Islamic financial model is based on ‘shared prosperity’

A fundamental principle of Islamic finance is that risk must be shared between the supplier and the user of capital, unlike Western capitalism, where the supplier of capital can dictate its own rewards. reports

The way Muslims do business is based on free-market economics, but it provides a far more equitable and sustainable economic model than the dog-eat-dog world of Western capitalism. This was a strong underlying message to come out of a recent conference on Islamic banking in Sandton.

Islamic finance, which is governed by shariah (Islamic law), is firmly established in South Africa. The sector has been boosted by the government’s efforts to accommodate its products and services in financial regulation, with a view to South Africa becoming the Islamic finance hub for sub-Saharan Africa.

At a well-attended conference hosted by law firm Cliffe Dekker Hofmeyr last week, two eminent figures in the Islamic finance community, Bilal Jakhura, the director of the Centre for Islamic Economics and Finance South Africa, and Mohammed Kaka, the executive director of Albaraka Bank, outlined for a largely non-Muslim audience the principles and practices of Islamic finance, and provided details of the various banking products on offer.

HISTORY

Although the faith-based principles underpinning Islamic commerce extend back to the early days of Islam, Jakhura says that formal Islamic banking and the codification of these principles has occurred only in the past 40-odd years. Now, with over 300 institutions spread over 75 countries, the Islamic finance market is worth about US$2.1 trillion (according to Thompson Reuters in 2014), with an annual growth rate of over 17% from 2009 to 2014.

Banking the Islamic way has been an option for South Africans – it is not restricted to Muslims – since 1989, when Albaraka Bank opened in Durban.

In 2004, First National Bank (FNB), the first mainstream South African bank to offer shariah-compliant financing, launched FNB IslamicFinance as part of its WesBank vehicle financing division, and it later became a fully fledged banking operation.

Absa Islamic Banking was established in 2006.

Shariah-compliant collective investments have proliferated in the past decade, and are offered by a number of asset managers (see “Collective Investment Schemes”, above). And the JSE, in conjunction with the FTSE, has two indices that reflect the performance of shariah-compliant listed companies: the FTSE/JSE Shariah All Share