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Islamic finance unpacked
28 Jan 2012

WHILE the National Treasury is considering issuing Islamic bonds and has asked interested banks to submit bids, some local banks and the JSE already offer Sharia-compliant financial instruments.

These include the JSE Sharia All Share index and the JSE Shariah Top 40 (Tradeable).

Other instruments include Mudarabah, a form of investment partnership between banks and businesses that shares the risk and losses. There is also Murabah, a transaction in which the bank buys the asset then immediately sells it to the customer at a pre-agreed higher price, payable by instalments.

Kokkie Kooyman, head of Sanlam Investment Management Global, said the Treasury’s Islamic bond issue would be part of a bid to “tap into” the funds from the Muslim countries that are Sharia-compliant.

“I am sure this was at the request of those Middle Eastern countries because South Africa has a small Muslim population,” Kooyman told Fin24, adding the Sharia products and funding are made attractive by the fact that they are not interest-rate sensitive.

FNB’s Islamic finance offers Sharia­approved banking options that are not limited to Muslims. They help FNB clients manage their day-to-day finances, whether they need an account for personal use or a number of products for their business.

Standard Bank Group, Africa’s biggest bank by assets, does not offer Islamic banking services in South Africa yet, according to Erik Larsen, the head of media relations at the bank.

In 2010, the bank launched its first Islamic savings and current account in Tanzania. In July last year Stanbic, a unit of Standard Bank, won approval from Nigeria’s central bank to provide Islamic banking services there.

Nedbank Group, South Africa’s fourth­biggest bank, does not offer any Islamic banking products in South Africa.

Absa Islamic finance offers businesses current and retail accounts. Its offerings range from savings, investments, term deposits and commercial-asset finance.

Kooyman said the Sharia-compliant offerings are worth pursuing because the end result or return is the same as that of conventional banks.

“The returns are also not much different for ordinary investors,” he said.

But Islamic banking, like conventional banking, has its advantages and disadvantages.

In terms of banking charges, clients of Absa Islamic banking and FNB Islamic finance pay the same fees as Absa and FNB clients banking conventionally. Both banks are well known for charging high fees.

In Islamic financing, loans for a house or a car offer fixed repayments, which are an ­advantage to many. This is not the case with conventional banks.

Banking experts said the introduction of more Islamic finance products into South Africa would improve the size of the economy. They added this would also help diversify the banking sector’s funding and investor base.

Steve Meintjes, a senior banking analyst at Imara SP Reid, told Fin24: “If people who have been using Islamic banking have been happy all the time, let us have [more] of it.”

Meintjes said: “The SA economy needs more finance. Islamic banking will enhance the productive capacity of this economy.”

He warned, however, that investors who are interested would have to do a bit of homework to understand the products on offer.

Tom Winterboer, a banking analyst at PWC, said Islamic finance products can be accessible to investors beyond the Muslim population.

Only two percent of SA’s population is Muslim, but the demand is coming from non-Muslims, according to Absa.

“It must be a good thing to happen to SA investors. It is a different principle from the domestic finance we have come to know,” Winterboer said, adding, however, that it needed a different expertise.

The government is also keen on opening the doors to Islamic finance banking in South Africa. It has proposed a tax amendment in a bid to put Islamic banks in SA on an equal footing with conventional banks. — Fin24.

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