A grow­ing trend

Pro­posed new leg­is­la­tion ‘will at­tract for­eign in­vestors’

Finweek English Edition - - Money Clinic - RUAN JOOSTE ru­anj@fin­week.co.za

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.


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