Islamic Banking Sector in South Africa shows healthy growth

ABOUT half of Africa’s population is Muslim and businesses are gearing up to meet the needs of this growing market with Islamic finance and banking products.

Just less than a decade since the market was created, the local Islamic banking sector is estimated to be worth R80.6-billion in terms of assets under management.

On the African continent, the market’s assets are estimated to be more than $1.6-trillion (about R17-trillion) and are expected to surge to more than $5-trillion by 2020. These numbers may seem a stretch, but Africa is home to more than 500 million Muslims — about a quarter of the world’s Muslim population.

The growth of Islamic banking has not gone unnoticed by the National Treasury. Earlier this year during the budget speech, former finance minister Pravin Gordhan revealed that South Africa will launch Islamic bonds — better known as sukuk — before the end of the year. Sukuk are normally based on property or infrastructure and are designed to pay a fixed profit rate rather than a coupon.

Absa, FNB, Al Baraka Bank and HBZ Bank offer Islamic commercial and corporate banking products in South Africa.

Standard Bank has Islamic banking offerings in other countries on the continent, and Nedbank is rumoured to be assessing the possibility of dipping its toes into the market.

Islamic banks do not require their clients to be Muslims. “We are not pushing a religion here. We are pushing a [financial] product that has certain requirements,” said the head of Islamic banking at Absa, Uwaiz Jassat.

Those requirements have to be compliant with sharia law, which prohibits the taking and receiving of interest and also rules out certain other practices in conventional banking.

For example, when Islamic banking clients deposit money in their savings accounts, the lender will then trade the money to earn a return on it and those returns are shared with the customers.

Jassat said this method sometimes beat the return on a conventional interest-bearing savings account.

Last year, the returns for Absa Islamic banking saving accounts were 2% higher than for conventional ones.

So it is not surprising that more people are opting to switch to Islamic banking. About 10% of Absa’s Islamic bank customers are non-Muslim. Although Absa’s Islamic banking division is relatively small, its contributions are quite significant to the parent company’s bottom line, according to Jassat.

Al Baraka, the first stand-alone Islamic bank to operate in South Africa with a full bouquet of financial products, has more than 40 000 customers.

Al Baraka, whose parent company is based in Bahrain, has eight branches nationwide, most of them in Muslim communities. Last year, total assets grew 18.7% to nearly R4.4-billion, and advances swelled 13.1%. Al Baraka’s deposit book grew 18.6% to R619.1-million and the equity finance book increased 23.1% to R126.6-million.

Al Baraka’s CEO, Shabir Chohan, said about 30% of the Muslim population — which is estimated to be more than two million strong in South Africa — was using Islamic banking products provided by local banks.

The total Islamic banking sector in South Africa is estimated to be worth as much as R12-billion. Chohan said this meant his bank had the potential to grow eight to 10 times its current size.

Absa’s Islamic banking division is eager to introduce vehicle and home-loan products. Jassat said that once more products were introduced, “customer numbers will skyrocket”.

However, if it does not move fast, it might end up eating its rivals’ dust. FNB’s Islamic banking unit already offers these products and recently launched a term-deposit product.

The CEO of FNB’s Islamic banking unit, Amman Muhammad, attributed the success of FNB’s Islamic banking products to the fact that they were underpinned by strong values and principles that, he said, covered much more than just finance.

Much like Absa, which is controlled by Barclays, FNB has its sights set on expansion beyond South Africa’s borders.

“Africa provides a large opportunity for growth,” said Muhammad. “Muslim entrepreneurs play an important role in the African economy, so the need to provide appropriate financial services through the correct channel is paramount.”