Agribusiness to increase Shariah compliant assets in Brazil
Brazil has always been one of the most traditional business partners in the Islamic market, particularly MENA countries, and is the leading Halal meat exporter with over two million tons per year and figuring as one of the most important Halal poultry exporters. The economic relationship between Brazil and MENA countries is currently on the rise, with Brazilian exports of beef to these countries amounting to US$189.75 million just in the first quarter of this year, a growth of 37.6% compared to the results observed in the same period in 2017.
In correlation with the increasing volume of operations involving beef, poultry and other commodities produced in Brazil, it is perceived that there will be an increase in the number and volume of investments made by Shariah compliant and sovereign funds in infrastructure and crop financing, cattle fattening and other financial products offered by Brazilian entities. Most of these investments were conducted by sovereign funds in publiclytraded companies or through other commodities specialized funds. One of these funds was launched by Banco do Brasil, the largest bank in Latin America by assets, and it focuses on shares of Brazilian commodity, energy, mining, oil and gas companies.
Review of 2018
Although several financial operations could be reported, there were three Shariah compliant funds that captained investments in Brazil: SALIC (Saudi Agricultural and Livestock Investment Company), a sovereign fund owned by the Saudi Arabian government; Mubadala Investment Company, another sovereign fund, owned by the Abu Dhabi government in the UAE; and the Rasmalla group, which was originally incorporated to serve GCC investors.
SALIC currently owns 21.4% of Minerva Foods, one of the leading exponents of cattle fattening and meat processing in Brazil, which owns assets valuated at BRL11 billion (US$2.8 billion) by B3 (the Brazilian Stock Exchange3). There were some rumors, in the beginning of this second semester, about the possibility of SALIC acquiring the entirety of shares available, converting Minerva into a closed company, but, at the time of writing this article, this transaction was not confirmed.
In the past few years, Mubadala has invested in infrastructure, commodities and renewable energy assets available in Brazil. One of its main investments was made through a joint venture entered into by Mubadala and the Impala Company (a subsidiary of the Trafigura Group), which holds the share equity control of Porto Sudeste, a maritime terminal focused on iron ore exporting. According to Eugenio Mamede, CEO of Porto Sudeste, the guidance and financial support of Mubadala has been crucial to the establishment of Porto Sudeste in Brazil and the realization of its mission to support Brazil’s iron ore mining sector. According to his projections, the investments provided by the controlling joint venture will allow Porto Sudeste to double its capacity (from the current 50 million tons of ore per year to 100 million tons) and expand into handling different products.
Mudabala Group also joined Snam SpA and EIG Global Energy Partners to place an US$8 billion bid for a pipeline owned by a branch of Petrobrás named Transportadora Associada de Gás, which operates about 2,750 miles of gas pipelines in the lessdeveloped north and northeast regions of Brazil. The pipeline sales negotiations are currently suspended, but are expected to resume in the next year.
Rasmala Group, which describes itself as a leading alternative investment group, located in the UK, recently reported its participation in a short-term financing facility for a listed Brazilian agribusiness to fund the purchase of agricultural inputs secured against a crop, which has been pre-sold to a US$40 billion-plus global agribusiness and food company.
All these transactions show that Shariah compliant funds and MENA region sovereign funds are very interested in investment opportunities in Brazilian assets, especially those related to commodities and infrastructure related to these products. Nevertheless, although numbers provided are impressive, in billions of dollars, Islamic investments are still very incipient in comparison to other foreign investments.
Preview of 2019
One of the main difficulties hampering the full development of Islamic finance in Brazil is that the banking and insurance industries regulations contain several dispositions that may restrain the operationalization of a Shariah compliant contract.
For instance, a bank cannot acquire and/or sell goods in general as part of its corporate purpose. This would be a direct impediment to a Murabahah contract of sale, in which the bank acquires goods for the client and then sets the cost and profit margin of the said goods in the contract, without Riba. A Brazilian bank would not be allowed to buy a certain good abroad (an equipment, for example) and sell it to its client (the final purchaser) with an agreed profit. Banking laws and regulations should be modified to fully accommodate Shariah compliant agreements.
Considering that it would be necessary to have several amendments made to our banking and insurance legislation, Brazil should include Islamic finance in the political and economic agenda. However, there are some measures that can already be taken to incentivize the introduction of Islamic finance in Brazil. One of them is reducing the number of restrictions imposed on foreign banks while carrying out activities in Brazil through branches or subsidiaries or authorizing Brazilian investment banks to offer Shariah compliant investments in their portfolio, through its foreign branches, backed by Brazilian assets.
Being among the 10 largest world economies, Brazil, despite its current economic issues, is and will remain a very attractive market to foreign investors in general. Such investors could come for Islamic finance products, but in certain cases, amendments to Brazilian laws and regulations would have to be made. In consideration of Brazil’s strong position as a leader in commodities exportation, we can expect to see in the coming years an exponential growth in Shariah compliant funding in agribusiness, which is expected to lead to an increase in general Shariah compliant assets offered in Brazil.
Este artigo foi publicado no Islamic Finance News, no dia 8 de fevereiro de 2019.