Brazil is a predominantly Catholic country, but has carved a niche for itself in the Halal market. One of the largest suppliers of Halal goods to the GCC and the most promising opportunity for Islamic finance in Latin America, Rebecca Simmonds investigates Brazil’s promising future.
Legal and regulatory
Brazil has a large and well-regulated financial market and legal system. The Brazilian government has supported the use of Islamic finance contracts such as Salam, Murabahah and Mudarabah to structure financial instruments that are widely used in Brazilian agribusiness such as Cédula de Producto Rural (certificates of rural commodity), contracts for structuring rural partnerships and Pagamento Antecipado de Exportação (prepayment of exports). Using the latter instrument, withholding tax due on interest payments for trade finance loans has also been reduced to zero by the
Brazilian government meaning that this Pagamento Antecipado de Exportação can be Islamised using Salam contracts for receiving capital investments from the Gulf region.
Business environment
One of the four BRIC emerging markets, Brazil has sustained economic growth of 4.5% over the last five years. The country is also one of the largest suppliers of Halal products including corn, meat and sugar to the GCC; and the Brazilian certification of Halal products is considered one of the best in the world, generating revenues of around US$150 billion in the food market alone. During the last economic crisis the Brazilian beef market suffered a downturn, but the country’s Halal market grew, mainly in the GCC, with export volume increasing yearly.
Banking and finance
The main problems faced by business sectors in Brazil are liquidity shortage and limited credit availability. Islamic finance has been used by some as a solution to this problem. In 2000, Chase Securities and the Saudi National Commercial Bank arranged a one-year Islamic credit facility of US$50 million for state-owned oil company Petrobras. The facility was structured using Murabahah contracts for financing the purchase of petroleum products from the Saudi Arabian national oil company Saudi Aramco, among others. Lenders for the deal were Arab American Bank, Arab Investment Company, Chase Securities and SNBC-Bahrain. In 2013, Brazil’s first agricultural Shariah compliant transaction took place. Brokered by Abu Dhabi Equity Partners (ADEP), a Cayman-registered Shariah compliant boutique investment firm, a Murabahah structure was used to finance a transaction for sugar and ethanol producer in Mato Grosso Do Sul. In the first half of 2013, ADEP agreed to provide inventory financing for Brazilian farmers worth US$100 million, with title of the soft commodity going to the investment firm in return.
There are currently two banks in Brazil offering Islamic banking products – Bank Nizwa and Bank of Tokyo – Mitsubishi UFJ Brasil.
Foreign investment
Brazil is the second most popular global destination in terms of foreign direct investment value and the fifth in terms of number of projects. In 2012, the trade flow between Brazil and the GCC reached US$26 billion, with exports from Brazil to GCC countries reaching US$14.83 billion. Figures for the first half of this year suggest that this figure will be met if not exceeded in 2013. Free trade talks between the GCC and Mercosur, the South American trade block of Argentina, Brazil, Paraguay and Uruguay, were scheduled to start again at the end of 2013. Brazil’s agricultural sector holds great appeal to the GCC countries, who are taking steps to invest in food security for the region. Brazil is seeking further investment from the GCC and estimates suggest that the total worth of GCC direct investment in Brazil is already between US$4-5 billion. In 2009, Dubai’s DP World entered into a partnership with construction firm Odebrecht to buy a majority stake in Embraport, Brazil’s largest private multi-modal port terminal; and in 2012 Abu Dhabi state investment fund Mubadala acquired a US$2 billion stake in Brazil’s EBX group, gaining a 5.63% preferred equity interest in the Centennial Asset Brazilian Equity Fund through the investment.
Challenges
While Islamic foreign investment is growing and the capital market is gradually developing its attraction for investors, the introduction of retail Islamic banking has to come from the domestic side. Whilst the main religion of Brazil is Catholicism and Islam is unfortunately viewed by the majority with suspicion, the number of Muslims in Brazil is estimated to be 200,000, in addition to the population of 12 million Arab-Brazilians.
Financing for the agricultural sector is the biggest issue. Credit availability is a significant problem and even where credit is available interest rates remain high. The total credit granted by the financial system for the agricultural sector was less than 30% of Brazil’s GDP in 2009. Brazilian medium-scale farmers secure credit through rural partnerships, credit sales, forwards and profit and loss agreements: processes which lend themselves well to adaptation using Islamic finance.
Opportunities
Brazil is the best and biggest opportunity for Islamic finance in Latin America. The government and the business community of Brazil are open to Islamic finance, the country is one of the largest exporters of Halal foods which should theoretically provide a good foothold, and has already hosted several Islamic finance events to educate local market players. The country holds great opportunities for Islamic microfinance and has the potential for Islamic finance institutions in Brazil to become a conduit between the wider region of Latin America, the GCC and Asia.
Outlook
Brazil is due to host the World Cup in 2014 and the Olympic Games in 2016. The need for funds to finance infrastructure development is great, and Brazil has been in talks with the UAE to increase ties, enhancing economic and investment cooperation and trade exchange development. Following a recent UAE official delegation visit to Brazil, the Brazilian Ambassador to the UAE, Joao de Mendonca Lima Neto, welcomed the start of a new era of UAE-Brazilian economic relations that would fully represent the potential and opportunities available for both parties, indicating a positive outlook for Brazil’s dealings with the UAE in the near future.
This article first appeared in Islamic Finance News (23 October 2013, Volume 10, Issue 48, Page 18). This is MoFo. For more information, please visit www.islamicfinancenews.com
