DEVELOPMENT OF HALAL INDUSTRY AND ISLAMIC FINANCE

The 2015 International Conference of Management Sciences ICoMS 2015, April 23, UMY, Indonesia | 163 Intengration of Halal Compliance and Islamic Financing : Analysis of Industry in Malaysia Nathasa Mazna Ramli , Nurul Aini Muhamed, Sumaiyah Abd Aziz, Nor Asiah Yaakub Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia USIM, 71800 Bandar Baru Nilai, Negeri Sembilan Corresponding author: nathasausim.edu.my ABSTRACT Based on Islamic perspectives, the principles of halal products industry and Islamic financing should complement each other. A holistic halal economy should exists, where the governance and supervision of these two industries are not being separated. In practice, however, the halal product and Islamic finance industries are govern by different entities. The focus of this study is to examine these two industries, focusing o n the industries’ principles, governance, supervision and development. In addition, this study looks on halal initiative and financing structure of a company that manufactures halal products. Based on a case study of a company listed on Bursa Malaysia, this study analyses whether the principle of halal compliance and Islamic financing are integrated in the operation of the company. Data of the study were collected from document reviews that are publicly available. The study provides initial indication on the integration of halal compliance and Islamic financing in company and offers potential research for development of holistic halal economy. Keywords : Halal Compliance, Islamic Financing, Islamic Finance, Halal Economy 1 ICoMS

1. INTRODUCTION

‘Halal’ is an Arabic word meaning lawful or permitted. The antonym term for ‘halal’ is ‘haram’ that refers to anything that is unlawful or prohibited. Halal and haram are universal terms that apply to all aspects of life. Under halal industry, the term ‘halal’ is more significant on producing goods and services that can fulfill the halal requirement. On the other word, this term usually used in relation to goods and services. While many things are clearly halal or clearly haram, there are some things which are not clear. Halal industry is a huge industry that involved of several sectors which are food, pharmaceuticals, services ie. transportation and logistics and, banking and finance. The government of Malaysia has puts its strong effort to establish Malaysia as a world halal-hub. There are several authority bodies have been given responsibilities to ensure halal compliance within halal industry and enhance stakeholders’ confidence. However, there is inconsistency when it comes to the financial aspect. The halal compliance not only restricted to the narrow perspective of halal ingredients and production proses only but it should also consider all. On the other word, halal industry should not only has focusing on production of the goods and services but also the financing. In generally, Islamic finance means the dealing with “interest-free” in all transactions. Looking at current situation, there is lack of collaboration between these two industries halal industry and Islamic financing. Concerns toward this disconnectedness, the industry has to integrate the halal industry and Islamic finance towards the developing bridging model. On the other word, the sources of financing from the Islamic banking product and finance industry should be channeled to halal industry. The Quran clearly stated where Allah has declared war upon for those who are do not shun dealing in interest. Besides, Quran also clearly condemns al dealings with interest as well as participation in and witnessing such transaction.

2. DEVELOPMENT OF HALAL INDUSTRY AND ISLAMIC FINANCE

Due toward the increasing of awareness on Halal aspects in foodsservices and, banking and financial transaction among Muslims in Malaysia noticeably arose in 1960s onward. Besides, halal industry grows very fast due to high demand from Muslim consumers around the world, affected by courage of religious concern. Therefore, Malaysia has put full efforts to develop this industry, both for goods’ and banking and finance sectors. Malaysia aims to become the worldwide hub for both of the sectors. The establishment of Lembaga Tabung Haji 1964 is knows as a landmark for halal industry in Malaysia. This institution plays a role in saving institution for the pilgrimage purpose. It is also as benchmark for Islamic banking and finance in Malaysia and worldwide. Since then, the government has puts full efforts to push the halal industry, both in banking and consumer goods The 2015 International Conference of Management Sciences ICoMS 2015, April 23, UMY, Indonesia | 164 sectors as well. Malaysia undeniably is recognized as among the global leas for Islamic banking and finance due its growth and comprehensive regulation. This sector started in 1983 with the formation of the first Islamic bank in Malaysia. From this significant beginning, the sector is expanded to the takaful and Islamic capital market consist of several financial products such as equity, sukuk and funds. The progress in the Islamic banking industry is shown by the evidence that it is a second country that has the largest Islamic banking industry after Saudi Arabia in 2011 Malaysian ICM 2013. The 2012 data shows that Malaysia’s sukuk outstanding size comprises 68 per cent of the total worldwide size, wherein the capital is channeled to financing different sectors in the capital market. . In a broader perspective, the halal industry can be categorized into several sectors, specifically banking and finance, food and beverages, pharmaceutical and cosmetic products, logistic and tourism see Figure 1. Figure 1. The selected sectors under the global halal industry Source: Adapted from Halal Industry Development Corporation 2013 Currently in Malaysia, there is no specific authority body who are conducted or integrated halal industries with Islamic finance. Specifically, it will assess the current practices of the authority bodies on ‘halal certified’ or ‘shariah compliance’ through their main documentation. There are three main bodies which are Jabatan Kemajuan Islam Malaysia JAKIM, Securities Commision SC and Malaysia Department Standard. Therefore, to make sure that Malaysia applied same rules of shariah compliance, industry needs one authority body that control all two sector sectors halal industry and Islamic finance in the same umbrella of industry.

3. HALAL COMPLIANCE