Islamic finance shows sustainable growth despite global economic slump

The Islamic financial market has grown substantially over the past decade. According to Hajira Akhalwaya tax consultant from PricewaterhouseCoopers (PwC) Islamic finance remained strong during 2008 and 2009 despite global markets experiencing one of the worst economic slumps in history. “Islamic finance is based on Shariah (Islamic Law) and is governed by certain basic principles, which many believe will play an increasingly important role in the global financial arena,’ says Akhalwaya.

Essentially, Sharia law prohibits any transaction which involves the paying or receiving of interest. Equally, transaction dealing with any activities which are prohibited in Islam, such as gambling, and any activity where there is uncertainty of the outcome of the transaction (“sale of the unseen”) is also outlawed. Islamic financing is based on the principle of trade and the sharing of risk between financier and borrower.

Some of the most prominent Islamic financing techniques include:

· Musharaka – Similar to a venture capital;

· Mudarabah – Similar to musharakah, the only difference being that the investor is a sleeping partner, (that is to say, a passive investor who provides finance but plays no active role in the business);

· Ijarah – A form of leasing;

· Salaam and istisna – A particular kind of sale, ideal for the farming and manufacturing industries

· Sukuk - The Islamic equivalent of tradable bonds; and

· Murabahah – A cost-plus sale transaction where a vendor sells an asset to a financier who resells it to a client with immediate delivery but deferred payment.

When a Murabaha sale takes place the financier spreads the profit earned from the sale over the period during which payment will be made. This profit would be subjected to tax immediately under the direct tax rules of the relevant countries and not spread out over the period when the payment will be made

South Africa falls short in promoting Islamic Financing

South Africa does not have legislation in place which treats Islamic financing in a manner which is compliant with Sharia law. A bank providing finance on a murabaha basis will be regarded as carrying on a trade and will therefore be taxed accordingly on the profits. The bank will be entitled to a deduction on the purchase of the asset and the selling price will be included in gross income.

Akhalwaya continues, “Given the vastly lucrative nature of Islamic financing, the South African National Treasury should seriously consider introducing legislation to accommodate Islamic Financing. It is clear that the Islamic financing market is growing steadily and changes to the legislation will attract foreign investors to the South African Market.”

Many conventional banks throughout Europe have already taken note of this profitable market and have introduced specialised Islamic financing divisions to accommodate Sharia law. In fact, authorities in the United Kingdom (UK) and France have realised that changes to the tax law need to be made in order to accept Islamic financing.

Murabahah is one of the most popular forms of Islamic financing and now fully acceptable in the UK and France. South African banks have also introduced certain facets of Islamic finance products as part of their services. However, unlike the UK and France, South African tax authorities have not implemented any changes to legislation.