It may also have something to do with the ambition of the
country to develop Cape Town into an international financial hub, an ambition
which was confirmed by Alan Winde, the finance minister of the provincial
government of the Western Cape; and South Africa’s aim of attracting inward
foreign direct investment (FDI) from the Middle Eastern countries and others such
as Malaysia and Brunei.
A clear-cut statement of intent came from the South African
National Treasury at the time of the announcement of the intention to introduce
the tax neutrality measures: “The development of Islamic finance in South
Africa is critical to the expansion of National Treasury's strategy to position
South Africa as a gateway into Africa. The treasury envisages South Africa
being a central hub for Islamic product development and ensuring the rollout of
such products into African markets.”
Given that Islamic finance has been around in South Africa
since 1989 when Albaraka Bank South Africa, now a joint venture between the
Saudi-owned Albaraka Banking Group and UK-based DCD London & Mutual PLC,
was licensed, Islamic finance was a mere niche curiosity, which the South
African authorities tolerated more for political reasons and the
white-controlled media treated with cynicism and suspicion.
In fact the South African Reserve Bank (SARB) had licensed
another bank called Islamic Bank Limited following the collapse of Apartheid in
the early 1990s and which was managed by a Muslim member of the ruling South
African government party, the African National Congress (ANC). The license was
a controversial one given that the promoters had very little experience of
banking per se let alone Islamic banking. Not surprisingly, the bank collapsed
after only a few of years of operations with serious allegations of
mismanagement and fraud which left Muslim investors livid and cynical about
Islamic finance, from which the South African market is only now recovering
after two decades. In fact, the liquidation of Islamic Bank Limited is still
not completed after all this time.
Nevertheless, South Africa like Malaysia, Egypt and Britain
has also been a laboratory for the contemporary Islamic finance movement,
albeit in the form of Jame Limited, a small Shariah-compliant cooperative and
credit union, which was established in the 1980s well before the likes of
Albaraka and Islamic Bank Limited. South African firms such as Columbus Steel
were some of the first in the world to access Islamic corporate finance then
arranged by Kleinwort Benson in London in the 1980s.
But with the spectacular growth of Islamic finance globally
over the last decade or so with total assets currently under management
estimated between $900 billion to $1.2 trillion and the presence of a 3 million
and relatively affluent Muslim minority, the South African government has been
forced to take more notice of this development. Similarly, the International
Monetary Fund (IMF), the World Bank, the IFC (International Finance
Corporation), the Asian Development Bank and even the African Development Bank
are all promoting Islamic finance as an option in their dealings with Muslim
countries which has resulted in them launching sukuk (Islamic certificates) and
funds to finance their activities in these countries.
The fact that Mauritius is also promoting itself as an
offshore banking centre including for Islamic capital market products has also
stirred Cape Town into action. Moreover, the success of new entrants such as
the Oasis Group, a fast-growing asset management company which now has a stable
of over 40 Shariah-compliant funds under its Crescent label, and the Islamic
banking windows of the banking majors such as ABSA, FNB, Standard Bank and
Nedbank, has been another major factor in the new financial inclusion policy of
the National Treasury with respect to Islamic finance.
South African Finance Minister Pravin Gordhan, introducing
the Taxation Laws Amendment Bills 2010 in the National Assembly in Cape Town on
Aug. 24, 2010, gave some insight into the government’s rationale for the tax
changes relating to Islamic financial products.
“South Africa is an ideal location for multi-nationals to
base their regional operation for investments into sub-Saharan Africa. South
Africa offers world-class financial services, strong and clear financial
regulatory architecture and world-class infrastructure … Certain domestic tax
anomalies, the exchange control regime and fierce competition from certain low
tax countries, remain stumbling blocks to South Africa taking full advantage of
the opportunities that are available.
“To remedy this situation, the proposed amendments remove
various tax hurdles that a multinational company would face if it based its
regional headquarter in South Africa. Another important area of innovation
relates to the growing use of Islamic financing, which contains certain
prohibitions in respect of finance, including prohibitions against interest,
immoral substances and the lack of transparency in respect of investments. At
issue is the tax system’s lack of recognition of Islamic finance, as it mainly
focuses on traditional forms of finance. The proposed amendments will level the
playing field in respect of certain Islamic financial products when undertaking
savings and investments and when attempting to bank finance,” explained
Gordhan.
The tax system does not currently cater for Islamic
financing, thereby hindering the growth of South African financial service
activities in this regard. The proposed amendments seek to place Mudaraba,
Murabaha and Diminishing Musharaka on an equal tax footing with conventional
finance products. One benefit of the proposal, says the National Treasury, “is
to provide Islamic savings products with the R22,300/R32,000 exemption for
interest available to traditional savings products.”
There are also further proposed amendments relating to
Diminishing Musharaka, which is commonly used in Islamic home financing or
mortgage products. The amendments propose the abolition of the double stamp
duty (property transfer tax) which is implicit in the Islamic contract because
it involves the transfer of title at the front and back end of the scheme. In
the UK, for instance, HM Treasury has done away with the double tax stamp duty
on the basis that the net economic effect of the Diminishing Musharaka is
similar to that of a conventional mortgage, albeit that the Islamic scheme
involves two transfer contracts, and as such it would be unfair to punish the
Islamic contract with a double tax.
Local Islamic bankers stress that the new measures when
adopted would result in greater product innovation and choice; and in lowering
the development costs and cost of capital for Islamic financial products. South
African Muslims have long been complaining that Islamic financial products in
their local market were not as competitive as their conventional counterparts,
especially in a country that already boasts the highest banking charges in the
developed world.
