Islamic Financial Services - A boom industry
- Just getting into its stride
18 July 2012|
Islamic financial services have become a boom industry. The sector's assets worldwide stood at US$1,3trillion at the end of 2011, 14% up on 2010 and 153% up on five years earlier, reports the UK Islamic Finance Secretariat.
The picture in SA reflects this increase. Islamic financial services assets here are growing at 15%-20%/year, says Yusuf Dukander, an Islamic finance specialist at the SA Institute of Chartered Accountants.
Despite this rapid pace, Dukander says, "Islamic finance in SA is in its infancy. There is still a long way to go." Imraan Jakoet, an analyst at Sanlam's Glacier investment platform unit, agrees. "We believe Muslims in SA are underinvested in financial products that comply with sharia law," he says.
Sharia law lays down strict rules, including the prohibition of the payment or receipt of interest and the banning of investment in sectors such as non-Islamic financial services, gambling, tobacco and alcohol. While this limits Islamic funds' investment universe, it has not prevented strong growth in the sector.
The number of unit trusts in SA complying with sharia law has grown from five in 2007 to 12 and total assets in Islamic funds stand at just under R12bn. The amount of assets Islamic funds could attract has not been determined. But Ernst & Young estimates that the $58bn invested in Islamic funds worldwide at the end of 2011 equalled only 10% of the available pool of funds.
Jakoet says growth is well below potential in the balanced fund segment, which is restricted by a shortage of sukuk (similar to bonds) in SA. Differing from conventional bonds, sukuk must be used to finance a physical asset, with payments to the lender in the form of rent in place of interest. Rent can, however, be determined by reference to a fixed or variable interest rate.
At present managers of balanced funds rely on murabaha, a variation of sukuk, which is essentially a deferred payment contract. An example of murabaha entails selling gold to a counterparty that undertakes to pay the seller its original cost plus a mark-up (profit) at the end of the 12-month contract period.
A lack of sukuk is also hindering development of Islamic banking in SA, says Amman Muhammad, head of FNB's Islamic finance division. At present interest earned on instruments held as liquid assets by banks against Islamic financial liabilities must be donated to charity, he explains.
Things are set to change when national treasury makes its entry into the sukuk market. "We expect it to issue sukuk on the domestic market in rand and on the international market in US dollars," says Muhammad. "Sukuk will help level the playing field for Islamic banking in SA."
Another leveller is expected to come from amendments to SA's tax legislation due to be gazetted in January 2013, says Muhammad. In its current form, he says, tax legislation detracts in particular from development of the Islamic residential mortgage finance sector.
Under an Islamic residential diminishing musharaka mortgage contract a bank buys a property on behalf of a customer and holds it in an equity structure. The customer's monthly payment to the bank comprises rent and the purchase of a portion of the equity. When all the equity has been bought, the customer takes ownership, which requires the payment of transfer duty on the property for a second time. The proposed tax amendments will eliminate this costly problem, says Muhammad.
With the changes to regulations that are envisaged to accommodate Islamic finance, SA will follow the example set by the UK in 2004, says Muhammad. The Islamic Finance Secretariat attributes London's position as the ninth-largest Islamic financial centre and the largest in the Western world to the country's accommodative stance.