By Jennigay Coetzer – Business Day, 23 February 2011

One of the challenges in the Islamic Banking market is that there there is no provision in the SA tax laws for the underlying structures of Islamic banking, which are different to conventional banking structures.

For example, with the Islamic banking diminishing equity finance structure, which translates into Mushakarah Mutanaqisah in Arabic, the individual wishing to buy an asset, such as a property, notifies the bank of his intention to acquire it, and the bank then approaches the seller and purchases.

The customer leases the house from the bank at an agreed cost plus profit percentage, as opposed to paying interest, and makes regular purchases of units of the house until the end of the lease term when ownership passes to him. All Islamic financial transactions must comply with Shariah laws.

This poses a problem in terms of VAT, because the goods have actually been sold twice, according to the current SA tax laws. “SA cannot be viewed as the gateway to Africa if the tax laws do not recognise the Islamic banking industry,” says Amman Muhammad, MD of Absa Islamic Banking.

In the case of property there is an additional implication of double transfer duty. He says the tax laws needs to be changed so that the bank can be recognised as the facilitator of the transaction as opposed to a participant in the transaction.

In May 2010 the government issued the first draft of an amendment to the tax laws for the provision of Islamic financial transactions for comment, and the final draft amendment was issued in July 2010. “We are now waiting for the minister of finance to announce its inclusion in the act,” says Muhammad.

Another structure within Islamic banking is Mudarabah, which applies to Islamic deposits or investment accounts that work on a shared profit or loss basis at the end of each year.
In conventional banking, these types of accounts would attract interest, and at the end of the year customers investing in their personal capacity would get a R22,000 exemption before paying tax.

“But, as the current tax laws stand there is no exemption attached to profit.” In the proposed tax amendment draft, if the customer can prove that the profit earned was as a result of an Islamic deposit it would be deemed to be interest earned and taxed accordingly.

The third Islamic banking structure relates to shorter term finance, or Muraabaha, whereby repayments are typically spread over months as opposed to years. In this case the bank would purchase an asset, such as a stock, on the customer’s behalf and the customer would buy the stock from the bank on a cost plus profit markup basis.

“All three of these structures are up for inclusion in the tax act.” He says Absa has started developing an Islamic home finance product in anticipation of the draft tax amendments. In November 2010, the bank also launched its Absa Vehicle and Asset Finance Family Takaful product, aimed at assisting individuals that cannot pay their vehicle finance installments due to legitimate reasons, such as being retrenched.

This year, it is launching a business current account product and it is introducing an Islamic trade finance product, whereby it purchases goods, such as inventory, and the customer buys it back.

Jennigay Coetzer is a freelance business and technology journalist with 25 years experience, and she writes regularly for Business Day. She also runs media training and writing skills workshops, and is the author of A Perfect Press Release – or Not?, a guide to writing and distributing effective press releases, an electronic version of which can be downloaded free from her website: www.jennigay.co.za.

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