A growing trend
Proposed new legislation ‘will attract foreign investors’
THE DRAFT Taxation Laws Amendment Bill tabled on 10 May this year incorporates proposed amendments dealing with the tax (and VAT and transfer duty) consequences of various forms of Islamic financing. Islamic financing implies financial services, transactions and agreements that comply with the precepts of Islamic law (see box).
WesBank and FNB’s Islamic Finance division says global and local trends in Islamic finance have grown substantially over the past decade and remained strong during 2008 and 2009, despite global markets experiencing one of the worst economic slumps in history. South Africa joins a number of non-Muslim countries looking to develop their Islamic finance sector by changing regulations to attract investors who can only put their money in Shariah- compliant assets.
“It’s clear the Islamic financing market has grown steadily and changes to the legislation will attract foreign investors to SA’s financial market,” says Tasneem Gangat, a tax consultant at Grant Thornton Johannesburg. Islamic finance essentially involves profit and risk sharing and forbids the paying or receiving of interest or investment in certain industries.
Says Gangat: “Interest is considered economically harmful by Shariah law, as the extension of credit increases money supply, which stimulates demand for goods and services but doesn’t always result in real, tangible economic activity. It believes interest-bearing transactions result in economic ills, such as high inflation and unemployment.”
Shariah law also places emphasis on
economic activity and ensures that as money changes hands (from provider to user) it’s accompanied by an increase in trade, manufacture, service provision and, as a result, employment.”
The basis of Islamic finance is equity through profit and loss sharing schemes and rental income. The Islamic financier will assume the risk of the purpose of the funds he’s investing in and share in pre-agreed ratios in profit or loss resulting from that. “The principles of investment management – such as sector diversification, low risk versus high risk, income versus capital growth, etc – will still apply to an Islamic investor but the manner in which those objectives are achieved, as well as the investments utilised, will differ from conventional finance,” says Gangat.
Islamic financing is available to the general public and not exclusively to those of the Muslim faith. Even though Islamic finance is still a young concept, it’s a way forward as entrepreneurs realise the scope of the potential market for Islamic products.