Absa to Offer Mortgages on Tax Law: Islamic Finance (Correct)
(Corrects global sales in 14th paragraph of story first published yesterday.)
Absa Islamic Banking, a unit of South Africa’s third-largest bank, plans to offer Islamic mortgages after the government introduces new tax rules next year.
The Treasury department said in August it will forgo charging tax on three Islamic structures to allow home loans. The government may sell Islamic bonds after deciding whether to make tax amendments in the middle of 2011, said Absa Islamic Managing Director Amman Muhammad, who is also a participant in the Treasury’s discussions on Islamic finance. Absa Islamic is a unit of Absa Group Ltd., which is controlled by Barclays Plc.
While its 737,000 Muslims account for just 1.5 percent of the country’s population according to CIA World Factbook, South Africa is seeking to access a growing industry with global assets of $1 trillion. Albaraka Bank Ltd., a unit of Manama, Bahrain-based Albaraka Banking Group BSC and the African nation’s only Shariah-compliant financial institution, will increase its capital next year to finance expansion, the group’s Chief Executive Officer Adnan Yousif said Oct. 31 in Kuwait.
“The minute the minister announces the first changes, we want to be in a position to start offering this product,” said Johannesburg-based Muhammad in an interview in Dubai Oct. 27. “The tax amendments level the playing field, so if a customer chooses to bank Islamically, there should be no extra-burden from a tax perspective.” Finance Minister Pravin Gordhan is expected to announce the tax changes in February, possibly sooner, Muhammad said.
The National Treasury and the South African Revenue Service didn’t respond to requests by e-mail and telephone for comment.
In the new tax plan, the Treasury will deem profit made from murabahah, mudarabah and diminishing musharaka deals as interest, exempting proceeds below 22,300 rand ($3,206) annually for investors under 65 years of age from being taxed, according to documents the Treasury e-mailed to Bloomberg on Oct. 20. Currently there are no tax exemptions on Islamic products, said Tasneem Gangat, an income tax consultant with Grant Thornton South Africa, part of Grant Thornton International Ltd.
Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles. A mudarabah is a partnership in profit, whereby one party provides capital and the other provides labor.
The taxation changes come as South Africa’s economy expands. The National Treasury raised its economic growth estimate to 3 percent this year from 2.3 percent in its medium- term budget statement on Oct. 27. It forecasts growth of 3.5 percent for next year. The country is the continent’s biggest economy.
Albaraka, which has assets of about $400 million according to Yousif, plans to have 15 branches within two years, he said in a phone interview from Manama yesterday. “There are good new laws waiving a lot of restrictions,” he said. The tax changes “will encourage many Islamic institutions to create funds,” he said.
Banks that don’t comply with the religion’s ban on interest are also looking to benefit from the industry. “I am aware of at least one bank that is planning to open an Islamic window toward the beginning of next year,” Tapie Marlie, Cape Town- based tax director for PricewaterhouseCoopers LLP, said in a phone interview Nov. 1. The trend to offer a so-called Shariah- compliant window is likely to grow in the short to medium term, he said.
Global sukuk returned 12.3 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets gained 16.6 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. Islamic bonds in the GCC returned 12.6 percent, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows.
Global Sales Fall
The difference between the average yield for emerging- market sukuk and the London interbank offered rate has narrowed 28 basis points, or 0.28 percentage point, in the fourth quarter to 345 on Nov. 1, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened 20 basis points in the fourth quarter to 392 today, according to data compiled by Bloomberg. The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 fell 1 basis point to 2.46 percent today, prices from Royal Bank of Scotland Group Plc show.
Global sales of sukuk fell 29 percent to $13.5 billion so far this year from $19.1 billion, according to data compiled by Bloomberg.
The Islamic bond market “is probably where the growth for Islamic banking is going to be in the next three to five years” as the government seeks alternative forms of funding, Stuart Grobler, head of the banking and financial services division at The Banking Association South Africa, said in a telephone interview from Johannesburg yesterday. He was unable to provide statistics on the nation’s Shariah-compliant banking industry.
“The Islamic products offered by the South African banking industry are still fairly new and fairly diverse,” Grant Thornton’s Gangat said in a telephone interview Oct. 26. “There is no existing tax legislation on Islamic finance.”
The country is also working on tax changes to facilitate wakalah and ijarah transactions, Absa’s Muhammad said.
“Given the seriousness the South African government has shown, I wouldn’t be surprised if we see the first national sukuk come through” after the tax changes to ijarah are completed, he said. Most sukuk are based on ijarah, a sale and lease agreement as in real estate.
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