It is anticipated that the South African taxation legislation governing the specific elements around Murabaha and Sukuk will be extended to cover listed companies, effective in January.
The government has followed through on their intention of ensuring Islamic financial arrangements accessibility to “other” entities (over and above just sovereign government itself and state-owned entities) to also allow for an alternate additional source to raise capital.
Over the last few years, the government has introduced Islamic compliant financial structures in stages. With the first of such introductions coming through in the Taxation Laws Amendment Act of 2010 – “the Act” that recognised for the first time arrangements like Diminishing Musharaka, Murabaha and Mudaraba as alternates to their conventional counterparts – these amendments were effected to enable banks to offer a Shari’ah compliant product.
In 2011 further amendments to the same act were effected, wherein Sukuk was introduced. However, issuance was limited to the sovereign government. Later on, effective from April 2015, Sukuk issuance was extended to state-owned entities.
The latest proposed amendment to the act regarding listed companies, which takes effect at the beginning of next year, will now almost complete the assortment of entities that would be allowed to offer and/or issue Islamic financial products.
This is an impressive achievement for a minority Muslim country where only 2 percent of its citizens are adherents of the Islamic faith. Praise must certainly be heaped on the National Treasury for understanding the underlying potential of Islamic financial products. This potential was evident in the four times over-subscribed 2014 South African debut Sukuk issuance, recording the country’s lowest US dollar funding at levels not seen since 1994.
Listed corporates in South Africa have been following the developments regarding the Sukuk. They understand the impact that such previously unavailable financial instruments could have on their ability to raise funding. Judging by the level of interest and the kinds of questions Islamic bankers in South Africa have been getting, we will not be surprised by the associated positive developments that this amendment would have on the economy at large.
Indications are that the South African companies in the telecoms industry would probably be the first to issue corporate Sukuk. With the continual threat of power interruptions, South Africa’s dominant power supplier – state-owned entity Eskom – will issue Sukuk and have made their intentions public.
Furthermore, the extension of the news of the taxation amendments to Murabaha structures bodes particularly well for many financial institutions that have become reliant upon equity and commodity conduit Murabaha transactions, where clarity around taxation on the various legs of the transaction will allow for more robust and competitively priced deals.
This is an opportunity for investors looking to previously untapped markets with new prospects. South Africa is an emerging economy that is always looking for innovative alternatives. With South Africa being viewed as the gateway to Africa, viable Islamic finance options open opportunities both for investment within the country and for growth across its borders in neighbouring countries.
(Business Report / 18 November 2015)---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com