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: Global, told Fin24 on Monday, January 23.
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 Shari`ah-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 Shari`ah-compliant services.
Kooyman said the Shari`ah-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.
Shari`ah-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.