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SHAIKH ZIYAAT ISAACS analyses the findings of a research paper which demonstrated the scope for South Africa to be a leader in Islamic finance.
SOUTH AFRICA has been on the world’s stage for decades with its political struggles, activism against injustice and its continuous fight for freedom. Almost thirty years since being ‘freed’ from apartheid and the underpinning injustice tied to it, the question in terms of social economic justice begs a response from the ‘new’ custodians of South Africa. Although it does not seem that we have achieved economic freedom in South Africa – at least in the context of the masses – a critical response to this question remains outstanding.
As this topic requires several vantage points of access to its research, we will analyse and unpack it from an Islamic finance standpoint as a differentiator that could assist the South African government to achieve social economic justice through its principles. Ultimately, the highest objective of Islamic law is to prevent harm and enable welfare in every aspect of life, albeit economics itself. The recent Economic Social and Governance (ESG) investment strategies are inherently in line with these principles and thus a pivotal directive to pursue.
In 2018, iConsult Africa hosted a Malaysian delegation of researchers from the International Shari’ah Research Academy for Islamic Finance (Isra) and the Ratings Agency Malaysia (RAM) to explore the South African context of Islamic finance. The following findings – from the research paper – demonstrate the scope for South Africa to be a market leader in Islamic finance on the continent and, ultimately, attract foreign direct investments (FDI) from the Organization of Islamic Countries (OIC), which could address the economic deficits the country requires.
Demand side
Lack of market awareness and understanding of Islamic finance
Islamic finance started in 1989 with the establishment of one full-fledged Islamic bank, followed by Islamic windows operated by conventional banks and the increasing number of Islamic asset management companies. However, the awareness of Islamic finance is low among its communities. Based on a study conducted in 2014 to examine the awareness of Islamic banking products and services among consumers in South Africa, the results revealed that 48 per cent of the respondents were not aware that Islamic banking is available for both Muslims and non-Muslims alike. The study also showed that 70 per cent of the Muslim customers have accounts in non-Islamic banks and with few customers embracing Islamic banking (Cheteni, 2014).
Government and some private sector employees have no choice but to opt for conventional pension funds
Government Employees Pension Fund (GEPF) in South Africa manages pensions and related benefits on behalf of all South African government employees, and it is also Africa’s largest pension fund. It has more than 1,2 million active members, in excess of 400 000 pensioners and beneficiaries, and assets worth more than R1,6 trillion. However, unfortunately, there is no specific allocation for shariah-compliant funds provided by the GEPF. Similarly, in the private sector, most of the companies would have their own private pension fund schemes, which are mostly invested in conventional funds. Therefore, both government and private sector employees have no choice but to place their money in conventional pension fund schemes.
Lack of incentives to encourage shariah compliant savings and investments
Normally, Islamic funds attract higher costs than the conventional counterparts due to certain fees, charges and treatment on the transactions. Therefore, the top-down approach from the government to provide incentives plays a crucial role in creating a level playing field for shariah-compliant investment/ savings.
Supply side
Inadequate shariah-compliant assets
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The number of shariah-compliant shares available on the JSE is limited. There are only 160 shariah-compliant shares out of 400 listed shares. The number of sukuk available in the market is also scarce, leading to fund managers investing in offshore assets. However, Regulation 28 limits the foreign exposure for pension funds to only 20 per cent.
Absence of harmonised approach among the shariah advisory committees
There is no central or harmonised shariah governance body in South Africa, and each asset management company is adopting a different approach and methodology as advised by their own shariah advisor. This has led to inconsistencies in the shariah ruling.
Shortage of experts in Islamic finance industry
There is a talent deficit in the Islamic finance industry. Hence, identifying domestic institutions that can assist to nurture local talent is crucial to sustain the industry’s long-term development (MIFC, 2016).
The study has given us clear injunctions to focus time and effort to enable a conducive environment for South Africa to not only grow in this space but become the custodian of Islamic finance on the continent. These sentiments and values are currently being echoed throughout industry and policymakers. The time has come to embrace our natural calling to enjoin in goodness and forbid from evil in all our economic affairs. Surely, these ‘fundamentals’ will remove the woes of corruption, mismanagement and unethical conduct from the system.
- Shaikh Ziyaat Isaacs [MSc Islamic Finance (INCEIF), certified shariah advisor and auditor (AAOIFI)] is the founder and managing director of iConsult Africa and a qualified Islamic finance expert. He is also the Head of Finance for the ARP Group and a lecturer in Islamic Banking and Finance at the International Peace College South Africa (Ipsa), in Cape Town.
iConsult Africa
iConsult Africa is a bespoke Islamic Finance and Business Advisory Firm focused on alternative financial solutions based on Islamic principles. Their primary focus is to explore financial solutions with broader social economic impact and inclusiveness. https://iconsult.africa/Home
