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DEVELOPING HALAL COMPLIANCE MODEL FOR HALAL FOOD PRODUCTION COMPANIES

Executive Summary

The world's first Halal Food Index, the Socially Acceptable Market Investments (SAMI) Halal Food was launched in April 2011. It is anticipated to grow faster than the Dow Jones Islamic Index (DJII) in terms of size, branding and spin-off products. This Index contains over 270 stocks from 15 OIC countries from six sectors with a market capitalisation of US$114bil, with 95 of these stocks are from Malaysia. The biggest Malaysian stocks on the SAMI index are Sime Darby Bhd, Nestle (M) Bhd and Genting Plantations Bhd. The champion of the index is Rushdi Siddiqi, who championed the introduction of Dow Jones Islamic Index in 1999 [4]. This Index was launched to response to both the development of Islamic finance and Halal Food industry, especially in OIC member countries, which grows at a double digit figure. In Malaysia, the market share of Islamic banking assets of total banking industry has grown from only 6.9 percent in 2000 to 22 percent in 2011. The contribution of Islamic finance to the Malaysian economy has also been growing significantly, accounting for 2.1 percent share to the country's GDP in 2009, as compared to only 0.3 percent in 2000[1]. On the other hand the Halal industry is a new growth sector in Malaysian manufacturing sector and is the fastest growing global business across the world [2]. It is also an emerging market force that is attracting non-Muslims with its wholesome, hygienic and contamination-free principles in food production. Research by the World Halal Forum Secretariat estimates that the global value for trade of Halal food and non-food products is estimated at USD2.3 trillion (excluding banking), and 67 percent (USD 1.4 trillion) of this market comprises of food and beverages. A further USD 506 billion is from pharmaceuticals and USD 230 billion is from cosmetics and pharmaceuticals [3].

What are still inadequate are the Halal compliance mechanisms to be used to ensure the level of Shariah-compliance adherence of the companies in the Index. Securities Commission’s screening mechanisms are not comprehensive to cater for the Halal industry needs which requires strict adherence of the companies to Halal certification, Halal standards on production, transportation, storage and many more. A new regime of Halal compliance procedures to consist of the financial screening mechanisms and also the Halal traceability’s seven elements established in the literature of halal food production; are labor/ cost reduction, competitive advantage, legislation, food safety, documentation of sustainability, chain communication, and certification [6]. When these forces are practiced, it reflects the management’s thorough adoption of traceability system in their production processes.

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This study aims to examine the adoption of the forces of traceability in a listed Halal food production company in order to derive a higher level framework of Halal traceability which may become a guide to other Halal food production companies. In addition, Halal Compliance Procedures to be developed to include the financial screening and methodologies to ensure Shariah compliancy in financial operations. These procedures is needed by the players in the industry such as World Halal Forum and International Halal Integrity Alliance (IHI) who are now taking the initiatives to work hand in hand with companies in the SAMI Halal Food index to develop appropriate Halal compliance procedures for the next phase of development. Having an academic research to study the framework of Halal compliance procedures using case study approach or interview with Halal food production companies listed in the Halal Food Index will help to boost the regulatory guidelines for the market to operate in a predictable manner.

Research Background

The growth of Islamic banking and finance as financial services and Halal food and non-food

manufacturing are seen as independent to each other. First is due to the different regulators

dealing with the different market. One is financial services and the other is tangible product

manufacturing and distribution. The closest encounter of both markets is availability of Shariah-

compliant investment opportunity in Bursa Malaysia in its Shariah-compliant securities, which

includes the Halal manufacturing sector in the consumer goods section. The number of the

securities now has reached nearly 90% of total securities traded in Bursa Malaysia.

However, the market did not make full use of the growth of both sectors, until recently, in April

2011 when a Halal food index was launched. The world's first Halal food index, the Socially

Acceptable Market Investments (SAMI) Halal Food, is anticipated to grow even faster than the

Dow Jones Islamic Index (DJII) in terms of size, branding and spin-off products. This Index

contains over 270 stocks from 15 OIC countries from six sectors with a market capitalisation of

US$114bil, with 95 of these stocks are from Malaysia. The biggest Malaysian stocks on the SAMI

index are Sime Darby Bhd, Nestle (M) Bhd and Genting Plantations Bhd. The champion of the

index is Rushdi Siddiqi, who championed the introduction of Dow Jones Islamic Index in 1999

[4].

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The summary profile of SAMI Halal Food Index is as follows:

Source: SAMI Index (Chart by DinarStandard)

Credit: Shikoh, R. (2011), A Look at the first ever Halal Food Investable Index. Available online:

http://dinarstandard.com/finance/a-look-at-the-first-ever-Halal-food-investable-index/

What the Index has to offer to Shariah-compliant portfolios?

The SAMI index is a consumer non-cyclical sector. Investors may include in their portfolios the companies in the index to as a hedge against inflation and also to boost the performance of their portfolios. In term of performance, the SAMI index outperformed several leading global food indexes from March 2010 to March 2011 by 20%, according to IdealRatings, a Shariah-screening company, which also collaborated in the introduction of the index.

Quality Shariah-compliant asset classes are hard to come by. This is because new issuances of Shariah-compliant papers are likely to be held by Islamic funds, creating liquidity problem for the Shariah- compliant securities. This leaves investors wanting to invest in Shariah-compliant assets are left with limited choice of high quality Shariah-compliant papers. The introduction of SAMI Halal Index provides investors with more help in term of information search to perform fundamental analysis on these stocks. A birth of an Index comes with many other perks such as database of securities in the index and many other supports for investors and fund managers.

Having Halal food companies as Shariah-compliant asset class moves the value proposition of

Halal food production. Previously consumers provide revenue to the firms producing Halal food,

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but now they are able to invest in these companies directly or through funds. By investing in

the sector known to them will make it easier for them to understand the risk and return profiles

of these shares.

With the introduction of the Index, investors are able to track and monitor their investment in the companies under the index. If the investment returns from their portfolios in Halal food companies beats the Index, it indicates that their investment performance is doing well. Having an Index in an industry helps investors, fund managers and financial planners to benchmark their portfolio returns to that of the index. Having an Index as a benchmark also helps the fund managers to tangibly compare the performance of Halal portfolios to the Index. With tangible benchmark, investors and fund managers or financial planners are likely to agree on the baseline (the benchmark). Lacking of such Index will open many opportunities for debate on which investment risk and returns characteristics they should refer to, thus creating some problems for portfolio monitoring and rebalancing.

The SAMI Halal Food Index will be the bridge builder for Islamic funds, exchange traded fund investing and Sukuk issues as well as for global non-Islamic investors interested in the emerging food sector markets, a non-cyclical and therefore lower risk sector.

For example, split-off effects for the Index introduction will be series of introductions of exchange traded funds for Halal food groups of shares which will suit investors with various risk taking profiles. IPOs opportunities are also possible. When this sector becomes more acceptable to the investors, Halal food production companies may financial injection from Islamic banks in form of Mudharabah participations.

This Index also might kicks off some introductions of Sukuk issuance in the future. Shikoh, R. (2011) writes about the how the two areas areas where Sukuk can be utilized by Halal food companies [5]. For example, a true asset backed financing, an Ijarah Sukuk could be issued to build factories producing Halal food. Another interesting opportunity is for the Halal food production companies which failed the debt screen test to issue Sukuk to refinance conventional and BBA debt to become a Shariah-compliant securities.

Halal Traceability Processes in Halal Food Production

Mr Rushdi Siddiqui, the man responsible to introduce this Index to the market was right when

lamented that Halal is not just about certification. It involves the whole production chain from

farm to fork. Even with a big sell-off in markets, the investor still needs to consume. He foresees

the SAMI index to become a globally recognised index even faster than the DJII, since investors

are more likely to connect with the Halal manufacturing as investors also are consumers.

Investors also have the ‘duty’ to invest in these companies as it is important to sustain the Halal

food production, for the Maslahah of ummah.

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The producers’ ability to trace the beginning to end processes will gain the confidence of the

consumers that the whole processes from the production, processing and distribution of the

products are Shariah-compliant. Basic Halal traceability provides further information about

which Halal standards have been applied, allow the consumer to verify the Halal claims and

ensure that the product delivered to the customer is thoyyib (wholesome, healthy, safe,

nutritious and of good quality).

At current, no established framework are available for Halal food producers to refer to as

different companies have different ways and procedures to measure their products’ quality,

system, and others. Although standards and guidelines currently in adoption such as GMP,

HACCP and SIRIM could be used to evaluate cleanliness, safety, efficiency and effectiveness of

system, producers’ thorough traceability practices are unclear.

Seven elements of driving forces of traceability adoption in a company are labor/ cost

reduction, competitive advantage, legislation, food safety, documentation of sustainability,

chain communication, and certification [6]. When these forces are practiced, it reflects the

management’s thorough adoption of traceability system in their production processes. This

study aims to look into the adoption of the forces of traceability in a listed Halal food

production company in order to derive a higher level framework of Halal traceability which may

become a guide to other Halal food production companies.

Adoption of Seven Elements of Traceability in a Halal Food Production Company

Data collected from the company selected was analyzed from the perspective of seven

elements of driving forces of traceability in order to identify the company’s Halal traceability

system in the production and management processes. In this case study, a company listed on

the main board of Shariah-approved securities on Bursa Malaysia was selected as the subject.

From this case study, investors and fund managers will be to learn about the requirements for

Halal traceability expected from a Halal food production company. This information is also

useful to perform non-financial fundamental analysis to the companies of interest to the

investors.

Certification

All of the company’s products are certified Halal, so consumers do not have to worry about the

cleanliness of the materials or ingredients used. According to the representative of the Halal

committee, usually the company would apply for Halal certification of their products 3 to 4

times per year. These applications are just for new products to be launched beside renewal of

the existing products. Before they start the production for a new product, the Quality

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Assurance (QA) department will send a list of new products together with a list of ingredients

used and the source of the ingredients itself to the Halal committee for Halal approval. The

Halal committee will verify the materials used with JAKIM to see if all the materials to be used

are certified Halal by JAKIM. The QA department will then proceed with the production

processes and at the same time the committee will apply for the Halal certification from JAKIM.

Halal certification application usually takes 6 months for approval.

Food safety

For safety and hygiene, the company has introduced the food safety policy in order to ensure

that all the products achieve customers’ satisfaction and confidence. The manufacturing and

processing of bakery and confectionary products were also involved in controlling of raw

materials, production and ensuring that the products are safe for customer. The food safety

policies of this company are:

1. Committed to maintaining the effectiveness of Food Safety Management System (ISO 22000:2005) through monitoring and reviewing of the actual performance of established food safety objectives.

2. Conform to the legislation, regulation and relevant standard codes related to food safety.

3. Continually improve the operation through adopting of effective Food Safety Management System (ISO 22000:2005) requirement whilst incorporating research and development.

4. Be at the forefront of product innovation and creativity to ensure further commitment to food safety while being result oriented at all times.

5. Keeping the policy at strategic locations and communicated to all level of organization.

On top of this, the employees are guided by officers during preparation and processing to

ensure the products’ safety and hygiene. There is only one entrance to the factory, so, all

workers will go in and out through that entrance only, hence employees’ safety and hygiene is

controlled at the entrance for example, employees are required to wash their hands before

they enter the factory and wear special clothing with hand gloves for safety and cleanliness.

Legislation

The company has conformed to ISO22000:2005 for Food Safety Management System assessed

by Lloyd's Register Quality Assurance, United Kingdom which enhances their processing quality

and hygiene standards. The company also study and is moving forward on the practices of Halal

standards. This company also uses Hazard Analysis and Critical Control Point (HACCP) and

Malaysian Standard MS 1500: 2004 Halal Food - Production, Preparation, Handling and Storage

- General Guidelines as a guideline for production and processing of products.

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Documentation sustainability

Sustainability in documentation is very important in order to maintain the system in high level

of application. The company uses a documentation system during processing and production

which is very systematic and they can identify the problems and cause of these problems. This

system is also centralized making it easier for officers to control the system and keep important

documents and information in the system.

Competitive advantage

The company also markets other imported products such as from the United Arab Emirates

(UAE) and other countries. Every year, two or three new products are introduced. This company

also uses high technology in order to produce their products which save cost and time. In

Singapore, this brand is one of the popular products for bakery and confectionary. The Group

Managing Director said ‘Right now, we are Halal but we want to concentrate on it more. Our

export market is 25%, but with this new concentration we aim to grow more’. This is one of the

changes made by this company in expanding their market and realizing the fact that most of

their customers in Malaysia are Muslims.

Chain communication

Companies need to understand that customers are constantly surrounding themselves with

their own ideals; they are building a world of their own. As producers and manufacturers, they

must strive to understand that world consumers’ demand is changing and ask themselves how

they can be a part of it. For the success of the production and to the company, they should

always receive feedback from consumers to enhance and improve the quality of their products.

Companies should also have a strong relationship with relevant authorities such as JAKIM, the

Ministry of Health (MOH), Universiti Putra Malaysia (UPM) and other institutions in order to

guide them regarding Halal issues. When problems on Halal matters arise, they should refer to

JAKIM to ensure that decisions taken are appropriate and do not violate ethics or procedures of

Halal certifications.

Labor/cost reduction

The use of technology during the production is strength to the company and it also helps them

in reducing the cost of production. Labours are only used at the end of the production line.

Labour is also reduced during the other line of production, because of the high temperature,

and the environment in the factory itself that takes care of the hygiene environment. A

combination of sophisticated European and Japanese Technology is also employed at this

factory. This is to ensure that the highest level of production standards needed to deliver the

quality products for the market demands is used. The usage of traceability system in this

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company also ensures them in reducing their cost by reducing time when the problem was

occurred and saving time in tracing the cause of the problem. The cost of implementing

traceability is significant, but the cost of not having one can be far higher. The cost of not

having a traceable system is effectively an export barrier and a limit to market access.

Traceability has already become a minimum cost of entry into international business.

References:

1. Zeti Akhtar Aziz. 2011. Governor's Keynote Address at the Launching of IBFIM's Islamic Finance Qualification Framework & Progression Route (IFQFPR): Talent Development in Islamic Finance over the Next Decade on the 14th December 2011. Available online: http://www.bnm.gov.my/index.php?ch=9&pg=15&ac=422

2. www.investpenang.gov.my/portal. Retrieved on 15th July 2011. 3. The Halal Journal, July & August, 2010. 4. http://www.meattradenewsdaily.co.uk/news/050411/malaysia___worlds_first_Halal_i

ndexes_launched_at_world_Halal_forum_.aspx. Retrieved on 15th July 2011. 5. Shikoh, R.,2011. A Look at the first ever Halal Food Investable Index. Available online:

http://dinarstandard.com/finance/a-look-at-the-first-ever-Halal-food-investable-index/ 6. Donnelly K., Olsen P., 2009. Harmonizing methods for food traceability process mapping

and cost/benefit calculations related to implementation of electronic traceability systems. Workshop hosted by Nofima in Association with the TRACE project. 25-26th February.