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Aug 28 2012

KFH-Research: Promising potential and numerous challenges facing Islamic finance in South Africa

Fully fledged Islamic bank and four windows for traditional banks.
11 asset management companies that offer Islamic investment systems.
Amendments of taxes will create suitable environment for expansion of Islamic banking sector.
South Africa is preparing to deal with Sukuk to diversify financing base.


KFH-Research prepared a report about Islamic banking in South Africa, where it noted that significant developments occurred during the past years in South Africa. Such developments allow South Africa to become one of the most important African countries in the Islamic finance field.

The report mentioned that although South Africa possesses promising opportunities to expand in Islamic finance in Africa, since it is the most advanced African country in legislative and governance structures, several challenges face the expansion of Islamic finance, such as lack of legislation that is concerned with managing the affairs of Islamic banks.

Islamic Finance in South Africa
Islamic finance has seen exponential growth in North Africa, particularly in Egypt, Libya and Tunisia, with many Middle East financial institutions investing in the region. Considerable development has also been taking place in the south of the continent. Despite the low Muslim population in South Africa, the government has been one of the front-runners to make it a hub for Islamic finance in Africa. South Africa is the most advanced African nation in terms of robust legislative structures, strict governance structures, and regulations, which gives it an advantage in implementing Shariah-compliant financial systems.

In 2008, the National Treasury of South Africa had set up working groups made up of representatives from banking, insurance, accounting and investments to study the requirements and implications of the government's commitment to create a more equitable approach to Islamic finance in the country. This culminated in a firm commitment from the Minister of Finance in his 2010 budget speech to simplify the tax system and to introduce further measures to reduce red tape and enhance the attractiveness as a viable location from which businesses can extend their African and worldwide operations. Proposed tax amendments were issued in May 2010. The revision of the tax framework is expected to create a level playing field for the industry in South Africa and help to build a vibrant and growing Islamic finance market.

On the Islamic banking front, South African full-fledged Islamic bank Albaraka Bank was established in 1989 while others who saw the potential followed suit, with major conventional banks such as First National Bank (FNB), which is part of the FirstRand group, HBZ Bank and Absa Bank have incorporated Islamic windows alongside conventional banking practices. Currently there is only a single bank offering full-fledged Islamic financial services and a further four institutions operating Islamic windows. Subsequent to FNB becoming the first conventional bank to launch Islamic finance in 2004, vehicle and asset financing using the Ijarah structure was introduced into the market. A year later Mudharabah products were introduced and in 2006, Shariah-compliant commercial and property product financing schemes were available.



On asset management front, Islamic asset management began in the country in 1992 with the launch of South Africa's first Islamic mutual fund, Futuregrowth Albaraka Equity Fund. Initially managed by Element Investment Managers from 2000-2005, it was then managed by Futuregrowth, which has since become a member of the Old Mutual Investment Group (OMIGSA).



There are 11 asset management companies in South Africa offering Shariah-compliant investment schemes or mutual. This comprises a quarter of the total number of asset management companies registered under the country's Financial Services Board (FSB). Oasis Asset Management currently manages the largest number of Islamic funds in the country, comprising domestic and off shore investments. Africa's first Shariah-compliant exchange traded fund (ETF), was launched in 2009 by NewFunds, a joint venture between Absa Capital and Vunani Capital. The Shariah Top 40 Exchange Traded Fund (ETF) includes-Shariah compliant companies that are selected from the FTSE/JSE Top 40 index listed on the main board of the Johannesburg Stock Exchange.

South African Investment Houses offer Shariah-compliant investments including:

· Retirement funds

· Pension annuities

· Unit trust funds

· Endowment policies

On the takaful front, Takafol SA was established in 2003 to tap into South Africa's emerging Islamic insurance market, which now brings in an estimated ZAR3bln (USD419mln) in annual premiums. The company found success in being South Africa's sole firm providing short-term takaful insurance for business, vehicle, personal and household cover. In 2008, Takafol made AIC their underwriting partner and this relationship contributed to Takafol SA's further development, with personal lines and commercial business growing by more than 66% over the subsequent two years. Due to their successful partnership, Absa Group, parent company of AIC, decided to acquire Takafol SA and merge their operations into Absa's own developing Islamic financial services sector. After the transaction is completed, Takafol SA will become part of Absa Islamic Banking and operate as the new brand Absa Takafol. The integration of Takafol SA's Islamic product portfolio into AIC will enable greater control over the company's underwriting, pricing and administrative efforts. Through AIC meanwhile, the newly-rebranded Absa Takaful will enjoy a greater capital position and be better able to respond to customer needs in a dynamic international environment.

On the sukuk front, South Africa is joining the select band of new jurisdictions preparing to issue a sovereign Sukuk. The invitation to banks, issued in December 2011, invited bids for the service of advising on the structuring and issuance of a government Islamic bond in the local and international markets. The country's National Treasury appointed six banks to advise on the much anticipated sovereign sukuk issuance, namely Al Baraka Banking Group, BNP Paribas, Liquidity Management House, Nova Capital Partners, Regiments Capital and Standard Bank.

The sukuk introduction process is in line with the South African National Treasury's intention to diversify its funding and investor base. South Africa is not considered a big borrower by global standards. Its public sector financing requirement for 2011-2012 was set at ZAR241.5bln (USD30.0bln), which represents 8.0% of the country's GDP. Almost all were raised locally with about USD1.5bln coming from abroad.

Opportunities and Challenges
Muslims in South Africa constitute about 2% of the country's population but all indications are that they deliver well over 10% of the GDP. Muslim businessmen and their partners have brought global brands to South Africa and are responsible for some of the largest construction and infrastructure developments in the country.

Private banking is an emergent segment of the Islamic finance industry in South Africa with product portfolios having grown to include more prestigious private banking packages on offer. Some of these offers are linked to the MasterCard World One card, operated as a debit card, which includes a wide range of benefits in line with the private banking client's needs and lifestyle. The largest Islamic banking window in the country has also extended its segmentation exercise to include the 'wealth market' to provide wealthy clients with benefit-rich transactional products, although the 'wealth' focus is on investment and advice aimed at the development of a unique balanced, Shariah-compliant portfolio. Insights gained from the development of the Islamic private banking products and customer behaviour patterns in the country will certainly be used by South African banks as they extend their Islamic private banking product ranges to other countries in Africa where they currently operate, including takaful products which have seen little development over the years in the region.

The insurance penetration rate of 12.9% to GDP in South Africa is one among the highest in the world. A well-developed insurance market and high awareness of insurance products and services will be helpful in effectively introducing and marketing takaful products to the customers.

Emerging Markets: Insurance Density and Penetration (Premiums per Capita in USD)



The Banking Sector Education and Training Authority (BANKSETA) of South Africa, after two years of hard work in development, launched a comprehensive introductory course on Islamic banking in January 2010. This is available to all South African banks that are interested in Islamic banking and will be used to train staff members who are involved in the delivery of Islamic banking products at all levels. This training material is expected to go a long way towards increasing the level of knowledge and understanding of Islamic banking products and services, while improving the quality of information that customers and potential customers receive.

Nevertheless, presently there is no legislation dedicated solely to Islamic banking in South Africa. The authorities have accommodated Islamic finance through the fine-tuning of existing regulations rather than create a separate regulatory framework and have left Shariah governance to the individual institutions. The absence of a central Shariah governance framework may pose a challenge to the development of the Islamic finance industry in terms of standardisation and consensus of opinion over the compliance of Shariah products.

South Africa is also one of the two biggest exporting countries in Africa. With exports being reduced to European countries as a result of the sovereign debt crisis, the growth of Islamic finance may face difficulties as a result of slower economic activities.

Other challenges that need be overcome in the development of Islamic finance industry in South Africa include:

· Lack of awareness and geographic spread of Islamic products and services

· Dearth of human capital

· Strengthening of link between private banking and business banking

· Required to work towards product differentiation and innovation

· To have ability to deliver personalised, relationship based banking to affluent Muslim customers.

· Be able to balance Shariah-compliance and value for money for their products

· To develop and enhance integrated Shariah-compliant banking solutions of investment, transactional and financing, takaful, asset and estate/wealth management

· Offer easy reach and access to Shariah-compliant product and services

· To develop more takaful products specially life and investment

· To persuade the authorities to amend and allow Islamic instruments to have level playing field in terms of equal tax and regulatory treatments.

© Press Release 2012


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