key products: Letters of credit and shipping and bank guarantees, as well as trust receipts and export credit refinancing	$15.4 billion	$5.9 billion
3.	Emirates NBD Bank PJSC	Dubai, UAE	2007	∙ Focus: Strong in the UAE trade finance market ∙ Key products: Letters of credit, guarantees, bill discounting and factoring	$14.6 billion	$4.0 billion
4.	Samba Financial Group	Riyadh, Saudi Arabia	1980	∙ Focus: Known for its strength in commodity trade finance ∙ Key products: Banker’s acceptances, letters of credit, documentary collections, and guarantees	$11.4 billion	$2.0 billion
5.	National Bank of Kuwait SAKP	Kuwait City, Kuwait	1952	∙ Focus: known for its strength in commodity trade finance ∙ Key products: Letters of credit, guarantees, and documentary collections	$11.1 billion	$1.5 billion
6.	Riyad Bank	Riyadh, Saudi Arabia	1957	∙ Focus: Strong in the Saudi Arabian trade finance market ∙ Key products: Islamic letters of credit, bill discounting, and letters of guarantee	$10.0 billion	$2.0 billion
7.	CIMB	Kuala lumpur, Malaysia	1924	∙ Focus: Well-known and highly commended for its Islamic trade finance in the Asia-Pacific region ∙ Key products: Letters of credit and guarantees, documentary credits, and export financing	$9.5 billion (2015)	$3.4 billion (2015)
8.	Abu Dhabi Commercial Bank	Abu Dhabi, UAE	1985	∙ Focus: A strong player in the trade finance market ∙ Key products: Letters of credit, import financing, working capital, and guarantees	$8.2 billion	$2.3 billion
9.	First Gulf Bank	Abu Dhabi, UAE	1979	∙ Focus: Known for its strength in commodity trade finance ∙ Key products: Letters of credit, bills for collection, and guarantees	$8.1 billion (2015)	$2.5 billion (2015)
10.	Dubai Islamic Bank	Dubai, UAE	1975	∙ Focus: A strong player in the trade finance market ∙ Key products: Letters of credit and guarantees	$7.4 billion	$1.2 billion
11.	Qatar Islamic Bank	Doha, Qatar	1982	∙ Focus: Strong in the Qatari banking market ∙ Key products: Letters of credit and guarantees, documentary collections and shipping guarantees	$5.4 billion	$1.5 billion
12.	Mashreqbank	Dubai, UAE	1967	∙ Focus: known for its strength in commodity trade finance ∙ Key products: Import and export finance, working capital, and merchant overdraft facilities	$5.3 billion	$1.6 billion
13.	Doha Bank	Doha, Qatar	1979	∙ Focus: Strong in the Qatari trade finance market ∙ Key products: Letters of credit	$3.6 billion	$0.7 billion
14.	Ahli United Bank	Manama Bahrain	2000	∙ Focus: Strong in the Egyptian trade finance market ∙ Key products: Letters of credit, inward bills, and structuring of bespoke solutions	$3.5 billion (2015)	$1.0 billion (2015)
15.	Al Baraka Islamic Bank	Manama Bahrain	1978	∙ Focus: Strong in the Bahrain trade finance market ∙ Key products: Open account financing, letters of credit, documentary collections, and payment guarantees	$2.0 billion	$1.0 billion
16.	Emirates Islamic Bank	Dubai, UAE	2004	∙ Focus: Known for its strength in the Middle Eastern market ∙ Key products: Multiple products for import and export finance, as well as EI Trade, the world’s first Shariah-complaint structured end-to-end import finance solution	$1.8 billion	$0.8 billion
17	BankDhofar	Ruwi, Oman	1990	∙ Focus: Known for its strength in the Omani banking market: its Shariah-complaint window, Maisarah islamic Banking Services, is well known for offering numerous Shariah-complaint trade finance services ∙ Key products: Letters of credit, guarantees, avalisation, and import/ export financing	$1.3 billion	$0.3 billion
18.	Bank Islam Brunei Darrusalem (BIBD)	Bandar Seri Bagawan, Brunei	2005	∙ Focus: Strong in the Brunei banking market. Known for adopting emerging technology platforms to enhance its provision of trade finance services ∙ Key products: Letters of credit, collection bits and shipping guarantees	$0.9 billion (2015)	$0.2 billion (2015)
19.	International Islamic trade Finance Corporation (ITFC)	Jeddah, Saudi Arabia	2008	∙ Focus: The only multilateral organization dedicated entirely to promoting Shariah-complaint trade finance in the OIC region ∙ Key products: Commodity murabahah, installment sale, and istisna (manufacturing finance) products	$0.7 billion (2013)	N/A; ITFC provided $6.05 billion of trade approvals in 2014
20.	Export-Import Bank of Malaysia	Kuala Lumpur, Malaysia	1995	∙ Focus: Strong in murabahah trade finance ∙ Key products: Islamic export credit refinancing, Islamic supplier financing and Islamic import financing	$0.6 billion (2015)	$0.1 billion (2015)
21.	Bank Syariah Mandiri	Jakarta, Indonesia	1999	∙ Focus: Known for its strong capabilities in Shariah-compliant trade finance ∙ Key products: Musharakah and mudarabah based trade finance products	$0.4 billion (2015)	$27 million (2015)
22.	HSBC Amanah Malaysia	Kuala Lumpur, Malaysia	2007	∙ Focus: Strong in murabahah trade finance ∙ Key products: Islamic Documentary credits and collections, Islamic Shipping Guarantees, and Islamic Accepted Bills	$0.3 billion	$0.1 billion
23.	Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC)	Jeddah, Saudi Arabia	1992	∙ Focus: Known for facilitating Shariah-compliant export credit finance for 44 member OIC countries ∙ Key products: Shariah-compliant trade credit insurance products, including bank master policies, specific transaction policies, documentary credit insurance policies, and comprehensive short-term policies	$0.2 billion (2015)	N/A; ICIEC provided $5.3 billion in investment and export credit insurance to OIC member countries in 2015

Source Thomson Reuters and DinarStandard, (State of the Global Islamic Economy Report 2016/17)

Appendix 3

See Fig. 40.5.

Fig. 40.5

Key steps for Islamic trade finance providers

The explanation of the key steps, according to the Thomson Reuters and DinarStandard 2016/17 report is presented in the boxes below.

Box 1: Key Step 1

1. Work with Islamic Economy Companies to Develop Dedicated Trade Financing Products

A substantial portion of OIC imports needs is fulfilled by conglomerates that cater to Muslim customers without necessarily seeking Shariah-compliant funding.

However, as the Islamic Economy grows, many small-to-medium sized businesses will need to tap into an ecosystem of trade finance services that are Shariah-compliant, which presents a substantial opportunity.

Syed Ali, CEO of Riz Global Foods, a halal food distributor supporting Canadian brands, and exporting to the GCC and China, discussed how he was able to secure Shariah-compliant trade financing, and opportunities for the industry to thrive.

Syed commented, “We have worked with a Canadian bank to structure a Shariah-compliant Purchase Order Financing product that met our faith-based needs…There is a substantial opportunity especially in North America to open halal financial hubs which can be used by all providers jointly sharing the platform and offering services.”

Elaborating upon the scale of the opportunity, Syed Ali further commented. “The halal food Industry in North America is at its infancy. A lot of companies have huge potential to develop in the coming years with proper Shariah-compliant trade financing tools to provide an end to end ethical halal business operation, whether it’s in production, distribution or logistics.”

Box 2: Key Step 2

2. Develop Dedicated Marketing Outreach Programs

There is a substantial opportunity to use B2B marketing channels to reach customers across different countries.

Discussing the current disconnect between Islamic finance and SMEs focused on the halal products sector opportunity, Abdulkader Thomas, CEO of SHAPE Financial Corporation commented, “The halal business sector has made its whole pitch based on halal ingredients. But, there seems to be an odd disconnect between the halal business sector and Islamic finance. In some conversations, I feel that the halal business sector distrusts the authenticity of Islamic finance. Moreover, Islamic finance planners have too often focused on the extremes. One is retail. The other is brand name corporates over SMEs. Somewhere lost in the target marketing process is the halal business sector. Both sides need to find each other.”

When discussing the importance of marketing trade finance products to SMEs, Professor Abdul Rashid A. Kadir, Lecturer at INCEIF, commented, “There needs to be greater collaboration and building relationships with OIC and non OIC countries—this can be achieved through both Government to Government (“G2G”) and Business to Business (“B2B”) arrangements.”

Two particular channels can serve as fruitful avenues to reach a key target audience: high-growth, values-based companies that are looking for trade financing to facilitate their expansion into OIC markets.

Firstly, physical channels need to be explored, such as attending trade shows and events dedicated to the Islamic economy, which can support very robust business development. Notable events include the Global Islamic Economy Summit, which attracted over 3000 delegates in 2016, and the World Islamic Economic Forum in Indonesia, which attracted over 2500 delegates in 2016. Global trade events such as Gulfood 2017 attracted over 95,000 trade attendees, including up-and-coming halal players from non-OIC countries, such as Haloodies, Riz Global Foods, and ieat Foods among many other high potential attendees.

Secondly, dedicated online marketing can help reach SMEs that are looking to grow rapidly. Halal Ad is a notable platform that targets Muslim end users and is expanding into B2B, having posted over 217 million advertisements since inception in 2015. However, only e-commerce platforms such as Ali Baba, as well as Islamic economy focused platforms such as DagangHalal.com can support finance providers seeking to proactively offer trade support services.

Box 3: Key Step 3

3. Co-locate with Trading Companies in OIC Countries

Free zones have played a critical role in spurring economic growth, leveraged as a strategic tool by governments, with 4300 free zones globally in 2015. With the rise of “halal hubs” supporting the Islamic economy, most notably in the UAE and Malaysia, there is a substantial opportunity for trade financing providers to co-locate with Islamic economy companies across the core sectors.

Syed Ali commented, “Halal hubs exist mostly in the Southeast Asian countries and many services have been launched. Halal hubs are yet to be launched in North America. We are working on one such halal hub in Canada to provide the basic infrastructure for warehousing, export-related services, including trade finance, distribution and supply chain management, for national and international markets.”