Islamic banking bonus
Islamic banking bonus
By: Jackie Cameron
How does a western bank make money off devout Muslim individuals when it can’t charge interest, which is forbidden in Islamic law? It charges profit margins and rewards clients with dividends generated from a share in the business.
First National Bank (FNB) recently launched Shari’ah-compliant banking and so far it is proving to be a lucrative niche, said Ebi Patel, chief executive officer of the bank’s IslamicFinance division.
In the last three months, more than 400 bank accounts have been opened with about R20-m in funds, he said.
The Shari’ ah-compliant banking initiative follows the introduction of WesBank Islamic Finance, which has made it possible for devout Muslims to buy assets like cars with the help of a major bank – without contravening religious principles.
Shari’ ah law does not allow for interest.
In the last year, WesBank IslamicFinance has financed about R175-m worth of assets, with about 5% for non-Muslim clients, said Patel.
Next on the cards is a special property deal as an alternative to the traditional home loan for clients who wish to comply with the tenets of Islam but require some financial assistance when acquiring assets, he revealed.
Patel said the way the bank is able to structure asset financing as well as transactional banking is not a case of changing terminology, as some have suggested.
Customers who opt for Shari’ ah-compliant bank accounts effectively become partners in a joint venture between FNB and WesBank Islamic Finance.
Bank customers provide funding used by WesBank to purchase the vehicles on behalf of Islamic customers – who are then charged a mark-up on their vehicles instead of interest.
Assets are repaid on a fixed basis.
The mark-up is “market-related”, said Patel, pointing out that the profit is in line with what a bank might expect to generate through a normal transaction.
Deals are fixed and there is no provision for arrear interest payments as these are not permissible in terms of Islamic law.
This should make it risky for the bank. However, as clients are doing these deals for religious reasons they shy away from breaking the conditions, noted Patel.
He said that in terms of Islamic law you should never oppress your debtor so those who are opting for these products out of religious conscience should never default on their debt.
When it comes to generating a return on money held in the Shari’ ah compliant bank accounts, the profits of WesBank IslamicFinance are shared in the form of dividends in the following breakdown: 40% for Wesbank; 30% for FNB; and 30% for clients.
FNB estimates that there are about 1,2-m Muslims in South Africa, of which about 250 000 to 300 000 are economically active – many of these sole traders and business people.
“This latest initiative is the first ever Shari’ ah compliant transactional account with a debit card in South Africa,” said Patel, According to him, closest competitors in this space do not offer transactional accounts.
As is expected of Shari’ah-compliant financial products, a Shari’ah compliance officer will have oversight of the way money is managed and shared out.
Shari’ ah compliant financial services products are gaining popularity, with unit trust funds attracting millions into pooled investments that ensure the underlying assets are not invested in companies that derive their proceeds in ways that are not in line with Islamic law.
