South Africa Looking for Sharia INvestment

1 September 2010

South African Islamic investors and financiers are likely to be recognised via a new insertion in the Income Tax Act, says consultancy firm Grant Thornton SA, enabling the country to attract further foreign investors to its financial markets.

Islamic finance is derived from the Shariah, and essentially involves profit and risk sharing and forbids the paying or receiving of interest or investment in certain industries.

"Interest is considered economically harmful by Shariah law, as the extension of credit increases money supply, which stimulates demand for goods and services but does not always result in real, tangible economic activity," Grant Thornton tax consultant Tasneem Gangat said in a statement last month.

"It believes interest-bearing transactions result in economic ills, including issues such as high inflation and unemployment."

Three account types

The proposed new section takes into account three types of Islamic financing and will be aligned to Shariah law.

For investment account agreements, or Mudarabah, tax will be payable on any profits derived by the client as these will be deemed as interest, thus making them taxable at the hand of the client.

Any Murahaba, or financing transactions, between a client and the financier will see "marked up" amounts within the agreement as the taxable amount payable in favour of the bank for tax purposes.

For joint ownership financing – known as Diminishing Musharaka – the client purchases the bank's "portion" of ownership in the asset over time, and the amount paid monthly to the bank includes both the premium payable and taxable amount owed to the bank.

Growing investment trend

According to Grant Thornton, South Africa joins Australia, Hong Kong, the United Kingdom and a growing number of other non-Muslim countries developing their Islamic finance sector by changing regulations to attract investors who can only put their money in Shariah-compliant assets.

The changes will be effective from a date to be announced by Finance Minister Pravin Gordhan.

Shariah law states that the emphasis on economic activity must ensure that money changes hands (from provider to user), accompanied by an increase in trade, manufacture, service provision and, as a result, employment.

The basis of Islamic finance is equity through profit and loss sharing schemes and rental income, usually mutually developed through agreements between the bank and client. The Islamic financier will assume the risk of the purpose of the funds he is investing and share in pre-agreed ratios in profit or loss which result from the transactions.

"The principles of investment management such as sector diversification, low risk versus high risk, income versus capital growth et cetera, will still apply to an Islamic investor, but the manner in which these objectives are achieved, as well as the investments utilised, will differ from conventional finance," said Gangat.

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