Islamic Finance in South Africa

By: Mufti Ismail ibn Mufti Ebrahim Desai

South Africa’s National Treasury wants to make the country the hub for Islamic finance in Africa. The country has the most sophisticated and advanced financial,legislative and governance structures and regulations on the continent, and has the potential to be the economic superpower of Africa. This gives the country a unique competitive edge over most African countries in actively capturing and promoting the Islamic finance industry. Within the country, Islamic finance has seen considerable development.

South Africa’s regulators have taken various measures to develop and promote the Industry including amending tax laws to create an equitable and level playing field for Islamic finance. Proposed tax amendments were issued in May 2010. Section 24JA of the ITA, first introduced in the draft Taxation Laws Amendment Bill, 2010, set out the proposed legislation for Islamic financial products. This section provided parity of tax treatment between Islamic finance products versus conventional banking products. Section 24JA of the ITA sets out the tax consequences of diminishing Musharaka, Mudaraba, Murabaha and sukuk.

Sovereign sukuk in the works; Islamic banking assets at 2%

The country currently has one full fledged Islamic bank; Al Baraka Bank was registered in South Africa in 1989. Other banks such as First National Bank (FNB), Absa Bank and HBZ Bank house Islamic finance windows alongside their conventional banking services. Total Islamic banking assets currently account for 1%-2% of total banking assets, indicating much room for growth, and various Middle East Islamic banks are currently eyeing business prospects in the country.

There are currently 11 asset management companies offering various Shari’a – compliant investment products. Oasis Asset Management currently manages the largest number of Islamic funds in the country.

The takaful market has been largely sluggish with only one takaful company. However various private wealthy business houses are currently in negotiations with large insurance corporations to develop Islamic Mutual Indemnity Funds.

During December 2011, the National Treasury invited banking institutions to submit proposals for the provision of advisory services for the structuring and issuance of a debut sovereign sukuk in the local and international markets. The issuance of a government sukuk will attract larger capital inflows to South Africa, the country that has the most developed stock exchange in Africa, and will make the country a more attractive destination for foreign (offshore) investors as well. The issuance of sukuk is in line with the National Treasury’s intention to diversify its funding and investor base by tapping into the huge pools of Middle East liquidity.

Up to 15% of Muslim population use Islamic banking

Muslims represent 2.3% or 1.3 million of the population in South Africa while contributing well over 10% of the GDP, according to some estimates. However, only 10%-15% of the Muslim population uses Islamic banking. Muslim businesses and investment houses have played significant roles in some of the largest infrastructure deals and they control huge pools of liquidity.

The demand for Islamic finance has been largely fuelled by an increasing awareness, increasing trade volumes with the Middle East, growing demand by the local Muslim population for Shari’a-compliant products and an ever increasing demand for more ethical risk sharing-based products given the recent global financial crisis.

Key Challenges

  • The Islamic finance industry in South Africa faces various challenges including the following:
    Lack of qualified and skilled personnel
  • Lack of awareness and geographic spread of Islamic financial products
  • Need to develop more innovative Shari’a-based products
  • Need for government to develop key legislative and regulatory reforms to create a more balanced and equitable playing field
  • Absence of a complete framework for Shari’a-compliant governance
  • Need to develop an Islamic financial market
  • Need to deliver an enhanced relationship based offering to high net worth
  • Lack of secondary Islamic capital market

Six pillars of innovation

It is important to recognise that South Africa’s Islamic finance industry is still in the nascent stages of growth. The following “Six pillars of innovation” will rapidly develop and promote the country as a hub for Islamic finance if implemented successfully:

1. Integrated regulatory framework

A well established and integrated regulatory framework is pivotal and essential for the sustainable development of a competitive Islamic economy. A clearly defined and enforced legal and administrative framework determines how individuals, firms and governments interact. As the industry’s standardization environment grows,there remains a strong need for the coherent and proper development and enforcement of a consistent Islamic financial framework to standardize and regulate the industry.

The South African government should take the lead from mature Islamic finance centres such as Bahrain and Malaysia in actively promoting and developing a robust regulatory framework for Islamic finance.

2. Qualified talent

The Islamic financial industry cannot develop without the professional human capital for Islamic finance. It is necessary to create large pools of experts and highly qualified professionals with in-depth expertise in Shari’a and conventional financial practices.

The government should introduce professional degree programmes, Islamic finance talent development programmes and courses for Islamic finance in collaboration with the central bank, universities, schools and Shari’a scholars.

At the same time, academic Institutes should be encouraged to set up Islamic finance research units and centres of excellence to drive awareness and address the shortage of research material and data on Islamic finance.

3. Islamic financial market

One of the greatest needs of the industry is the creation and development of a
secondary Islamic Capital Market. Islamic banks cannot manage their liquidity in the absence of suitable short term and long term capital market instruments. This drastically affects their competitiveness and profitability since they maintain vast pools of liquidity with conventional institutions. The development of an Islamic Capital Market will dramatically level the playing field between the Islamic and conventional financial institutions.

4. Distinctive marketing and promotion programme

Marketing and promoting a country’s economic activities has become integral
elements of development strategies, actively driven by investment agencies, trade and investment co-operations and bilateral economic and trade agreements.

The United Kingdom is one of the non-Muslim countries that have focused its attention on promoting Islamic finance. The UK government launched an aggressive campaign to promote London as a global hub for Islamic finance in March 2013,launching the Islamic Finance Secretariat and the UK Islamic Finance Council. In 2013 the annual World Islamic Economic Forum (WIEF) took place in London, the first time it was held in a non-Muslim majority country.

The South African government should actively engage the private and public sectors in promoting the Industry via conferences, marketing and promotion campaigns. The government should be encouraged to develop a strategic plan with a clear vision and focus, not only on Islamic finance but also the Halal food and beverages,pharmaceutical, cosmetics, fashion, tourism and lifestyle markets.

5. Central Shari’a board and Shari’a audits

The government should encourage the harmonization and regulation of Shari’a standards by setting up a central Shari’a board. The creation of a central Shari’a board will lead to a minimization of differences among scholars, optimal standardization of Islamic financial Instruments and the harmonization of Shari’a issues.

The Central Bank of Bahrain recently issued a decree making external Shari’a audits mandatory for Islamic financial institutions. South Africa should take heed of this move as external Shari’a audits would increase depositor confidence. The South African government could create independent Shari’a audit firms which would examine and screen the transactions of Islamic financial institutions. The existing auditing firms such as the big four may even develop specialist external Shari’a audit programmes. Shari’a scholars with specialist Islamic finance knowledge may be equipped with auditing skills and employed by such firms.

6. Islamic Economic Free Zones and Hubs

South Africa can also learn from others how to develop the Halal sectors. Malaysia has successfully introduced the concept of “Halal Parks” in rapidly developing its Halal industry and positioning itself as the global hub for Halal products. Halal Parks have successfully attracted USD 2.25 billion in investments in Malaysia in 2013.

Dubai Industrial City has recently launched a dedicated Halal Cluster spread across nearly six million square feet. South Africa already has special economic zones (SEZs) across the country, and an Islamic Economic Free Zone would better drive growth for the Islamic economy sectors, including Islamic finance.

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