Islamic finance’s $13bn agri fund opportunity

Sharia compliance and agriculture investment are not two terms you often see together – farmland manager Canada’s AgInvest Properties, and The Treedom Group, the Southeast Asian agarwood investment manager, are the only two firms currently offering sharia-compliant investments. 

But the Shariyah Review Bureau thinks compliance and agri investment make a great match. It business development department has been researching the agriculture fund market in the UK and its openness to the principles. Here Saif Shawqi, assistant business developer at the Bureau, discusses what it found. 

In the past 10 years, nations throughout the world have faced “agflation”, the phenomenon in which food prices rose sharply due to factors such as falling food supply, increasing demand for food due to rising population and with the massive usage of food products as an alternative energy resource. Expecting prices to rise further, hundreds of agri funds were set up globally to capitalise on appreciating food prices.

Another reason behind the rapid expansion of agriculture-linked investments has been its ability to help investors diversify from conventional asset classes, especially as farmland returns have a broad negative correlation with equities and bonds. This characteristic makes it a brilliant diversification tool that can balance a portfolio and offset financial real estate market volatility. Given this “inflation hedge” ability it is quite often compared to investment in gold, however, unlike gold, farmland produces stable income streams and as a result it has been described as “gold with yield”.

The UK has emerged as one of the leading hubs for agriculture investments in the world and, according to our analysis, the estimated market size of this sector is $13 billion.

But is the agri fund market in Britain willing to open its doors to the rising community of Islamic investors?

To find out, we at Shariyah Review Bureau conducted a comprehensive study of the UK agri market. The survey revealed that the agricultural investment market is thirsty for capital and a surprising 50 percent of the respondents are ready to quench their commercial thirst by deploying sharia-compliant products.

Commenting on the potential, Alfred Evans, former chief executive of Climate Change Capital and current chief executive of Islan Investments International, said: “I think there is a great opportunity for sharia-compliant financial products focused on the agricultural value chain. Agriculture is getting a lot of attention from investors for a variety of reasons, and is clearly a focus area for a lot of Middle East investors, the United Arab Emirates states in particular. So, yes, it is an interesting space because there is serious capital to be put to work that might be attracted by a sharia-compliant product.”

Several respondents believe that certifying their funds as compliant is in alignment with their objective of administering ethical funds. Sharia compliance, the board observed, is often equated to ethical standards.

“We are interested in gaining access to the sharia-compliant agriculture fund and investment market,” said Alix Burke, head of communications at Agro-Ecological Investment Management. “We have an ethically-driven approach and it would seem there is good alignment.”

With the rapid expansion of Islamic financial trends in the Middle East and spiking interest for agriculture investments attributable to food security concern in the region, many individuals and institutional investors are now only seeking investment in compliant products.

Mike Wellings, business development director of Agriculture Asset Management, noted that he sees “a demand for sharia compliance. It’s a market that has huge potential. We are aware of the potential for sharia-compliant funds specifically related to agriculture, given the [MENA] region’s requirement for food security going forward, especially from Saudi Arabia.”

For Islamic capital to be attractive, support from the central regulatory authorities is the trump card. Due to the UK’s close proximity to the Middle East, its openness to Islamic finance and the neutrality of English law – which is also practiced in the Middle East – the UK would definitely have more scope for  compliance of  agri funds than other countries, and therefore, the ability to attract capital from the Gulf region and Islamic investors from around the world.

In light of recent falling commodity values, it should be highlighted that agriculture is a long-term investment and not a quick money-making machine. The legendary investor Jim Rogers rightly said: “Farming is going to be one of the best places to make money in the next 10 years, if you know what you are doing.”

Islamic financial markets often lack new products so if the leaders of this industry want to move closer to conventional financial markets, mainstream asset classes like real estate and international equities should take hold and alternative investments, such as agriculture, should be explored and revitalised.

At Shariyah Review Bureau, our long-term goal is to help more businesses develop and expand cost-effective agricultural options through compliant venues. We hope that our efforts will encourage the growth of more compliant farmland investments in the UK, and elsewhere, through the rapidly growing community of Islamic investors. By helping such businesses grow we will help drive more investment towards a clean agricultural future – where sustainable food will be in abundance, easy to obtain and affordable.

It won’t happen overnight but we will continue working hard to make that future a reality.