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People of the Islamic faith across the globe are currently observing Ramadan, the ninth month of the Islamic calendar – a month of fasting, prayer, reflection, and community.
“It is a highly spiritual month, where people look at all facets of their life, typically focusing on their finances as well,” says Shaheen Suliman, head of Islamic Banking at Absa. “At the bank, it is a time where we receive quite a few requests for specific Islamic Banking solutions.”
Islamic finance, as a solution specifically suited to banking customers who want to observe and adhere to Shari’ah requirements, is showing healthy growth worldwide. Last year S&P Global Ratings released its report on Islamic Finance, stating that it expected the industry to expand at a rate of 10% to 13% into this year. Despite the shock of the global pandemic, Islamic finance had shown remarkable resilience, with total assets expanding by 10.6% in 2020.
The rating agency predicted that the industry is positioning itself for sustainable growth by looking at increased standardisation and integration, the development of dedicated social Islamic finance instruments and green sukuk (Islamic bond or Shari’ah-compliant bond), higher levels of digitalisation and fintech collaboration.
In South Africa, the growth rates, while off a small base, show great potential for banking service providers to understand this specific type of client and ensure they receive appropriate solutions to reach their goals.
According to a South African Banking Association report, Shari’ah-compliant financial assets were estimated at around $2 trillion globally in 2019. In South Africa, the percentage of Islamic banking assets as a percentage of the total stood at only 0.16% in March 2021.
The important statistic, however, is the rate of growth between 2019 and 2021, two years where economic activity was marred by the pandemic. Traditional banking deposits grew at a rate of 15.16% while Islamic deposits increased by 41.51%.
Islamic advances grew at 49.71% in the same period, compared to only 7.86% for commercial banking loans and advances.
As a direct result of demand, where customers understood their financial obligations with regard to their religious principles and became more adamant about being able to observe them, Absa recently launched Islamic Banking in Botswana.
“It also gives you, as a bank, a competitive edge. If you don’t offer it, and another bank does, you will lose those clients,” Suliman says.
What makes it different?
Islamic banking is a banking system based on Islamic financial principles promoting risk-sharing, transparency, and social responsibility. Interest is forbidden, but trade is allowed.
“The principles of Islamic banking also prohibit investments in forbidden industries considered harmful to society such as gambling, alcohol, pornography, and weaponry.
In an Islamic banking system, the bank does not borrow or lend funds, it becomes an entity engaged in a trade relationship – whether as the seller, lessor, partner, or investor.
Suliman explains the difference of a vehicle financing arrangement: “If you require vehicle financing from us, we enter into a lessor/lessee arrangement where we lease the car to you for some time and at the end of the term sell the car to you at a nominal value,” he says. “When you place a deposit with us, we use the funding in a profit-generating activity such as purchasing cars for lease purposes. The profit we generate from these activities is then shared with you as a depositor.”
How can you be sure the products are compliant?
In South Africa, there are no specific regulations for Islamic banking and no national body that governs it. Internationally, as per the S&P report, there are developments towards international standardisation, but it is a slow and steady process.
“Standardised regulation would add a layer of protection and safeguard investors so that they know the product is compliant,” says Suliman. “It would protect them against instances where products pop up under the guise of Islamic banking, but with underlying issues that jeopardise the integrity of the banking practice.”
At Absa, says Suliman, trust in the product suite is very important.
The internal Shari’ah team look at the day-to-day operations of the department to ensure compliance with the principles approved by the independent Shari’ah Supervisory Committee.
The Shari’ah Supervisory Committee brings an added layer of independent oversight and expertise. “They provide initial guidance during planning stages but, more importantly, approve all Islamic Banking products that are sold. This certification provides customers with greater confidence in the compliance of our products and services,” says Suliman.
An inclusive product
Suliman states that while the products are Shari’ah compliant, they are not exclusively available to Muslim customers. Anyone interested in the specific product attributes can apply.
“The products are available to anyone who chooses this alternative form of banking,” he says. He references some geographies in Africa where the products have been marketed as “no-interest” solutions, which then immediately markets them to a larger part of the population.
End-to-end solutions, also during Ramadan
While there are no specific obligations that require Islamic banking during Ramadan, Absa does offer support to its customers who may have an increased need for banking solutions at this time.
For customers who perform the sacred pilgrimage to Saudi Arabia, the bank offers foreign exchange without charging a commission on Saudi riyal and US dollar bank notes, for example. This is a promotional offer that will end in June 2023.
The bank also markets its Shari’ah-compliant savings products that assist customers to meet their obligatory 2.5% Zakat (charity).
“As part of Absa’s larger customer-centric vision, our innovative and competitive solutions cater for the personal and business banking needs of an Islamic customer in line with their religious values,” says Suliman.
Brought to you by Absa Relationship Banking.
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