Until the late 20th century there was no institutionalised Islamic banking, but two pioneering social projects in interest-free finance in the 1960s - in Egypt and Malaysia - paved the way.
In Egypt, the Mit Ghamr savings project was aimed at providing people with a simple savings vehicle and interest-free loans. It enjoyed unexpected success but was abandoned due to political factors.
The Malaysian scheme was started primarily to provide Muslims with a means to save for haj - their obligatory trip to Mecca - but also to save for other goals and to have access to small business loans. The Pilgrims' Savings Corporation, later the Pilgrims' Management and Fund Board (Tabung Haji), was established in 1963 and is still in existence today.
In 1971, the Mit Ghamr project was revived in Cairo by the Egyptian government to become the Nasser Social Bank, a state-owned but autonomous entity aimed at social upliftment. And 1975, a watershed year for Islamic finance, saw the establishment of the multilateral Islamic Development Bank in Saudi Arabia, for financing development in member countries, as well as the first modern commercial bank, Dubai Islamic Bank, a public limited company.
Since then, and especially since the turn of the millennium, Islamic banks and banking have proliferated in both Muslim and non-Muslim countries. This has been accompanied by the establishment of international regulatory and developmental bodies, such as the Accounting and Auditing Organisation for Islamic Financial Institutions (inaugurated in 1991) and the Islamic Financial Services Board (2002).
According to various financial news sources, for the past decade Islamic banking has been growing at a rate of between 10 and 15 percent a year. In 2005, says The Economist, there was over US$822 billion invested in sharia-compliant assets worldwide. This represented about 0.5 percent of estimated total world assets.
Sources: Islamic Financial Industry News Centre, Wikipedia, AAOIFI and IFSB websites
What the banks offer:
Absa Islamic Banking
Absa Islamic Banking, part of the Absa group and Barclays, was established in 2006, and is available from all Absa branches nationally. Its services include:
- Islamic cheque and savings accounts: transact with an Absa ATM card, which is also a debit card. Internet and cellphone banking are available.
- Islamic TargetSave: a monthly savings plan of at least R100 a month for at least six months. The account matures at the end of each year, after which profit share on the funds in the account is calculated. Funds may be reinvested and are then available at 32 days' notice.
- Term deposit: a sharia-approved fixed deposit account that offers competitive returns over periods from 30 days to a year. Based on the mudaraba principle, the customer is a passive partner in the transaction. The bank invests the customer's money on his or her behalf.
- Vehicle and asset finance: finance for vehicles and movable assets based on the ijara (leasing) model, with the option to own the asset on settlement.
- Islamic wills: wills and estate planning/execution.
- Takafol: sharia-compliant insurance.
Al Baraka Bank
Jointly owned by South African investors, the London-based DCD group, and the Saudi Arabian-based Dallah Al Baraka banking group, the bank has its head office in Durban. It has nine branches in South Africa, mainly in areas with traditionally high Muslim populations: Durban, Lenasia and Fordsburg in Gauteng, and Athlone in Cape Town. Registered in South Africa in 1989, it pioneered Islamic banking in the country and offers a full range of banking and financial services. These include:
- Debit card account: a current account with debit card and internet banking facilities;
- Participation account: lump-sum deposits for a fixed term, ranging from just over a month to 24 months;
- Regular Income Provider: monthly income payments on a fixed deposit of at least R20 000;
- Monthly Investment Plan: a long-term savings scheme in which a specific amount is invested monthly;
- A unit trust investment, the Futuregrowth Albaraka Equity Fund (see "What the investment houses offer", below);
- Business finance, and vehicle and housing finance and leasing;
- Financial planning and estate planning; and
- Takafol: sharia-compliant insurance, offered by an outside party, whereby participants make a regular donation to a central fund "with the sole intention of it being for the purpose of helping other participants in their hour of need".
FNB IslamicFinance
The FirstRand group launched FNB IslamicFinance in 2004 as part of its WesBank vehicle financing division. It was the first mainstream bank in South Africa to offer sharia-compliant financing. Since then it has expanded to offer a wide range of banking services in South Africa and Botswana, and sponsors the annual IslamicFinance Business Awards for entrepreneurial excellence among Muslim-owned businesses and individuals. Although IslamicFinance products are available at all FNB branches, there are 16 branded IslamicFinance branches in areas with high Muslim populations. Services on offer include:
- Personal transactional accounts: card-based savings and cheque accounts, with an online banking option.
- Business banking: transactional accounts for sole proprietorships, partnerships, close corporations and companies.
- Vehicle and asset finance: finance according to the ijara (leasing) model, ranging from six to 72 months with transfer of ownership at the end of the lease.
- Property finance: based on a "wakala" contract in which the bank acts as an agent in acquiring the property on your behalf. The monthly repayments are fixed for the full period of finance. Currently FNB IslamicFinance is the only institution offering a fixed 20-year home loan product.
- Wills and estate planning.
Chief executive Ebi Patel says the bank is soon to offer private banking. Also in the pipeline are trade finance and investment products.
HBZ Bank
HBZ Bank is a wholly owned subsidiary of the international Swiss bank Habib Bank Zurich. Launched in 1995, its head office is in Durban, and it has branches in KwaZulu-Natal and Gauteng. HBZ offers both Islamic and conventional banking. For its Islamic banking customers, the bank has current and savings accounts, lump-sum fixed deposits, and business, property and vehicle finance and leasing. It has an internet banking facility.
Standard Bank
Although it has no local Islamic division, Standard Bank, trading under the name Stanbic Bank, recently launched an Islamic banking service in Tanzania and is awaiting regulatory approval to do the same in Nigeria.
"We have targeted these two countries initially. They have large customer base groups that would find sharia banking attractive. We are aware that 40 percent of Africa's people are Muslims," Terry Moodley, the head of personal and business banking at Standard Bank, told Reuters news agency.
Sukuks and the Dubai crisis
Sukuk is the plural form of the Arabic "sakk", meaning financial certificate. In the media, however, it has widely taken on the singular form, its plural being sukuks.
A sukuk is similar to a bond, but it must be backed by tangible assets, such as property. Sukuks take various forms, but a typical one, based on ijara (leasing), works as follows, according to an online document by international sharia finance consultants Yasaar. A financial institution or government will typically incorporate a special purpose vehicle company (SPV), which issues sukuk certificates to investors and uses the money raised to buy a rental-generating property or another cash-generating asset. The SPV leases the asset to the institution, with the income from the lease payments going to the sukuk holders. At the end of the lease period, the institution buys the asset from the SPV and the proceeds of the sale are used to repay the investors' principal. (Sukuks may also be based on mudaraba or musharaka models - see main story.)
The fact that there are still some legal grey areas surrounding this relatively new type of instrument was demonstrated during the Dubai crisis at the end of 2009, in which a stricken Dubai World, the state-owned development corporation, was bailed out by Dubai's neighbour Abu Dhabi, to the tune of US$10 billion.
The crisis was sparked by Dubai World's property unit, Nakheel, developer of Dubai's iconic artificial palm islands, defaulting on repaying a US$4.1 billion sukuk after property values plummeted. Apparently this sukuk, and others like it, was structured to resemble a conventional bond, in which ownership remains with the issuer instead of being shared among investors.
Whether the investors ultimately had recourse to the underlying assets remains unresolved, because Abu Dhabi came to the rescue before the legal wrangling could begin. But confidence in sukuks as an investment instrument took a knock on global financial markets.
In a story in Business Report at the time, Professor Habib Ahmed of Durham University was quoted as saying the crisis pointed to the need for a return to the spirit of sharia.
"Instead of coming up with products that reflect the spirit and substance of Islamic law, (the Dubai sukuks) are structured very similar to conventional products," Ahmed said. "This case is a wake-up call for Islamic finance to focus more on ethical and moral issues," he said.
Others defended the integrity of the sukuks. In a Bloomberg news report, the chief executive of Abu Dhabi Islamic Bank, Tirad Mahmoud, said: "Was there an extraordinary weakness in the Islamic structure? No. Maybe people thought if it is Islamic, it is zero risk. But Islamic banks never promise guaranteed outcomes."
What the investment houses offer:
Advantage
This multi-manager, a subsidiary of the FirstRand group, is focused on socially responsible investment. Its Advantage Shari'ah Fund is an institutional (used, for example, by retirement funds), regulation 28-compliant fund of funds that invests in a range of established sharia funds.
Element
Element Investment Managers, previously Frater Asset Management, pioneered ethical investing in South Africa. It managed the Futuregrowth Albaraka Equity Fund from 2000 to 2005. (This was the first Islamic fund in South Africa. It now falls under Omigsa - see below.) In 2006, Element launched its own sharia-compliant unit trust fund, now called the Element Islamic Equity Fund. The company also developed the first non-interest-based Islamic cash instruments, which it incorporates into its newly launched regulation 28-compliant Islamic Balanced Fund.
Kagiso
In July 2009, Kagiso Asset Management launched the Kagiso Islamic Equity Fund, a retail unit trust fund, which is administered by Coronation Fund Managers.
Liberty
For institutional investors, Liberty Corporate has an umbrella retirement fund, the Shari'ah Balanced Portfolio. For individuals, there are two pension funds from Liberty Life: the Excelsior Shari'ah Equity Portfolio and the Excelsior Shari'ah Balanced Portfolio.
Momentum
In August 2008, Momentum launched the Momentum Shari'ah Fund, a multi-managed balanced life portfolio with exposure to multiple sharia-compliant equity and sukuk investments. It is open to investors who make use of retirement products or endowments.
NewFunds
In April 2009, South Africa's first sharia-compliant equity-linked exchange traded fund (ETF) was launched by NewFunds, a joint initiative between Absa Capital and Vunani Capital. The NewFunds Shari'ah Top 40 Index ETF tracks the FTSE/JSE Shari'ah Top 40 index, which reflects the sharia-compliant companies among the top 40 companies listed on the main board of the JSE, as measured by market capitalisation.
Oasis
Oasis Group Holdings is a Cape Town-based global fund management operation, formed in 1997, offering both conventional and sharia-compliant products. Its Crescent range is the largest range of sharia-compliant products offered by a single company in South Africa. It comprises:
- Four retirement funds: Crescent Retirement Annuity Fund, Oasis Crescent Retirement Fund, Crescent Preservation Provident Fund and Oasis Crescent Preservation Annuity Fund.
- A pension annuity with a choice of high-, moderate- or low-equity portfolios.
- Eight established unit trust funds, made up of two offshore global funds denominated in dollars and based in Ireland, three local funds invested in the local market (of which one, a property fund, is closed-ended), and three local funds invested worldwide ( see table). In April 2010 the company launched the Oasis Crescent Income Fund, Oasis Crescent Balanced High Equity and Stable Funds of Funds, and the Oasis Crescent Global Income Fund.
- A newly launched endowment policy, also with a choice of high-, moderate- or low-equity portfolios, with a maturity term of five, 10 or 15 years.
Old Mutual
Old Mutual Islamic Product Solutions offers a range of sharia-compliant products for both individual and institutional investors. These include investment, retirement, group life and disability cover, and savings products.
Omigsa
In 2008, Old Mutual Investment Group South Africa (Omigsa) purchased a majority stake in Futuregrowth Asset Management. Futuregrowth and Omigsa's quantitative investment professionals joined forces to manage both institutional and retail funds in a range of long-only, alternative and ethical products. The quantitative investments team manages two sharia-compliant funds:
- Quantitative Investments Shari'ah Equity Fund. This institutional fund was launched in January 1990 and is benchmarked against the JSE Shariah All Share index.
- Futuregrowth Albaraka Equity Fund. This unit trust fund, managed on behalf of Al Baraka Bank, offers access to a broad spectrum of JSE-listed investments, in accordance with sharia. It was launched in June 1992.
Stanlib
This Liberty/Standard Bank-owned asset manager has a retail unit trust fund, the Stanlib Shariah Equity Fund. It also offers a sharia equity fund option to institutional investors.
Symmetry
This specialist multi-manager within Omigsa offers the Symmetry Islamic Fund, a sharia- and regulation 28-compliant life portfolio for individual and institutional investors. It has been designed to target an investment return, over the long term, comparable to that of a traditional balanced fund.
Sharia indices
The Dow Jones Islamic Market Index, launched in Bahrain in 1999, was the world's first index for sharia-compliant investments. Since then many sharia indices have appeared on markets globally, including the FTSE and S&P families of sharia indices.
The JSE, in conjunction with FTSE, has two such indices for South African investors. The FTSE/JSE Shariah All Share index was launched in November 2007. It reflects the performance of all sharia-compliant companies in the FTSE/JSE All Share index (Alsi). The FTSE/JSE Shariah Top 40 index, launched in July 2008, reflects the sharia-compliant companies in the FTSE/JSE Top 40 index. JSE-listed companies are screened for compliance by international sharia consultants Yasaar. At present there are 65 sharia-compliant companies (out of 160) on the Alsi, of which 18 are in the Top 40.
The JSE's top 10 sharia-compliant companies by market capitalisation on March 31, 2010, were:
1. BHP Billiton
2. Anglo American
3. MTN Group
4. Anglo Platinum
5. Sasol
6. Kumba Iron Ore
7. Anglogold Ashanti
8. Vodacom Group
9. Gold Fields
10. Exxaro Resources
Source: JSE
This article was first published in Personal Finance magazine, 3rd Quarter 2010. See what's in our latest issue