A Look at the first ever Halal Food Investable Index

For all those who have wondered when and how the $1 trillion+ Islamic Finance industry and the estimated $640 billion+ world-wide ‘Halal’ food industry will ever connect—we hopefully now have a tool that will kick this off.

ThomsonReuters, in partnership with IdealRatings, have recently launched the SAMI Halal Food Index (Socially Acceptable Market Investments) which is a collection of food industry companies listed on OIC (Organization of Islamic Conference) member country public markets and screened for Halal compliance.  This Index has turned part of the Halal food market into an asset-class and made them approachable to the usually risk-averse Islamic Finance industry.

As large and real the Halal food industry is, it’s ironic very little Islamic Finance investment or transactions have taken place in the sector.  Conversely, the Halal food industry, which by definition is adhering to Islamic principles, has for the most part ignored Islamic compliance of their financing.  Furthermore, they are forgoing an available and compliant capital source that Islamic Finance can provide.

This first of its kind Halal Food Index was unveiled at the opening of the World Halal Forum on April 4th, 2011 by Tun Abdullah Ahmad Badawi, former Malaysian prime minister.  The visionary behind the Index, Mr. Rushdi Siddiqui, Global Head of Islamic Finance and OIC at ThomsonReuters, calls this the re-uniting of twins separated at birth.

Here are some basic facts about the SAMI index and comments from Mr. Siddiqui on its relevance to individual investors, Islamic Finance industry, and the Halal food industry.

Summary Profile

The Socially Acceptable Market Investments (Sami) Halal Food Index is about companies involved in food processing, distribution, fishing, farming, etc. The companies in the index, at stage one, are from 15 OIC member countries, about 270 plus companies with market capitalization of $114 billion.

SAMI Index key criteria:

  • Nation: Member of OIC countries
  • Business Activity: Restaurants, Beverages – Non-alcoholic, Fishing, Farming, Food Processing, Food Distribution
  • Non-permissible Revenue: Has no revenue from pork, alcohol, tobacco and impermissible foods
  • Investment Guidelines: Set of Minimum Market Cap, Minimum Free Float Market Cap and Trading Volume restrictions
  • Shariah Compliance: Equities have to be compliant according to respective Shariah mandate
  • (Click here to download PDF document with detailed methodology)
  • (See list of top performing SAMI Index Companies)

What is the relevance of this Index to retail investors?

Muslims, as consumers, already invest in these companies by buying their Halal products. Now they can be investors of such companies by purchasing shares in these companies directly or through funds. To those (Muslims) who have been saying investing in the stock market is gambling–investing in publicly listed Halal food companies in Muslim countries becomes a true investment vehicle for its own local/regional economies.

Shariah compliance is not enough for many retail Muslim investors, there has to be more connectivity to companies if Islamic investing is going to make commercial bank depositors into capital market investors. For example, there are only 560 plus Islamic funds and total AUMs of $37B, and we speak about 1.6 billion Muslims, do the math!

Islamic equity investors in the west have difficulties understanding why and how Microsoft, IBM, Apple, Pfizer, etc., are Shariah compliant, but they invest because (1) approved by a Shariah scholar AND (2) there is, at minimum, market performance.  The dilemma of understanding becomes more pronounced in Muslim countries where investors typically invest locally or regionally, as they know these companies, use their products, etc.

What does this index mean for Islamic finance?

The industry has been talking about authenticity, innovation, Sharia based funds etc, and the Sami Halal Food index may just be the model for these. It is about Muslim money staying in Muslim countries for growing and building companies that contribute to the real economy.

For Islamic finance, the Halal industry has generally been viewed as the (1) ‘kebabs for lunch’ and (2) as a business model deemed too risky for Islamic corporate loans. But, when Halal presented also as an asset class and about inward investments or even investment banking, it becomes an interesting conversation.

One of the attractiveness of this Index is that it’s much easier to explain to the users/consumers of Halal products.  In the west, typically consumers of products become investors of those companies. It may even go as far as HNWs buying these companies because the products are superior.

Thus, we can now take this Sami Halal food index, 200 plus companies from the Muslim countries, and create a fund based on it for investors. These potential investors are also consumers of these companies’ products in their respective countries. For example, if I’m a fund sales-person tasked to gather investor’s money into the fund, the sales script is much easier than other Shariah compliant funds. The consumer will realize the credibility of the offering, because they are familiar with the company products.

Relevance to Halal Food Industry Players

The Halal food industry has not done itself well in explaining its proposition to either Islamic finance or media journalists in Islamic finance. For example, there is a well known journalist covering Islamic finance for about 20 years, and his coverage on the Sami Halal food Index was that Islamic finance may not move from its comfort zone of real estate understandings to give compliant loans to Halal food manufacturers. Yes, agreed. But, here we are talking about two areas where Sukuk can be utilized by Halal food companies:

1.     To build factories where Halal food is ‘made,’ a true asset backed financing, an Ijara Sukuk makes sense, all things being equal to conventional loans/bonds and level regulatory/tax field. Thus, a Sukuk financed Halal food factory, is an end to end Shariah based solution!

2.     Many of the Halal companies have been built/ financed by conventional debt, hence; fail the debt/asset or debt/market cap financial ratios of Shariah compliant screening. This presents an interesting opportunity to issue a Sukuk and refinance conventional debt with Islamic paper, hence, increase supply of corporate Sukuk and number of companies in the Halal food space that pass the Shariah complaint financial screens. Malaysia has shown this can be done, and has done it. For example, during my days at my previous employer, an index provider, PLUS, the major toll operator, was failing the debt screen, issued a Sukuk (aligned to AAOIFI standards) and sued proceeds to refinance conventional and BBA debt, hence, becoming a  Shariah complaint company in the Islamic index for the country.

What is the role of IdealRatings and World Halal Forum?

IdealRatings has been screening companies for Sharia adherence for a number of years. They do research-based screening over the commonly used automated screening. World Halal Forum, along with International Halal Integrity Alliance, has full understanding of the Halal food process.

Tun Abdullah Ahmad Badawi, former Malaysian prime minister, congratulating Mr. Rushdi Siddiqui on the launch of the SAMI Index at the World Halal Forum held April 4-5, 2011, in Malaysia

What are the challenges faced by food companies in the index?

The major challenges include: (1) excessive weighting of Malaysia’s Sime Derby, we had to put a ceiling on its weighting to 20 per cent; (2) free float is small for many companies and (3) illiquidity for many companies. These are common issues when investing in emerging and frontier markets. However, the more important point is that these companies, including the small capitalized companies, are now in the world’s first Halal Food Index, and are on the radar screens of investors.

What are the expectations of the Index?

We expect investment products like mutual and exchange-traded funds will be launched off of the Index, giving consumers another viable avenue to invest. A Halal food fund may be easier to explain to the Muslim ‘woman and man on the street’ than Sharia compliant companies like Exxon Mobile, Pfizer or Procter & Gamble. As the index gathers traction over time in the marketplace, it will become a high-profile index, hence, an ideal marketing opportunity for investor relations department for companies in the index. It may even encourage privately held Halal food companies to go public to be included in the index.

SAMI Halal Food Participation Index (March ‘10 – March ‘11)
TOP PERFORMERS

(Disclaimer Note:  DinarStandard is on the Advisory Board of the SAMI Halal Food Index)

Related:  DinarStandard Research Brief “State of Food Insecurity & Opportunities in the OIC Countries.”

Corruption in Muslim Markets – Special Report

 

Special Report

The age of Wiki-leaks, social-media and Al-Jazeera, has enabled people across Tunisia, Egypt, and elsewhere to expose and galvanize people’s frustrations with their governments.  Indeed, corruption in all its forms has been one of the main reason for the major inequities created in these societies and perhaps is its root cause.

In this special report, we look at Corruption in the mostly Muslim majority 57  Organization of Islamic Conference (OIC) countries.  We focus specifically on the business community, its common corrupt practices or environment, and opportunities of curbing its cancerous effects.  This disease of corruption has been crippling the OIC economies and societies for far too long.  However, the recent revolutions in Tunisia, Egypt and now Libya provide some hope, perhaps indicating that the people may drive not just political change, but economic change as well.

Jump to:

Dismal State of Corruption in Muslim Countries

Transparency International (TI) is a global civil society organization focused on fighting corruption.  It defines corruption as the abuse of entrusted power for private gain. TI has more than 90 chapters worldwide and an international secretariat in Berlin.

Based on the TI Index, 51 of the 55 OIC member countries covered by this list are corrupt. 38 of which would fall under the severely corruption band of 2.9 score or below!

TI’s Corruption Perception Index (CPI) measures the perceived level of public-sector corruption around the world. The CPI is a good initial tool to see the state of corruption in various countries. The 2010 report  covered 178 countries covering perception of bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts.

TI’s Corruption Percept Index
Ranking: Least corrupt to Most. Score:  1 (Highly Corrupt) to 10 (Very Clean) (Filtered for OIC member countries; 55 countries covered, top 10 and bottom 6 shown)[table id=9 /]Source: Transparency International. To see the full OIC list click here

Although not focusing on the private sector, this report paints a disturbing picture of the prevalent public-sector corruption in Organization of Islamic Conference (OIC) member countries which has direct implications to the private sector .   The list ranks countries on a scale of 1 (Highly Corrupt) to 10 (Very Clean.)  Countries below the score of 5 are considered corrupt in some significant way.

Given this criteria, the report states that 51 of the 55 OIC member countries covered on this list are corrupt.  Of the 51 covered countries, 75% (38 countries) would fall under severe corruption band of 2.9 score or below!  Another way to see this would be that OIC member countries form 42% of the corrupt nations on this list while they only represent 8% of the non-corrupt nations.

Qatar (7.0 score) comes out to be the least corrupt amongst OIC member countries followed by United Arab Emirates (6.3 score), Brunei (5.5 score), and Oman (5.3 score.)

The most corrupt countries from the OIC (bottom of the list) were Somalia, Afghanistan, Iraq, Uzbekistan, Turkmenistan, and Sudan all with a score of less than 2.

Amongst the large OIC economies, Indonesia (2.8) , Pakistan (2.3) and Iran (2.2) have the worst scores.  Other large economies fare relatively better Saudi Arabia (4.7), Malaysia (4.4), Turkey (4.4) but still below the the score of 5 and with ample corruption issues.

The cleanest, non-corrupt nations in the world, according to this list are Denmark, New Zealand, and Singapore all with a score of 9.3. 

Corrupt Sectors/ Institutions

Click image to see full illustration

TI’s Corruption Perception Index (CPI) covers just the public sector.  However, the CPI also serves as a strong and ominous indicator of structural corruption inherently prevalent in the private sector, given the major role played by the central governments of the OIC member countries in their respective corporate sectors. This is confirmed by the fact that the institutions considered most corrupt are usually government related entities, as shown in the table.

TI’s Pakistan Chapter concluded a local survey in June 2010 on Corruption Perception in Pakistan (CPI score 2.3, CPI rank #143).  The survey revealed that the Police remain the most corrupt public institution, followed by the Electric Utility, coming in at second most corrupt, and the Land Administration office rounds out the top three most corrupt institutions in Pakistan’s public sector. A similar study conducted in Indonesia (another major OIC market with high perceived corruption) shows that the Police, Customs, and Immigration institutions are the key purveyors of bribery.

In terms of business sectors, the TI Pakistan report showed that Builders/Contractors were perceived to be the most corrupt (see table).   This assertion is supported by findings of the global study of Industries most prone to corruption, which shows Public Works/Construction as most prone to corruption.

Click image to see full illustration

Prevalent Forms of Corruption

When looking at the wide array of ways and types of corruption, it is fair to say that evil geniuses are hard at work.  Its impact is catastrophic and lives and livelihoods are affected.  Below is a breakdown of some of the main ways corruption takes place; please note, this is not a comprehensive list – but rather just a snapshot – of deviant business tactics.

Both big and small

Corruption happens at individual level, or by big and small business and public entities who engage in it as part and parcel of their culture and processes.

Types of Corruption: DinarStandard Illustration
Click to see full Illustration

Indeed corruption is both small and big.  Practiced on a smaller scale corruption usually involves relatively small amounts of money, including bribery (grease money or speed payments). Whereas “big corruption” is most dangerous – where policy making and business collude to design and implement projects and initiatives compromised by corrupt practices.  In big infrastructure projects for example, government officials in the process of making decisions of significant economic value, routinely demand bribes or kickbacks for ensuring that tenders or contracts are awarded to specific contractors.

Main forms

The main forms of corruption can be broken down as follows:

  • Cronyism/ Nepotism: Favoritism in appointing for posts, promotions
  • Bribery: The most common and prevalent form of corruption. Kickbacks, ‘Speed money.’
  • Embezzlement:  Theft of public property or money.
  • Fraud: Procurement fraud, insider trading, money laundering, price fixing, accounting irregularities, etc.
  • Extortion: Threatening with authority to extract favors
  • Grey areas: Gifts, client expenses.

To gather some opinions on corruption, DinarStandard spoke to a number of executives from Pakistan, Bangladesh, Turkey and Indonesia.

In Pakistan a “personal bribe” seems to be the most common unethical business practice. Athar Mian, a technology executive, lists: “Personal bribes, misleading information followed by deliberate delays.” He says that unnecessary regulation can also be a problem because “all rules can be interpreted or re-interpreted to your tastes.”

In Turkey, tax evasion, bribery, smuggling, and domination attempt of a target market are the norm. Yakup Kocaman, a market analyst, relayed that some small and medium size companies employ workers illegally in order to reduce employment cost. “Total cost of a legal worker is USD 600 , which is far higher than competitors like China and India.”

Corrupt practices thus limit formation of competitive market environment for both local and global companies. “Foreign investors prefer to enter the more stable markets like banking, insurance, telecom, energy and hesitate from less-regulated markets such as textile, apparel, tourism and construction”, Kocaman said. The Turkish government is actively working to minimize bribery.

Kristanto Santosa, Executive Director, Business Innovation Center in Indonesia, explained that bribery exists in Indonesia because it falls under a gray area. “Many business people consider bribery common practice and ‘ethical’ even though it is formally illegal.”

Samiur Rahman, a Bangladesh based entrepreneur, points to infancy of markets as a contributing factor to corruption. “For example, in a country, such as, Bangladesh that was liberated in 1971 — existing laws come from 3 sources: British, East Pakistan Pre-1971, and Bangladesh Post-1971. This contributes to both gaps and overlaps (in addition to confusion) and regulatory arbitrage.”

Why it matters: The Business case

World Bank’s 2008 estimates show that the cost of corruption equals more than 5% of global GDP (US $2.6 trillion), with over US $1 trillion paid in bribes each year.

Corruption risk is a business reality today with a major cost to companies and national economies.  The UN Global Compact report on business corruption summarizes the economic impact by stating that, “corruption impedes the development of markets, drives away investment, increases the costs of doing business, and undermines the rule of law.”

World Bank’s 2008 estimates show that the cost of corruption equals more than 5% of global GDP (US $2.6 trillion), with over US $1 trillion paid in bribes each year.

This corruption adds up to 10% to the total cost of doing business globally, and up to 25% to the cost of procurement contracts in developing countries.

Another way to look at it is that for a business moving from a country with a low level of corruption to a country with medium or high levels of corruption is found to be equivalent to a 20% tax on foreign business.  Thus, corruption levels are an important factor for corporations to consider when analyzing the economic feasibility and impact of expanding or moving operations into an emerging market.

A 2008 PwC report looked at the business case for an effective anti-corruption program by surveying 400+ global executives.  “45% of respondents say they have not entered a specific market or pursued a particular opportunity because of corruption risks, 39% say their company has lost a bid because of corrupt officials, and 42% say their competitors pay bribes.”

They also highlighted that, “If corruption was discovered, 55% say the most severe impact would be to corporate reputation. This is greater than the combined total of those who say legal, financial and regulatory impacts would be the most severe.”

Why it matters: Ethical/ Islamic Underpinning

“And O my people! Give full measure and weight in justice and reduce not the things that are due to the people, and do not commit mischief in the land, causing corruption.” The Noble Qur’an – Hud 11:85

Certainly, core principles of ethics and morality as it relates to economic corruption are universal.  So for those communities and environments (family, education, etc) that value good morals, corruption’s catastrophic impact on others in society and community would be a big concern.

For believing Muslims, there’s added concern of accountability to God for acts of corruption.  There is indeed a strong emphasis in Islam against corruption and in support of just and equitable transactions.  Below are just a couple references from Quran and the Hadith (sayings and actions of the Prophet Muhammad, peace, mercy and blessings be upon him.)

“And O my people! Give full measure and weight in justice and reduce not the things that are due to the people, and do not commit mischief in the land, causing corruption.” The Noble Qur’an – Hud 11:85

I heard the Prophet (saaws) saying, “Any man whom Allah has given the authority of ruling some people and he does not look after them in an honest manner, will never feel even the smell of Paradise.”  Sahih Muslim – Volume 9, Book 89, Number 264, Narrated Ma’qil

Leadership of any sort, including managing a business and/or team, is seen as a heavy undertaking, in terms of both practical and spiritual liability, requiring a high level of responsibility in both morality and ethics.  Given this strong emphasis on just and equitable dealings in Islam, one would naturally expect a low affinity towards corruption in Muslim markets.  Unfortunately, in practice (as shown earlier), Muslim markets are notoriously corrupt.  Perhaps this is a function of lack of awareness of Islamic principles governing business transaction amongst the local professionals.  More likely than not, the rampant corruption is an indicator of a weakness of ‘Imaan,’(belief in God) and ‘Taqwa’ (God consciousness)?  Interestingly, TI’s Pakistan report showed that while 71% said people get involved in corruption “under duress,” still 29% said it is done “voluntary.”  Sadly, this is  certainly a sign of losing Islamic and moral character in exchange for a quick, unethical, and undeserved economic return.

Corruption Controlling Guidelines for businesses

So what can be done?  When corruption has infested so many aspects of a business environment, how can it be controlled?  Fortunately, there are many institutions across the world and Muslim markets who are striving to eradicate corruption and push to establish a just and equitable business environment.

The “UN Global Compact” is an initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. Its Anti-Corruption efforts are driven from UN Convention against Corruption (Principle 10.)

The UN Global Compact has an online anti-corruption tools inventory. The inventory is intended to guide companies through various initiatives and tools to help curb unethical dealings.  These tools provide anti-corruption guidelines and integrity systems, training, whistle-blowing systems and reporting.

Building an Ethical Culture
  1. Commit to ethical business practices
  2. Talk to your employees
  3. Make rules and communicate them
  4. Make it part of everyday business practice
  5. Have an open door
  6. Apply discipline
  7. Recognise ethical behaviour
  8. Report corruption
  9. Consider collective action

Source:  Anti-corruption guide for South African SMEs

TI’s local chapters in Bahrain, Turkey, Pakistan, Malaysia, Indonesia and other places also support businesses in instituting anti-corruption practices and policies.

The global consultancy PriceWaterhouseCoopers, published a report on “Confronting Corruption”. The report presents five steps to establishing a better anticorruption program that cover, 1)Risk analysis, 2) Implementation, 3) Sanctions process, 4) Help lines, 5) Monitoring.

Similarly, an anti-corruption guide for South African SMEs presents ten steps to building an ethical culture as shown in the table.

Conclusion

Corporate corruption is an epidemic plaguing the highly interconnected economies of the modern world, and unfortunately, the OIC countries are no exception.  In fact, the OIC countries are some of the worst sources of corruption in the global economy.  The Prophet Muhammad (SAW) shunned corrupt practices long before any form of index was formulated, some 1400 years ago. OIC countries need to seriously look at the implications of their gray areas and “permissible” corrupt practices, and make a concerted effort to return to these core principles of justice and morality as advocated by Islam.  Morality demands it, divine accountability demands it, and such practices do not bode well with the international market.  Sustained corruption will only cause the uncontrollable growth of inefficiencies and overhead to aggregate, resulting in heavy economic loss.  Countries, companies, and institutions alike with low tolerance for corrupt practices will not work with massively corrupt environments, and will naturally close opportunities of potential investments in corrupt markets.

As leaders in the OIC markets are awakening to a higher level of accountability and responsible governance, demanded by its grass roots revolutions, driven by the rejection by the people of corrupt regimes, we hope the tide of corruption in these markets will start changing as well.  The question now is how does this momentum of change translate to the business sectors?  Will a consumer revolution also demand accountability of business leaders?

As the respected scholar Shaykh Ibn Taymiyyah said, “This is why those who are in authority are of two groups: the Scholars and the Rulers. If they are upright, the people will be upright; if they are corrupt, the people will be corrupt.”

See Related Report:

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Corruption is a vast topic indeed and we have just touched its surface.  Please join us with your comments below, or on our Facebook page.

Potential of the Palestinian Private Sector in Crisis


Mr. Sam Bahour and Mr. Bashar Masri are two symbols of the resilience and potential of the Palestinian economy which continues to exist in perpetual crisis.

Bashar Masri runs Massar International – a private sector holding company based in Ramallah, Palestine. It includes an advertising agency, a management consulting and technology services firm, real estate ventures and financial services firms.

Its subsidiary, Sahem Trading & Investments is the largest brokerage house serving the small yet growing Palestinain capital markets and recently introduced the first ever e-trade operation allowing local and international investors to buy and sell Palestinian stocks online.

Meanwhile Massar also has brokerage houses and real estate interests in Jordan, Egypt, Morocco and Serbia.

Similarly, Sam Bahour is another Palestinian private sector stalwart who first participated in the establishment of the Palestine Telecommunications Company (PalTel), which is today the largest business enterprise in Palestine.  Mr. Bahour, who is also a prolific writer on the Palestinian plight, now runs Ramallah based Applied Information Management which provides Information Technology consulting services in a growing IT services sector.

The fact that such new economy ventures are being managed by people subjected to a crushing occupation of their lands is a tribute to the Palestinians spirit of survival with dignity.

Both Mr. Bahour and Masri are part of the professional, globally experienced Palestinian diaspora, which post the Oslo Peace Accords in 1993, moved to Palestine to contribute and build businesses in the hope that the Israeli military occupation will end. They were able to invigorate the Palestinian private sector and leverage the qualified workforce (93% literacy rate) in building and supporting a new Palestinian economy which today includes, a stock market, a banking industry, an ICT industry, an olive oil industry, a furniture industry, and a pharmaceutical industry, among others.

Resilience in adversity

Since the occupation began, the economy of the occupied lands (the Gaza Strip and the West Bank including East Jerusalem ) have been systematically tied to that of Israel .  In 2003, this wounded economy was sent reeling with  Israel ‘s decision to unilaterally ‘disengage’ with the Palestinians.  Thousands of workers allowed into Israel for work were stopped–causing a sudden spike in unemployment, and the Separation Wall’s cut farmers from their lands causing major strain to the agricultural sector.  Compounding the crisis had been the lack of free movement within the occupied territories and very limited market access.

The list of adversities is endless, but the recent situation in Gaza where Hamas militants have taken over resulting in further Israeli restrictions has deepened the abyss.  It is amidst such continual crisis which Mr. Bahour calls “hyper resilent” that the private sector has been able to keep its head above water, backed by a quality workforce and fundamental market potential.

Many governments and businesses support the Palestinians through massive humanitarian programs.  However, as is true with any economy, the real sustainable engine of development and survival has to be its entrepreneurial private sector.  Especially, given the endurance of this private sector and the market potential even in crisis, the World Bank and many professionals such as Mr. Bahour are asking donors to not only provide near term humanitarian aid but invest in real opportunities that support long-term sustainable development.

Problems choking the private sector

A March 2007 assessment by the World Bank on West Bank and Gaza Investment Climate revealed that shrinking market access and the lack of free movement are the main constraints to growth for Palestinian enterprises.

The report concluded that relative to other countries in the region, the Palestinian investment climate is actually good: petty corruption is low, the bureaucracy is relatively efficient and financial markets are well developed.   Unfortunately, the growing settlements and movement restrictions imposed by Israeli authorities for security reasons overshadow all other elements of the investment climate. The restrictions close off markets, raise transaction costs and prevent producers from guaranteeing delivery dates.

Gisha, an Israeli Legal Center for Freedom of Movement, just released shocking data about Gaza ‘s economy, post-Hamas overrun. They state that:  “75% of Gaza ‘s factories have shut down because of the closure of the borders. 85% of Gaza residents are already dependent on food aid and the number is growing. There is a serious shortage of raw materials, including flour and sugar for household and industrial  consumption, and prices of raw materials have risen between 15% and 34%.

In addition, since the Palestinian economy is tied to Israel, it has a higher cost structure than other countries producing labor intensive products. The average wage of a production worker in the West Bank and Gaza  is about twice that of a Jordanian worker and almost three times an Egyptian’s. According to the World Bank report, if the Palestinian private sector is going to grow and provide jobs for the rapidly expanding population, Palestinian entrepreneurs will have to invest and move to high value goods that can compensate for the high costs of production.

The challenge is also exasperated by growing poverty amongst the populace.   Kevin Kennedy, the UN’s Jerusalem-based Humanitarian Coordinator recently said, “Two-thirds of Palestinians in the West Bank and the Gaza Strip are now living in poverty. Growing numbers of people are unable to cover their daily food needs and agencies report that basic services such as health care and education are deteriorating and set to worsen much further.”

There is certainly a steady stream of state donation to counter this.  Mr. Sam Bahour in one of his recent writings pointed out that on average, donors annually injected $650 million into the Palestinian Authority from 2001-2007. This amounts to over $7 billion, more per capita than anyplace in the world except for Israel, which is heavily subsidized by the U.S.

However he laments that of those funds, less than 5% were invested in private sector development.  The result he said is that, “state donor’s role in funding Palestinians’ ‘development’ turned into an international underwriting of the Israeli occupation, reducing, and many times removing, the financial costs of military occupation from Israel. In short, knowingly or not, donor funding had an accomplice-type role in allowing the situation to reach where it is today.”

What’s Needed

Mr. Sam Bahour’s plea is clear — an integral part of every donor intervention should include support to the Palestinian private sector which is the only place where sustainable development can be realized.  “Even with meager donor support, the private sector has proved its stamina and resilience in the face of crisis. Productive economic sectors have been organized, firms are now experts in crisis management, and a greater understanding of the limitations of economic growth while yet under Israeli occupation has been internalized” said Mr. Bahour.

The World Bank report supports Mr. Bahour’s assertion and offers specific recommendations both on political and investment fronts.

Politically it recommends that free movement and access must be re-established, while maintaining Israeli security.   At the same time investments should focus on building enterprise capabilities.  In this unstable situation, Palestinian enterprises are highly risk averse and the level of investment is below what is socially optimal. Palestinian enterprises need support to help lower the cost of developing learning mechanisms and to offset some of the risk of investing in new capabilities.

The report suggests that focusing investments on creating a few world class “made in Palestine ” brands that will offset some of the negative perceptions about the ability of Palestinians to reliably supply goods.  It also suggested a matching grant challenge fund or some other type of program that directly supports individual Palestinian enterprises upgrade their internal capabilities.  Such support however must target specific market failures and should focus on helping find and adopt new technologies and opening new markets.

Investment Opportunities

With a total of approximately 4 million Palestinians living in Gaza and the West Bank, the potential of investment opportunities to serve even the domestic market is certainly there.

Take the Fast-Moving Consumer Goods (FMCG) sector which includes processed food, beverages, personal care and household consumables.   According to a 2007 report by an initiative named Intajuna to enhance the local FMCG sector, the estimated market size in the Palestinian territories is $1.7 billion.

What’s to be noted is that 34% of this market is being served by local manufacturers while 50% is served by Israeli products and 16% by other foreign products.  There is certainly an opportunity for the existing competing local Palestinian players to gain a larger market share here.

Intajuna is an initiative to help identify and raise the competitiveness and profile of 10-15 such local company products.  The project is supported by the Swiss Agency for Development and Cooperation and is being executed by a local consulting firm Solutions for Development Consulting Co.

Similarly, Palestine ‘s pharmaceutical industry is a unique opportunity and a symbol of innovation within its private sector.  According to the Palestinian Investment Promotion Agency, the total value of the annual pharmaceutical’s supply is $65 million in the Palestinian territories.  Currently there are six major Palestinian pharmaceutical companies, with revenues of $25 million.  The balance of $40 million in sales is covered by Israeli and Foreign manufacturers.  Even besides the export potential, the local players have an opportunity to expand their domestic market share.

Beyond the above two examples, a quick look at company listings on the Palestinian Stock Exchange also gives a good view of the diversity of the Palestinian corporate sector.  The stock exchange which just completed its tenth year in existence has 35 companies listed with a total market capitalization of $2.1 billion (as of Aug 2007.)   The market has certainly suffered in the last two years but has showcased a steady mix of profitable business enterprises from the services, investment, banking, manufacturing and insurance sector.

To facilitate investments, the Palestinian Authority in 2005 launched a one-stop-shop, The Palestinian Investment Promotion Agency (PIPA),   which simplifies the registration and facilitation of new private sector investment.  Indeed, credible structures now exist to support investments as evidenced by a positive Doing Business Report on the Palestinian territories as well as endorsement by the World Bank of a competitive business process.  A 1998 Investment law even guarantees investors the right to repatriate all financial resources, including capital, profits, dividends, wages and salaries

Foreign Investment

Foreign Investment in the Palestinian economy isn’t completely an unchartered affair and shouldn’t deter first time investors.  In September 2006, Kuwait based Wataniya International won the bid ($356 million worth) to build and operate a second mobile network in Palestine and in December 2006, Wataniya International signed a partnership agreement with the Palestine Investment Fund (PIF) to form Wataniya Telecom in Palestine .  Wataniya expects mobile penetration in Palestine is to grow by 70% in the next 10 years and it hopes to be the driver behind that growth.

According to a 2005 FDI report by the Euro-Mediterranean Network of Investment Promotion Agencies (ANIMA) other recent investments have included, Kuwait based Global Investment House’s 5% take over of the Al-Quds Development & Investment Bank.  Similarly, the largest MENA region logistical and overnight delivery services company Aramex bought Al Khazen Distribution in Palestine  in 2005 expanding the number of point-of-sale outlets to 150 compared to the earlier 40.  Also, the emerging global real-estate developoer Emaar Properties has setup Emaar Palestine.

Major infrastructure related investments have also been undertaken.  A $500 million infrastructure investment by  CCC Consolidated Contractors Company ( Saudi Arabia ) aims to rehabilitate and construction strategic Palestinian projects.   It also planned on constructing of a 800 to 1000 MW electric power station at Gaza using natural gas.  The electricity produced would be transported by the Israeli network on the West Bank .  Any eventual surplus would be sold on the Israeli market.

An Export oriented private sector

The Palestinian economy has also strategically been setup as an export oriented industry.  In 2003, the total estimated private sector output from the Palestinian territories was a little over $3 billion (PCBS economic statistics).

Stone/ Marble and Agricultural produce were Palestinian territories largest export categories (see below).  However, a healthy set of value added product categories also exist and are key growth sectors.

According to the Palestinian Investment Promotion Agency, Information Technology is the fastest growing sector of the Palestinian economy.   Mr. Sam Bahour’s company, Applied Information Management, is part of this sector which is benefiting from a sophisticated telecom infrastructure, the existence of an educated labor pool and adoption of international quality standards such as CMM and ISO and supportive international trade agreements.

The Palestinian Information Technology Association (PITA) represents 56 companies in this sector and is a good place to start in engaging with qualified vendors.  In addition to serving local market needs, these IT service providers are poised to tap into the regional IT services boom specially using their English/Arabic proficiency as a regional advantage.

Mr. Sam Bahour however provides a sobering reminder of the challenges on the ground saying, “To remotely service clients many traditional services are required, access to enter and exit country to be able to visit clients, removal of Israeli occupation from the provisioning of basic services, like telecom, and a working postal system, among others.  So this sector remains to have more potential than it currently has impact on the ground.”

At the same time, as Mr. Bahour points out, the private sector has also built a unique crisis management capability.  “The ability for private sector firms to remain operational after so many decades of strife, and in specific the last 7 years of Israeli battering of our economy, is proof that our private sector is hyper resilient and this characteristic is one that can be utilized across the globe, especially in troubled areas.”

For those interested in engaging with Palestinian companies but didn’t know where to start, can either contact industry specific trade associations or utilize the services of the Palestine Trade   Center (PalTrade) which serves as a one-stop-shop for all trade related needs.  Its recently released Export Directory is also a great resource to identify vendor and partners from the Palestinian territories.

Foundation of future state

With all the promising private sector signs, the harsh reality is that the much of the Palestinian population is living in poverty and under a crushing occupation.  Short of a political solution, the responsibility of the global community, especially in the Muslim world, is to go beyond humanitarian aid and support the resilience of the Private sector to survive and build sustainable development.

Mr. Sam Bahour makes a pointed remark that, “The donor community has a historic responsibility to Palestinians, especially after so many years of observing the Israeli occupation from afar and a decade of footing the bill as Israeli actions continue unabated. The challenge to donors today is to convert assistance to the Palestinians to sustainable assistance, equal in priority to relief and humanitarian assistance, but sustainable in a way that creates an enabling environment allowing the private sector to assume its natural role of becoming the foundation of a future state.”