The South African minister of finance Nhlanhla Musa Nene noted in his medium-term budget speech that tough times are indeed ahead but a better future can be created; however, Nene punctuated his policy statement speech with one exhortation: “Without economic growth, there is no revenue growth, and without revenue growth, expenditure cannot increase and the nation cannot develop and succeed.”
This maxim holds true in all facets of business life and in this context, the Islamic finance industry is no different and is also subject to the same rules. However, with the increasing consideration in the use of Islamic banking and finance structures for both micro and macro requirements, we believe that these Islamic underlying structures will inspire growth in not just South Africa, but sub-Saharan Africa as well.
Review of 2015
2015 in South Africa will be remembered as a year of anticipation. Roughly translated, it equated to a wait-and-see game as to who in the South African market would next issue Sukuk following the successful sovereign issuance in 2014.
2015 saw the return of the dreaded, electricity supply load-shedding return, which drove incentives and increased pressure on authorities to stabilize the South African electricity grid and to ease electricity cuts. These electricity cuts proved to be detrimental to output production in the country and adversely affected the country’s business sector. Eskom, the country’s major electricity public utility firm desperately sought funding and thoroughly investigated Sukuk-funding options.
Briefly moving away from Sukuk, the country’s Islamic banking operations appeared to have showed resilient growth with all indicating decent growth. The same was noted of the Islamic asset management industry, where Shariah compliant mutual funds and exchange-traded funds appear to be performing relatively well in challenging and volatile market conditions. It is encouraging to note that the South African Islamic asset management industry through some of its niche, boutique operators deployed innovative techniques in utilizing foreign exchange control-approved annual allowances in allowing Muslim investors access to offshore Shariah compliant investments. This diversification in the investment platform has allowed for greater risk diversification and has also allowed its customers exposure seldom experienced.
In addition, during 2015, ‘tax-free’ investment structures that were introduced by the government have seen Islamic financial institutions adapt products and offer such tax-free Shariah compliant investments to Muslim customers. The products essentially were designed to inculcate a culture of savings and legislation around the product exempts customers from paying tax on earnings made from these specific products.
2015 also saw one of South Africa’s largest financial services providers suspend the sale of its short-term Takaful product through its Takaful window. The said provider is the only Takaful provider in South Africa. It is understood that they are exiting the short-term insurance business in its entirety and as such the Takaful window will also fall away. However, in the interim, it is understood that another insurance company has stepped up to service the South African Takaful market.
Preview of 2016
Having discussed the attention that Sukuk has generated in the South African market, the consideration of Sukuk as a different funding mechanism has once again captured public interest in this minority Muslim country and it remains a buzzword that corporate, merchant and Islamic bankers propose in discussions with typical customers looking to raise funding. The key element that Sukuk has taught even the staunchest of conventional bankers is that Sukuk provides for an alternate funding source that an investor has not considered before.
South Africa as an emerging economy with a growing population and large infrastructure requirements sets itself up as a fertile environment for Sukuk issuance of all types, servicing government and corporate development alike. Over and above Eskom, a number of the country’s other state-owned entities, local municipal governments and certain listed entities are also looking to issue Sukuk to fund projects that they are working on. Sukuk issuances are anticipated from South African entities during 2016 and by doing so, South Africa will steadily entrench itself as the Islamic finance hub for sub-Saharan Africa.
Furthermore, new entrants to the South African Islamic banking market are also expected and this would come in the form of large established banks and smaller niche players opening Islamic windows to serve an ever-growing list of discerning customers looking for Shariah banking options. Competition in this market will undoubtedly benefit the customer who for a long time had few choices in a small market. This move would also accelerate other financial institutions to enter the Islamic market with alternative improved offerings like Shariah compliant pension and provident funds, retirement annuity products and competitive Takaful services. 2016 will also be the year of consolidation of the African continent and will showcase the collective importance of Africa as a serious player in the Islamic finance markets.
Conclusion
While the South African Islamic finance industry continues to report growth, further advancement and investment in awareness and education programs will be required to develop the skills and capabilities of Islamic financial services practitioners and also to capture the imagination of the Muslim customer.
This industry is complex and delicate and the appropriate development of all its role players is paramount, not forgetting those of the Islamic scholars that sustain the underlying structure.
Amman Muhammad is CEO of FNB Islamic finance. He can be contacted at [email protected].