Business Insight 21st Aug 2015

The halal economy

China's rise as an economic juggernaut has captivated the world for years. But there's another financial force quietly on the ascent, one that's steeped in opportunities as well as challenges.

Assets in Islamic banking are growing at 17% per annum, outpacing the 15% growth in conventional banking assets, according to Ernst & Young's World Islamic Banking Competitiveness Report. In the next few years, Islamic banking assets are predicted to increase by 19%.

Ernst & Young's World Islamic Banking Competitiveness Report estimates the value of Islamic banking assets with commercial banks in international markets at around US$778 billion. In a 2010 report, Austrade noted that demand for this type of finance has not been matched by supply.

Kuala Lumpur

Islamic vs traditional banking

There are key differences between Islamic and traditional banking, says Dr Steiner. Conventional banking and finance is based on interest and the notion of risk and return. "These two approaches do not sit with Islamic law at all," she says.

"Interest is prohibited and taking risks is not allowed either. It's much more about risk sharing and having equal responsibility in these endeavours. It's a very different approach to conventional banking and finance."

Instead of a home loan, for instance, a bank might buy a property and resell it to a buyer at profit, with the buyer paying the bank in instalments.

The challenge for Islamic banking is to meet the demands of customers while meeting the strict needs of shariah or Islamic law. "It's a very bold, fine line industry has to walk to be compliant with Islamic law and to be competitive in a market that is functioning to rules that are not necessarily compliant to Islamic law," says Dr Steiner.

This financial powerhouse isn't geographically specific, instead it spans countries that embrace Islamic faith and the principles of shariah. Malaysia, Indonesia, Saudi Arabia and the United Arab Emirates are some of the key players. Shariah laws are often observed in parallel with the host country's conventional legal and financial framework.

For Australia, this is particularly interesting because we do a lot of international trade with these countries. Not only in the Middle East, but also Malaysia.

Dr Kerstin Steiner

Senior Lecturer, Department of Business Law and Taxation

Rise of a halal economy

Islamic principles not only affect the banking and finance sector. They are applicable to all economic activities. In Islam, activities are categorised into halal (an Arabic term meaning permissible or lawful) and haram (unlawful or forbidden), says Dr Steiner. These principles guide a Muslim's economic and commercial decision making, from buying property to investing and buying goods and services. Food and personal care products must be approved or processed as halal, for instance. Animals are slaughtered according to Islamic law to meet halal standards.

Australia's agribusiness is particularly attractive to the halal economy. Malaysia, for instance, is Australia's ninth-largest trading partner and its retail food and beverage sector is worth more than US$15 billion, according to Austrade. Australia's potential share of this was strengthened in 2013 when the Malaysia-Australia Free Trade Agreement took effect.

Malaysia imports much of its red meat from India, New Zealand and Australia, with the Australian Government Authorised Halal Program providing guidelines for local businesses. But it's not without problems: the halal-prescribed slaughtering of animals has attracted local criticism from animal-rights groups like the RSPCA.

In general, halal matters have become much more encompassing and now extend to biotechnology, tourism, personal-care products and supply chain management. So, in effect, a Halal Economy is on the rise. One that "could suggest a viable distinct economic paradigm based on Islamic principles," says Dr Steiner.

This economic approach has been particularly popular in Asia, with Malaysia, Indonesia, Pakistan and Brunei all aspiring to be a global 'halal hub', she says. It is estimated that the halal industry grew 9.5 percent to US$2 trillion in 2013, and is expected to reach US$3.7 trillion by 2019.

"As the 'halal economy' continues to rise, Australian businesses keen to trade in halal-certified products will need to better understand the structure and demands of the industry," says Dr Steiner. "We've got to be in it from our foreign trade perspective."

Dr Kerstin Steiner is a senior lecturer in the Department of Business Law and Taxation. She was the first female non-Muslim to hold a visiting position at the Academy of Islamic Studies at the University of Malaya, in Malaysia, in 2009.

By Janelle Carrigan

  • Kerstin Steiner

    Dr Kerstin Steiner

    Senior Lecturer Department of Business Law and Taxation

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