The global Islamic finance industry was estimated to be worth $2,5 trillion in 2018 and is forecasted to reach $3,5 trillion by 2024. This robust growth is attributed not only to a growing potential target market across the globe but also to an audience that has developed a deeper appreciation for financial services that resonate with the principles of the Islamic faith.
The Islamic finance industry has developed significantly and incorporates more than just banking and asset management. It has evolved and now boasts a developed Islamic insurance industry, otherwise known as Takaful, and has progressed substantially within the domain of capital markets.
The core developments within this financial discipline have subsequently spawned several other specialist industries to serve this growing market, with specific reference to the audit, advisory, consulting and legal practices.
South Africa
South Africa is known as the ‘Rainbow Nation’ for its diverse cultural tapestry. It is the promotion of this diversity that has spurred the interest and a steady growth in Islamic finance.
The Islamic banking industry was born in South Africa in 1989 with the launch of Albaraka Bank – the first and only standalone Islamic bank in the country. FNB was the first of the large banks to launch an Islamic Window. An Islamic Window is a unit or division of a conventional financial institution whose operations comply with the requirements of Shari’ah, in addition to applicable jurisdictional laws and regulations and which offers only Shari’ah-compliant financial products.
South Africa, being a non-Muslim country, did well to introduce Islamic financial services when it did. While we may not offer the depth of financial services as compared to certain Muslim-majority countries like the United Arab Emirates, Malaysia, Indonesia and Pakistan, South Africa has done well in keeping up with the leading Islamic finance nations of the world.
Looking at back at the last 30 years, the South African Islamic finance industry has grown significantly. It offers a variety of service providers across multiple disciplines and diverse product offerings, and industry statistics prove that customers and institutions alike are scrambling to get involved in this successful industry.
Principles that govern Islamic financial services
What entitles an entity to classify themselves as Shari’ah compliant?
Islamic banking is an alternate form of banking that is based on Islamic Law, which, amongst other requirements, prohibits interest and encourages risk and reward sharing. To ensure an adequate level of adherence to Islamic laws and principles, additional governance, in the form of Internal Shari’ah scholars and an external and independent Shari’ah advisory committee, are generally implemented to ensure the highest level of compliance at a product and institutional level. The Shari’ah scholars that fulfil this compliance function are required to possess the necessary skill set to ensure that all products and offerings meet an internationally recognised standard of Shari’ah compliance.
The leading financial institutions in South Africa now offer Shari’ah-compliant services, to varying degrees.
Apart from the banking industry, there are other industries like the asset management and insurance (Takaful) providers that offer Shari’ah-compliant alternatives.
Why choose Islamic financial services?
Islamic banking is an alternate form of banking that is not solely for Muslims or followers of the Islamic faith: it is based on a set of principles that date back over 1 400 years, and this form of banking is available to anyone who chooses.
Amongst a variety of key underlying structures that can be used to structure a financial product, the following are the most popular due to their ease of use and applicability in modern financial structures. All the names below are referred to in their original Arabic naming conventions. These structures are also referred to and defined for taxation purposes in the South African National Taxation Act, under section 24(JA):
- ‘Ijarah’ refers to a lease-type structure
- ‘Wakalah’ refers to an agency agreement
- ‘Musharakah’ is closely associated with a partnership agreement
- ‘Mudarabah’ a partnership where one party provides the capital while the other provides labour and both share in the profits
- ‘Murabaha is a cost-plus mark-up agreement
- ‘Qard’ is a benevolent loan where no profit is expected by the customer and the bank is not obliged to pay a profit share to the customer
Use and access to funds
Islamic banking keeps Islamic deposits separate from those funds that are used in a conventional interest-based environment. Islamic funds are managed by skilled treasury experts and the funds are deployed according to accepted Islamic financial principles that align with underlying Shari’ah-compliant structures.
The Islamic banking industry has evolved significantly and banks such as FNB Islamic Banking offer customers full access to their money on demand and enjoy the functionality of their banking application and, if one desires, access to an online banking platform as well.
Tax parity
In 2010, the South African Taxation Act introduced legislation in the form of sections 24JA and 8A of the VAT Act, where, for the first time ever, Islamic financial structures were formally recognised in legislation. This recognition enabled an entity to treat an Islamic finance transaction in the same manner as if they had used a conventional structure.
Rate parity
Given the above amendments to the Taxation Act and improvements around the treatment of Islamic financial transactions, the industry is now able to create alignment to conventional options. This has ensured that customers are no longer penalised on rate for choosing Islamic product alternatives.
Ease of switching or change to Islamic financial services
Switching to an Islamic financial product is generally a seamless process within most institutions. The request for a switch to the Islamic option would entail a complete re-routing of funds to the Islamic Treasury, which, generally should not affect customer experience and/or the customer service model. This switch provides customers with the comfort that their funds are now managed in a manner consistent with the requirements of their faith.
Islamic financial services product offering
Over the past 30 years the evolution of Islamic product offerings has increased significantly. This advancement has ensured that various structures are able to cater for customers with varying needs in terms of complexity.
This complexity ranges from simple personal credit requirements to business banking and includes the specific detailed requirements of infrastructure funding. This was demonstrated in the South African National Treasury issuance of a US dollar-based Sukuk in 2014. The debut South African US $500 million Sukuk issuance was four times over-subscribed at the international capital markets, priced at a coupon rate of 3,90%. In addition, the debut Sukuk ensured that South Africa benefitted with the issuance counting as the lowest dollar-borrowing costs, and according to sovereign issuance records, appeared to have been the lowest coupon out of 14, previous dollar bond issuances since 1994.
This product continuum stretches across the overall deposit spectrum, which includes transactional accounts for everyday banking. Savings, call accounts, notice deposits, and term deposits are available for longer-term investments.
Customers looking for assistance with property finance (residential and commercial), asset-based finance (vehicle, equipment, and alternate energy generation). Trade finance is also offered for businesses looking for working capital solutions that can assist with cash-flow management.
We anticipate that the Islamic financial services industry will develop to an even greater extent and will have a positive influence on the overall South African financial services industry.
The key to this evolution lies in −
- The development of innovative product and services
- Creating awareness and training programmes for Islamic financial services practitioners and customers alike
- Attracting banking professionals and Shari’ah scholars with specific skill sets into this industry
Authors
Aseef Hassim CA(SA), FNB Islamic Banking Commercial Head, AND Omar Ahmed Baker CA(SA), FNB Islamic Banking Chief Financial Officer
