September 18th, 2010 by Tom Minney
South Africa is proposing amendments to the Income Tax Act to level the playing field between Islamic banks and conventional banking, although no date has been set for their implementation.
Business Day newspaper (www.businessday.co.za) quotes Amman Muhammad, MD for Absa Islamic Banking saying the new laws are to encourage foreign direct investment into SA. He says current tax laws prejudice Islamic finance and undermine SA’s financial role in non-western markets as a regional financial centre.
Countries such as UK, France and Hong Kong have changed their tax laws to make them compliant with Sharia law. In South Africa in 2004 and 2005 First National Bank and Absa introduced Sharia banking. Albaraka Bank and the Islamic Bank were the first Islamic banks to be granted a licence by the SA Reserve Bank (1980s) but the Islamic Bank was liquidated in the late 1990s due to allegations of reckless trading.
There are about 500 million Muslims in Africa, including just over 1 million South Africans (2% of the population).
According to the news report, Islamic finance forbids the paying and receiving of interest (riba), including investing in certain industries. Sharia law says interest-bearing transactions result in economic ills, such as unemployment and high inflation. Trading in derivatives and speculative investment also is forbidden, as Sharia law requires that all transactions be backed by tangible assets.
Mr Muhammad says the proposed laws could increase the tax base and bolster the country’s gross domestic product (GDP). The Banking Association of SA estimates that the “unbanked” in SA have put about R12bn (US$1.7 billion) “under mattresses”. The new laws could have a great effect if some of that money came back into that market, says Mr Muhammad. He believes many Muslims, due to the restrictions on Islamic banking, have had to keep their money at home.
The proposed amendments to the Income Tax Act take into account 3 different types of Islamic financing on which one can develop products.
1. Mudurabah, a form of deposit where the client invests with a bank and, the bank invests deposits in Sharia-compliant enterprises or products.
2. Murabaha, which is a mark-up financing transaction offered by a bank so that a client can obtain financing for various assets, such as property and equipment.
3. Diminishing musharaka, a partnership arrangement usually used for project financing.
Wouter Scholtz, a director for tax at audit, tax and advisory firm Mazars, told the Business Day, that the proposed tax laws adopt the principle of “substance over form” as the basis for the analysis and regulation of Sharia-based financial transactions. In terms of this, for tax purposes an amount will be taken to be interest if it replaces interest under conventional transactions. He acknowledged that the treatment of such a transaction might be construed as offensive, but it should be appreciated that if the amounts in question were not to be treated as interest, the client might be deprived of the right to claim a tax deduction, Mr Scholtz points out. Emil Brincker, a tax director at commercial law firm Cliffe Dekker Hofmeyr, says in Islamic law the time value of money is not recognised. It regards money as a measuring tool for value and not an asset, he says.
Mr Muhammad also hopes that the Government will issue a sovereign sukuk (Islamic bond), which has been done in some other African countries.
June 16th, 2010 by Tom Minney
Finance compatible with Islamic investment principles is taking further root in Kenya. There has been take up of sukuk portions of infrastructure bonds launched by the Government, the Central Bank of Kenya (CBK – www.centralbank.go.ke) has announced that it is working on plans to launch sharia-compliant treasury bills in the money market and it is reported in local media that a sharia-compliant unit trust is applying for registration.
According to the bank, including sukuk bonds and bills (structured in compliance with sharia law), is likely to increase the amount of cash flowing into Kenya from the Gulf region. CBK Governor Prof Njuguna Ndungu said the 2 sharia-compliant banks in Kenya – First Community Bank (www.firstcommunitybank.co.ke) and Gulf African Bank (GAB www.gulfafricanbank.com) – have contributed to the development agenda by participating in the sukuk component of infrastructure bonds issued by the central bank on behalf of the Kenyan government. GAB invested KSh500 million (US$6.2 million) in the sukuk portion of a government infrastructure bond issue last year and received a 13.5% rate of return, according to CBK figures.
In Ndungu’s reported speech during the opening ceremony of the Second Gulf African Bank Annual East and Central Africa Islamic conference in Nairobi, the entry of Islamic banking institutions in the country meant CBK was developing new regulations: “Islamic banking prohibits interests and allows profit sharing; however, our prudential returns and disclosure report formats were tailored for institutions which have an element of interest in their financials. We have therefore tailored our returns and disclosure formats to cater for the new market niche,” Ndungu said.
He said the CBK grants exemptions to Islamic banking institutions upon request in transactions that involve wholesale trading and holding land and buildings, since the Banking Act prohibits these activities. He also commended the 2 full sharia-compliant banks in Kenya, both founded within the last 2 years, for enabling formerly unbanked Kenyans, specifically those in the Muslim community and rural areas, to access financial services. The 2 banks have 1,570 loan accounts and 58,548 deposit accounts and control 0.8% of the banking sector’s net assets, according to the report. Islamic banks still require research and innovation to grow and be competitive.
“We are still waiting for ’structured sukuk’ to cover the bonds and T-bills market,” Ndungu said.
According to a report in Business Daily (www.businessdailyafrica.com), ApexAfrica Capital Ltd, recently rebranded from Apex Africa Investment Bank Ltd (the website, www.apexafrica.com does not reflect this) is the issuer and is undergoing approval as required by the Capital Markets Authority. The product is a collective investment vehicle in the form of a unit trust that will require a minimum of KSh25,000 ($311) to start.
Bank Managing Director Kassim Bharadia (listed as Chief Executive on the website) reportedly said the product is in response to investor demand.
According to Islamic finance principles it would avoid interest and gain profits from capital gains and dividends paid by companies whose shares that the unit trust has invested in. It would also target companies that companies that fit within the interpretation of Shariah. Thus it should avoid companies that deal in, for example, alcohol but shares such as plantations will be compliant.
The report says Hamilton, Harrison and Mathews is guiding the issuer in the legal process of issuing the unit trust.
Unit trusts are popular in Kenya, despite a few frauds in the past, according to the news report.