Perhaps the most surprising fact about Islamic banking is that so many non-Muslims choose to be clients.
When the global financial system was in meltdown last year, the resilience of Islamic banks began to attract attention. Why were these banks able to weather the storm? The suggestion that a banking system is more stable without interest-bearing assets is a tantalising one.
“Islamic banking is based upon what has been called a ‘real economy’,” says Amman Muhammad, managing director of Absa Islamic Banking. “There are no notional transactions—everything is asset-based. Remember that, according to Islam, money is not a commodity in itself, but a means of trade.”
Islamic banking follows Shari’ah law, which is based on principles set out in the Qur’an.
According to Shari’ah law, Islamic banking forbids the payment or earning of interest (Al-Riba), which is considered akin to usury. Muslims cannot take or give interest, though they do still want to see a good rate of return while adhering to Islamic principles. Shari’ah supervisory boards ensure that transactions are in line with Shari’ah principles.
Muhammad points out that some clients are attracted to the ethics of Islamic banking.
“Many of our clients are pleased to know they their money is not being invested in casinos, breweries, nightclubs, pornography and so on,” he says.
Banks currently offering Islamic banking options in South Africa include Absa and First National Bank. Al Baraka Bank has been in South Africa for 20 years and was the first Islamic bank in the country.
Shari’ah-compliant investment products and services are available from Oasis, Momentum, Element, Futuregrowth, Symmetry, 27 Four, Stanlib and Kagiso.
Making a profit
There is, in effect, a difference between making a profit—which is permitted—and profiteering, which is exploitative. In a sense, profit-sharing and equity participation replace the earning of interest.
Partners can use their joint capital to generate a surplus and profits and losses will be shared between the partners according to equity ratio. This ratio is predetermined, but the rate of return itself is not.
In Shari’ah, there are many ways to share profit or returns between a bank and its customers. For example, in a deposit product, profits from a deposit arrangement will be shared between a bank and its depositors based on an agreed ratio and paid as profit share.
How do loans work?
A loan is granted for a fixed period on a goodwill basis and the borrower is only required to repay the amount borrowed. In certain instances mortgages can operate more like leases than loans and fixed rates of repayment are attractive.
What you need to know:
- There are no overdraft facilities on accounts.
- You do not receive interest on credit and, quite naturally, you do not have the option of a credit card.
- Investing only in companies that are broadly Shari’ah-compliant.
- Clients earn profit rather than interest.
- No trading in derivatives .
The South African National Treasury has promised some tax amendments as part of its stated intention to put Islamic banks in South Africa on an equal footing with conventional banks, calling Islamic finance “critical to the expansion of National Treasury’s strategy to position South Africa as a gateway into Africa”.
“With regard to Islamic investments, it’s proposed that the profit share earned by the investor will benefit from the tax exemptions currently provided for interest earned. The exemption is currently between R22 300 and R32 000 per annum,” says Absa’s Muhammad.
* Absa Islamic Banking joined the Teach a Child to Save South Africa (TCTS SA) campaign in July, educating Muslim children about the principles of Islamic banking.
An initiative of the Banking Association of South Africa and the South African Savings Institute, TCTS SA is supported by the Department of Basic Education and equips children with basic financial skills.
Among other lessons, the children were taught that money has no intrinsic value and is a means of trade; the hoarding and wasting of money is prohibited; money must be lawfully earned and spent; and paying Zakah (an obligatory religious levy) purifies one’s money and uplifts the community. These principles are cornerstones in Islamic finance, which holds that money is the bounty of Allah.
Savings plans, budgets and the value of charitable donations were emphasised.
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