Islamic Financial Services in South Africa
Amman Muhammad, Chief Executive Officer, FNB Islamic Banking South Africa
What the future holds
Participation in the South African niche Islamic banking market has proven that it certainly is an exciting place to be in. Looking back at the challenges that the industry faced, not too long ago, one can certainly be proud of the significant developments that have taken place at an industry level over the past few years. These developments have played their part towards levelling the playing field for niche Islamic financial services providers and in growing awareness of this small but growing industry.
Among some of the more noteworthy developments that were made, we were encouraged that the Islamic finance sector had finally established itself as serious player, with the SA government issuing the first draft of an amendment to the National South African Taxation laws during May 2010, which went on to become officially recognised with the provision and inclusion of Islamic financial transactions in legislation for the first time ever. This key legislative inclusion acted as the front runner in the establishment of the issuance of the debut South African sovereign Sukuk. The debut South African USD 500 million, Sukuk issuance was four times over-subscribed at the international capital markets, priced at a coupon rate of 3.90%, and according to the South African National Treasury “representing a spread of 180 basis points above the corresponding benchmark rate”. In addition, the debut Sukuk ensured that South Africa benefitted with the issuance counting as the lowest dollar-borrowing costs, and according to sovereign issuance records, appeared to have been the lowest coupon out of 14, previous dollar bond issuances since 1994.
Not too long ago, our South African Islamic finance market was viewed as nothing more than a potential Islamic financial market, where market depth and market reach was purely in an embryonic state and the market was really just exploratory around the notion of Islamic finance. The participants were working hard at building a market and confidence in their product offering, the macro market lacked sophistication and there was a significant lack of skilled resources to support any real growth.
If we fast forward back to the current date, we find the Islamic finance industry in good shape with most of the South African Islamic financial institutions delivering consistent double-digit growth, this in trying economic conditions. Furthermore, we are also witnessing new entrants to the industry, this from all the various financial disciplines, not just from the banking sector, but, also from the insurance and asset management sectors. In addition, we have noticed a fair level of curiosity from other big financial institutions looking to offer Islamic financial products and services.
The South African Islamic market can now comfortably categorise itself as an emerging Islamic financial market as opposed to being just a potential market. We have seen dedicated taxation changes to enable the market, there are plans for further legislative changes and the Sovereign has issued Sukuk, as mentioned above, to be further supplemented with a potential local currency Sukuk issuance towards the end of the year. Plans are afoot that will mark the return of the country to the Islamic debt capital market, with an eagerly anticipated local currency Sukuk, five years following the maiden USD 500 million Sukuk issuance in 2014. At this stage, not much information is available regarding this Sukuk, however, the market is expecting more news from the National Treasury clarifying the specific details regarding this issue.
The market, through the efforts of the various Islamic financial institutions, is enjoying a heightened level of awareness and we find that potential customers are better placed than before and understand what they require from an Islamic finance institution, this has been driven by a greater variety of products that have been offered to the market and of critical importance is the pricing parity that these institutions can offer customers looking for an Islamic finance alternative. We are also working on delivering Islamic finance specific liquidity management solutions and innovative ways in which to manage excess liquidity positions. At this stage, we still struggle in finding appropriately skilled resources and identifying Shari’ah scholars with a finance specialisation remains a challenge. Having said that, the various banks and the Islamic banking industry body in South Africa are working on programs to upskill individuals.
In addition, the Islamic banking industry through the South African Banking Association, are working with the various financial regulators and National Treasury to establish consistent compliance and governance standards.
The African National Congress (“ANC”), the ruling party of the country scored a clear victory at the polls with a 57.5% win at the national elections. This has provided an increased sense of confidence to the international investor and business community. This linked to the anticipated increased fixed investment spending, associated growth in production, hopefully leading to real GDP growth and resulting in jobs to offset the high levels of unemployment. There are big expectations from the newly elected President and his ability to resurrect the South African economy and rebuild its internal structures. All in all, the renewed focus at a government and business level bodes well for the Islamic financial industry.
Going forward, I anticipate that the Islamic financial services industry will evolve to become an even more relevant player in the overall South African banking industry. The key to this evolution is in the innovation that has been highlighted above. South African Islamic financial institutions have adopted Islamic banking to offer much more substantial value propositions that now boast benefits and attributes that rival the best of conventional offers.
Quoting from a previous report that I had drafted, I still firmly contend that given South Africa’s highly developed financial infrastructure and sophisticated banking system, this country could just well be the launch pad that international players use to catapult themselves into the highly lucrative market that is Africa. With its enhanced capability, through an alternate funding source, in the form of Sukuk, South Africa should be even more attractive to the Muslim markets previously not tapped by this emerging economy. With the host of Islamic finance related legislative introductions, inclusions and amendments, the South African government have remained true to its word in levelling the playing fields for Islamic financial products. South African Islamic Finance Institutions have benefited from these developments and are now more easily able to develop quality Shari’ah compliant banking and investment products.
Globally financial institutions are aggressively strategising penetration plans into Africa incorporating Islamic Finance as part and package of their offerings. A few South African banks, including FNB, currently successfully offer Islamic banking in countries outside South Africa, but with the success of the overall market, all eyes will be focussed on an even greater thrust into the African Muslim markets, strategically placing South Africa at the helm for such a move.
