Most people purchase a home or a car on credit as these are big-ticket items that are difficult to save for in advance. Yet for many Muslim South Africans, the traditional method of accessing credit goes against their fundamental belief system.
Muslims cannot pay or receive interest, yet this is the basis of banking systems throughout the world, says Edi Patel, CEO of Islamic Finance at the FirstRand Group. Today, however, several banks, including Absa and FNB, offer Shari’ah-compliant banking products.
Under Shari’ah law, wealth must be generated through legitimate trade and investment in assets. The Shari’ah financial model works on the basis of risk-sharing — the customer and the bank share the risk of any investment on agreed terms and divide any profit between them.
Absa offers a Shari’ah-compliant savings account in which the bank mobilises funds from a pool of investors and manages these funds on their behalf, in return for a share of the profits. Earnings are calculated and distributed to clients at the end of the financial year. The slice an investor is entitled to is directly related to his or her average annual contribution to the total Islamic deposit pool.
When it comes to loan products on homes or cars, Patel says a figure that includes the profit to be made by the bank is worked out upfront. That profit plus the capital amount is then divided by the number of months it will take to repay. In this way the borrower knows exactly what amount he will be paying, and there will be no adjustments if interest rates change. Interest on deposits is similarly replaced by a dividend from the bank.
FNB offers Shari’ah-compliant car finance through Wesbank, as well as a cheque account, a debit card, home loans, personal loans and commercial property loans. In FNB’s case, customers invest directly in Wesbank Islamic Finance and receive an annual dividend based on the profits of the company. The percentage of the dividend pool a customer is entitled to is based on his or her average daily balance.
Albaraka Bank, which is based in Durban, has been operating since June 1989 and was pioneered in response to the need for a system of banking in line with Islamic economic principles and Shari’ah law.
When purchasing a home, Albaraka customers have two options to choose from. Under Musharaka, the bank purchases the property in partnership with the client. The bank annually sells portions of its share of equity to the client at an agreed price, so that over the period of financing the client purchases the entire share held by the bank. The client makes equal monthly instalments towards this annual acquisition. The maximum period for this type of finance is 10 years.
Murabaha works in the same way as vehicle financing. The bank buys the property from the seller for the original price and then sells it to the client at an agreed price after adding a fixed profit. The client makes fixed monthly payments towards the debt and the maximum repayment term is seven years.
Patel says non-Muslim investors can also benefit from purchasing a vehicle or home in this manner. The original costing is market-related and will be determined by current interest rates, but it allows you to fix your repayments for the full term so you are not caught unawares by rising interest rates.
‘Our products are open to anyone of any religious denomination. Currently, five percent of our customers are non-Muslim,” says Patel.
‘The right path’
Shari’ah, an Arabic word meaning ‘the right path”, refers to traditional Islamic law. The Shari’ah comes from the Qur’an, the sacred book of Islam, which Muslims consider the actual word of God. The Shari’ah also stems from the Prophet Muhammad’s teachings and interpretations of those teachings by certain Muslim legal scholars. Muslims believe that Allah revealed his true will to Muhammad, who then passed on Allah’s commands to humans in the Qur’an.