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Sunday, 5 October 2008

Islamic banking in South Africa

Saturday, 04 October 2008


In light of the volatile events on Wall Street during all last week, perhaps this is a good time to reflect on the Islamic banking system. Here is an interesting example on how well such system can thrive and even generate demand from non-Muslims in regions where Muslims are small minorities. Fascinating article providing an excellent overview on South Africa and the raise of Islamic Banking.

South Africa is a new democratic state emerging as a powerful actor in the African continent and internationally. It has been identified along with India, Brazil and China as the countries with the fastest growing economies amongst underdeveloped and developing countries. Islamic enterprises are firmly integrated in this developing process.


The Muslim population is in the minority. An estimated 2.5 percent of the total population of 47 million is Muslim. Islam came to South Africa with the banishment of political exiles by the Dutch East India Company. They were mostly from Indonesia and India. Their crime was dissenting political views. Cape Town, in 1683 was a convict station. The convicted prisoners were living under extreme laws, known as the ‘Statutes of India', imposed by the Dutch East India Company. One of the laws imposed was the prohibition of preaching, practicing and teaching of all religions except the Dutch Reformed Church. The punishment for non-compliance was the death sentence. But despite the severe constrictions, the Muslim exiles practiced Islam in secret thus keeping the spirit alive.

This colonization was taken over by British rule in 1795 after the Napoleon wars in Europe. British dominance lasted for a period of eight years and in 1804 the state was transferred back to Dutch rule. Freedom of religion was granted with the change of occupation. The colonialism ideology of severing all cultural and religious attachment and adopting the occupiers' culture and religion failed dismally evidently as Islam has grown in strength over the centuries.

In 1994 the country had its' first democratic elections after 30 years of Apartheid. Nelson Mandela, after 27 years of incarceration was elected as the President. The country enjoyed enormous international investment and economic growth flourished. But after 13 years of a transformation process that includes over taxation of consumer spending, the country is in an economic depression much as the rest of the world. A new Credit Act, statute by the government in order to curb consumer spending and reduce the budget deficit is resulting in forced major cut backs by consumers.

South Africa also has a high unemployment rate. The Apartheid regime deprived the majority non white population of equitable education. This is the main reason for the difficulty in securing employment. The recent xenophobia incidence in the country was due to the better educated and skilled refugees from Somalia, Nigeria, Zimbabwe and Ghana finding employment easier. Refugees from Maputo and Malawi, whom perhaps are not as educated as their other African counterparts, would accept a lower wage whereas the South African black would accept nothing less than the South African government stipulated minimum wage.

The high incidence of the HIV/Aids epidemic amongst black South Africans also contribute to the high unemployment level. Many are not proactive in seeking employment but yet statistically ‘unemployed'.


The strength of Muslim presence is manifesting in the establishment of Islamic Banking in a predominantly Western environment in sync with the trends in a global context. Though interest (riba), the primary reason for Islamic finance, is strictly prohibited in the Qur'an, revealed over 1400 years ago, the obliging responsibility to refrain from interest (riba) is becoming increasingly conscious in the last decade. Muslims residing all over the Western world are increasingly looking for Shari'ah compliant financial institutions to deal with.

Al Baraka Bank is the leading Islamic bank in South Africa. The bank is owned by South African investors, DCD London and Mutual Plc, a company incorporated in London and Wales, and the Saudi Arabian based Dallah Al Baraka group. The bank is well established in South Africa as an institution striving to operate totally within the confines of Shari'ah compliance banking. The bank also has to abide by the South African Banking regulations.

Al Baraka has its' headquarters in Durban, South Africa and six branches in different regions of the country. The addition of a corporate branch attached to the existing Cape Town branch will bring their corporate financing to two branches. The Board of Shari'ah Advisors consists of South African highly learned scholars who interact periodically with the international Board of Advisors of the Al Baraka group. In addition to the Board of Advisors, within the precincts of each branch a regulatory officer checks each transaction to exclude any misdemeanor that may have crept into a transaction. The bank has a both Muslim and non Muslim clientele. A senior official at the bank attribute this interest from non Muslims to the better proposition regarding asset financing. Conventional South African banks have the highest interest rates in the country. The prime interest rate on a residential home loan is at 15, 50 percent. Personal loans interest rates vary from 18 to 44 percent per annum. Al Baraka offers a fixed rate repayment scheme over a seven and ten year period. The bank however offers no credit cards and personal loans.
The bank offers the services of:-
Murabaha (Cost plus financing)
This is the financing scheme used for financing any fixed asset such as a residential property. The loan period is over seven years. An additional percentage rate varying around 60 percent of the cost price is added to the price and spread over a repayment agreement of seven years.

Musharakah (Partnership Financing)
This is a fixed asset financing scheme between two parties. The bank finances the project and a pre-agreed arrangement regarding profit and loss sharing is between the concerned parties. Repayment to the bank is over a ten year period with a rate varying annually.

Ijara & Ijara-wa-Iktina (Leasing)
Ijara financing is a pioneering scheme for the bank. Inception is August 2008. Clients will have the option of choosing between Murabaha and Ijara.

Takaful (Insurance)
Takaful, South Africa is a subsidiary of the world wide Hanover Reinsurance group. Takaful provides cover to clients on goods ranging from fixed assets to moveable property.
The Takaful Waqf Fund operates in participation with Takaful and all excess funds are channeled to Shari'ah compliant projects. This fund has become an instrument in South Africa's much needed social upliftment and development.
The same principle that applies to Equity Investment companies is applicable to the Takaful Waqf Fund. All companies that are Shari'ah approved in their business practices are deemed allowed for Takaful Waqf Investment.
The Waqf Fund is interest (riba) free and this condition is governed by the Al Baraka Board of Shari'ah Advisors.

In line with common conventional banking practices the bank offers the usual banking services in addition to a Haj Investment scheme. This is a scheme for individuals and organizations who wish to proceed for the pilgrimage. A minimum fixed amount is deposited every month and a share of profits is earned monthly.

Major conventional banks in South Africa, First National Bank and Absa Bank have started incorporating Islamic windows along side conventional banking practices. Islamic bankers ascribe this to the strength of Muslims seeking Shari'ah compliance in Islamic banking. For the discerning Muslim the principle Institution remains entrenched in interest (riba) goal oriented practices.

Another concern of the minimal Islamic Bankers in the country is the allowance of conventional banks to borrow from the government controlled South African Reserve Bank. This of course would be an interest laden loan. The concern with conventional banks introducing Islamic windows is the overlap of the pool of finances available between the conventional section and Shari'ah compliant section.
Al Baraka also offers investments. The Futuregrowth Al Baraka Equity Fund consists of shared investments on the South African Stock Exchange.

The country also has other investment companies. The Stanlib Shari'ah Equity Fund has the international author on Islamic Jurisprudence, Mohammed Hashim Kamali, on its Board of Shari'ah Advisors.

The best performing Asset Management in South Africa is the Oasis Group Holdings. The company has grown from its Cape Town regional offices to national and international occupation. It now has international offices in Dublin and Dubai. The company offers the best return on investments at present. The Oasis Crescent Equity Fund, which in June celebrated 10 years since inception, announced a return of 31,8 percent per annum. The company is also exclusive on offering a Shari'ah compliant Property Fund.

Internationally the company was the recipient of the Failaka Islamic Fund Award for two consecutive years. In 2006 the Oasis Asset Management received the Kuala Lumpur Islamic Finance Forum Award for outstanding Islamic Fund Manager.

The company has an international Board of Shari'ah Advisors of which Sheikh Yusuf de Lorenzo; the international renowned scholar is a member.

Interest (riba) is prohibited in explicit versus (Ibarat Al Nass) in the Qur'an. Therefore no consultation (Ijma) or analogy (qiyas) is entertained.

However, Public Interest (Maslahah Mursalat) has become a contentious issue in respect of interest (riba). Equity (Istihsan) is another element in Islamic Law some scholars have used to seek divergence from the explicit prohibition of interest (riba).

Equity is a term related to fairness and conscientiousness. Islam is sensitive to rigidity and unfairness. When personal reasoning (ijtihad) is employed in order to arrive at equity, the instruments are the Qur'an, the practices of the Prophet Muhammed (Peace be upon him), analogy (qiyas) and consensus (ijma). The procedure prevents deviation from the framework of Islam.

Essential (darurah) requirements intrinsically get linked to economics. Changes in different aspirations have called for consensus to review or amend interest (riba) in view of essentials (darurah). The factor overlooked is consensus is only valid in the absence of clear direction in the Qur'an. Interest (riba) is clearly defined as prohibited and essentials inhibit too many variations. Different populations in different regions present different definitions of essentials (darurah). Globally Islam lacks a universal body to validate required components for issues qualifying essentials (darurah).

By Sister: Rabiah Talib Badroen MuslimBridges Correspondent in South Africa
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