Entrenching Sukuk into the fabric of the South African economy

Amman Muhammad, Chief Executive Officer: FNB Islamic Banking.

It is anticipated that the current South African taxation legislation that governs the specific elements around Murabaha and Sukuk will be extended to cover listed companies, effective January, 2016.

The SA Government has followed through on their intention of ensuring Islamic financial arrangements accessibility to ‘other’ entities (over and above just sovereign government itself and state owned entities) to also allow for an alternate additional source to raise capital.

Over the last few years, the SA Government introduced Islamic compliant financial structures in stages. With the first of such introductions coming through in, The Taxation Laws Amendment Act of 2010 – “the Act”, that recognised for the first time ever, arrangements like Diminishing Musharaka, Murabaha and Mudaraba as alternates to their conventional counterparts – these amendments were effected to enable banks to offer Shari’ah compliant product.

Subsequently in 2011, further amendments to the same Act were effected, wherein Sukuk was introduced, however issuance was limited to the sovereign government. Later on, effective April 2015, Sukuk issuance was extended to state owned entities.

Closing the loop

The latest proposed amendment to the Act regarding listed companies, which takes effect at the beginning of next year, will now almost complete the assortment of entities that would be allowed to offer and/or issue Islamic financial products.
This is an impressive achievement for a minority Muslim country where only 2% of its citizens are adherents of the Islamic faith.

Praise must certainly be heaped on the South African National Treasury for understanding the underlying potential of Islamic financial products. This potential was evident in the four times over-subscribed, 2014 South African debut Sukuk issuance, recording the country’s lowest ever US dollar funding at levels not seen since the country’s first democratic elections held in 1994.

Immediate opportunities

Listed corporates in South Africa, have been following the developments regarding Sukuk, they understand the impact that such previously unavailable financial instruments could have on their ability to raise funding. Judging by the level of interest and the kinds of questions that Islamic bankers in South Africa have getting of late, we will not be surprised by the associated positive developments that this amendment would have on the economy at large.

Indications are that the SA companies in the telecommunications industry would probably be the first to issue corporate Sukuk. With the continual threat of power interruptions, South Africa’s dominant power supplier – state owned entity, Eskom, will issue Sukuk and have made their intentions public.

Furthermore, the extension of the news of the taxation amendments to Murabaha structures bodes particularly well for many financial institutions that have become reliant upon equity and commodity conduit Murabaha transactions, where clarity around taxation on the various legs of the transaction will allow for more robust and competitively priced deals.

Impact of such amendment

This is an opportunity for investors looking to previously untapped markets with new prospects. South Africa is an emerging economy that is always looking for innovative alternatives. With South Africa being viewed as the gateway to Africa, viable Islamic finance options open opportunities both for investment within the country and for growth across its borders in neighbouring countries.