04 August 2006
Banking
INTEREST: YES AND NO
By Stafford Thomas
SA institutions see the need to provide Shariah-compliant
services to the Islamic community
Banking, insurance and investment products that comply with Islamic Shariah law
represent one of the fastest-growing segments of the global financial services industry. After
a setback with the collapse of the small Islamic Bank in the mid-1990s, SA is catching up as
institutions grasp the need to meet the demands of a financially significant sector of the
population.
There are between 1,2m and 1,5m Muslims in SA, of whom 300 000-400 000 are
economically active, says Ibrahim Patel, CEO of WesBank Islamic Finance (WIF). In 2004
this became the first major SA bank to begin offering Shariah-compliant banking products.
"The take-up by the community has exceeded our expectations," says Patel. Products now
extend from basic banking accounts to vehicle and mortgage financing, all based on the
fundamental Islamic principle of neither paying nor earning interest, or riba.
Patel explains that riba is overcome quite simply. Vehicle finance, for instance, takes the
form of a lease agreement in which WesBank buys the vehicle chosen by a client and then
places a firm value, including profit, on the total amount to be repaid over a period of up to
60 months.
The approach is termed mudharaba and meets another Shariah requirement - certainty.
Unlike conventional credit agreements where repayments vary in line with the prime
overdraft rate, the amount to be repaid is fixed, says Patel.
The same principle extends to mortgage loans that were introduced for residential and
commercial properties in January this year. "We sign the offer to purchase a property and
then add a fixed mark-up," says Patel. Repayment periods on mortgages extended on this
basis vary from five to 10 years.
Another key aspect of Islamic law, mutual assistance between people, is found in the
cheque account system. All cash, says Patel, is channelled into the finance part of WIF's
business. This is used to finance vehicle leases, mortgages and commercial loans. All
profits earned in the process are shared between WIF and its clients in the form of an
annual dividend. In general, adds Patel, returns should exceed interest earned on a
conventional cheque account credit balance.
As in all Islamic financial services, compliance with Shariah law is overseen and assessed
by a board of independent Islamic scholars.
In April this year SA's Islamic banking sector was broadened further, with Absa's expansion
of Shariah-compliant offerings beyond Absa Private Bank into the broader market. Though
the delivery model into Absa's branch network is still being developed, Absa Islamic
Banking MD Ahmed Moola says there has been an excellent response.
Cheque accounts, vehicle and other finance products are already available. Mortgages will
come later, says Moola, who believes SA's bankable Muslim population could be as high as
800 000.
As with WIF's products, Absa's interest-free Islamic banking services are available to nonMuslims. "We feel many people want the certainty of fixed payments," says Moola.
However, to enable the bank to hedge the risk, they can be more costly than variable
interest rate products.
In SA the Islamic insurance, or takaful, market remains largely unserved. But there are
promising signs. The Shariah-compliant short-term takaful market is already generating
premium income of R70m-R100m/year and could reach about R300m/year by 2015, says
Uwaiz Jassat, MD of short-term insurer Takafol SA. Since its establishment in 2004, the
uptake of Takafol SA's offerings - household and commercial products - has been primarily
by those who have not previously had insurance, for religious reasons.
Reflecting the growing interest of global financial services companies in the Islamic market,
Takafol SA has Germany's Hanover Reinsurance Group as a 49% shareholder.
Among SA life insurers, Old Mutual has so far been the only group to enter the market, with
the launch in 2005 of its Pristine Retirement Scheme, a group benefit product. This product
took two years to develop and also offers group life and disability insurance, says Ikhraam
Osman, divisional manager for Islamic products at Old Mutual.
He explains that takaful follows the Islamic principle of pooling community resources. A
partnership is created between the company and members of the scheme. Profits are
shared between fund members and Old Mutual also receives a fee (wakala) for its
expertise.
Osman says the riba factor has been overcome by using "synthetic cash", an instrument
that can be equated to a zero-percent bond in which all income accrues in the form of a
capital gain.
Investment products became available to individuals this year, but life assurance for
individuals has not yet been introduced, says Osman. But this requires only a minimum of
two people to form a partnership with an insurer, with same principles as group life
insurance.
In the retail asset management arena Muslims have been catered for for many years. There
are now three unit trusts that comply with Sharia law - Oasis Crescent Equity, Futuregrowth
Albaraka and Fraters Islamic Equity - and there are other retail offerings from Absa and First
National Bank.
The basic principle Islamic funds follow is to exclude shares of companies associated with
activities deemed unacceptable, such as alcohol, gambling, non-halaal food and interestbearing financial activity. The filtering process goes further to include acceptable limits on a
company's debt level, interest income, accounts receivable and corporate governance
levels, says Frater Asset Management chairman Anwah Nagia.
The principles of Islamic funds, and generally solid returns, have attracted interest from nonMuslim investors. Of Futuregrowth Albaraka's R625m total assets, 45% is from non-Muslim
investors, says manager Ashraf Mohamed.