South Africa all set to introduce Islamic Bonds

Johannesburg: Plans by South Africa’s National Treasury to introduce Islamic bonds are gaining a strong support in the African country, amid expectations the move would help boost the state’s economy.

“I am sure this was at the request of those Middle Eastern countries because SA has a small Muslim population,” Kokkie Kooyman, head of Sanlam Investment Management told Fin24.

The National Treasury has announced plans to introduce Islamic bonds as part of efforts to get a share of the booming Islamic banking industry.

Other financial instruments planned by the Treasury 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 installments.

The Sharia-compliant Islamic finance is not new to South Africa with different banks and investment companies offering these products. Several banks as the First National Bank and ABSA bank offer Sharia-compliant services.

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.Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets — not shady repackaged subprime mortgages and banks cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Sharia-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.Analysts opine that offering Islamic bonds will help South Africa lure investments from the Middle East and the Gulf region.

“If people that have been using Islamic banking have been happy all the time, let us have (more) of it,” Steve Meintjes, a senior banking analyst at Imara SP Reid, told Fin24.The banking expert said the introduction of more Islamic finance products into South Africa would enhance the economy.

“The SA economy needs more finance. Islamic banking will enhance the productive capacity of this economy,” Meintjes said.Tom Winterboer, a banking analyst at PwC, noted that Islamic finance products can be accessible to investors beyond the Muslim population.

“It must be a good thing to happen to South African 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.“But South African banks have this expertise.”

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Islamic finance unpacked

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 Shariah All Share [JSE:J203] index and the JSE Shariah Top 40 – (Tradeable) [JSE:J200].

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 unds from the Muslim countries that are shariah-compliant.

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

FNB Islamic finance offers shariah-approved 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 [JSE:SBK], 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 [JSE:NED], South Africa’s fourth-biggest 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. Pros and cons 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 that 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 2% of South Africa’s population is Muslim but the demand is coming from non-Muslims, according to Absa.

“It must be a good thing to happen to South African 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. “But South African banks have this 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 South Africa on an equal footing with conventional banks.

http://www.fin24.com/Money/Investments/Islamic-finance-unpacked-20120123