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Sunday Times STLive By BRENDAN PEACOCK, 2012-06-10

Shariah banking growing rapidly

Kazakhstan's Minister of Industry and Trade Aset Issekeshev speaks at the World Islamic Banking Conference in Manama, December 7, 2009.
Image: STR Reuters

Many non-Muslims like knowing they are not investing in alcohol, tobacco or porn

More than 100000 South Africans make use of the shariah-compliant banking products of local banks.

Eric Enslin, head of client engagement at FNB Wealth, said the shariah customer base is not exclusively Muslim.

Enslin said shariah banking is consistent with the principles of Islamic rulings and their practical application through the development of Islamic economics. Shariah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as trade and other activities that provide goods or services considered contrary to its principles.

With shariah products, profit comes exclusively from the nature of the agreement. "There are a number of ways trade contracts can be set up, such as rental with a view to ownership, cost plus mark-up, and more," Enslin said. "An example of a rental agreement could be the financing partner [the bank] purchasing the asset on the client's behalf and renting the goods to the customer at a fixed rental repayment price over an agreed period. The rental amount would include the bank's profit mark-up that is agreed at the inception of the sale. The agreed repayments are not subject to any fluctuations, irrespective of market conditions."

Without any fluctuations, Enslin said, the customer can rely on a constant repayment amount throughout the period of the contract.

This provides the certainty required by shariah, and the stability is a win-win for bank and customer, said Enslin. "The structure of Islamic finance products is gaining rapid acceptance as a viable alternative to traditional Western banking. This is because the sale and buy-back agreement between the financier and the customer is agreed when the partnership is entered into. The terms of the sale and the profit margin are fixed."

FNB's Islamic product client base has been growing at 25% a year, showing rising demand.

Absa's head of retail markets, Arrie Rautenbach, said the Islamic banking product choice is available to anyone - and for reasons beyond the usual. "Many non-Muslims choose Islamic banking products because they like knowing that their funds will never be invested in industries that are potentially negative for society, such as alcohol, tobacco, gambling and pornography. Absa also offers an Islamic will, Islamic risk cover (Takaful), Islamic business banking and Islamic private and wealth banking. Even shariah-compliant exchange traded funds (ETFs) such as NewGold and the Shariah Top 40 ETF are available through Absa Capital.

"Any company - small, medium or large - that chooses an alternative to conventional banking can make use of the Islamic business bank offering," said Rautenbach. "During June the Islamic Forward Exchange Contract [FEC] from Absa Capital will be launched to support international trade by Islamic banking customers. Support for companies wishing to do international business is a current focus and products in the pipeline include a unique working capital solution and letters of credit, which will be shariah-compliant."

Will you never earn or be charged interest if you opt for a shariah-compliant bank account? "Conventional banking pays interest, which is a guaranteed amount," said Rautenbach. "Islamic banking pays a profit share, which is not guaranteed as it is the sharing between the customer and the bank of profit earned by the bank on the customer's behalf. Shariah compliance also requires complete transparency of contract, so the customer knows in advance what his or her expected share of the profit earned will be.

"Islamic finance products require that there is an underlying asset. This is one of the reasons why Islamic banks fared better in the recent economic meltdown than many conventional banks. For example, in a vehicle finance transaction, after being mandated by the customer, the bank buys the car and agrees with the customer what profit mark-up will be added to the purchase price. The cost of the car plus the profit mark-up is then divided by the number of months the customer chooses for repayment to arrive at a monthly repayment amount for the duration of the contract - this could be anything up to 72 months. What the Reserve Bank does with interest rates will not affect the payments as interest is not part of the transaction," Rautenbach explained.