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Thursday, 19 November 2015

Entrenching Sukuk into South African economy

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.
Underlying potential
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)
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Turkey to boost use of Islamic finance

The Turkish government is seeking to increase the use of Islamic finance for state agencies, state-owned companies and the private sector, a senior treasury official has said.

“The lack of long-term financing is choking developing countries,” said Hakan Tokaş, the director-general for Foreign Economic Relations at the Undersecretariat of the Turkish Treasury, speaking at a G-20 meeting on Islamic finance in Istanbul on Nov. 18.

 “The government will continue to issue sukuk both in Turkish Lira and in foreign denominations. Turkish lira issuance will be aimed at the domestic market, while foreign-currency denominated sukuk will be issued on the international market,” Tokaş said.

Sukuk is an Islamic finance instrument that resembles a bond, but is based on asset growth rather than interest payments - forbidden under Muslim religious law.

“With this policy, which few governments currently undertake, Turkey hopes to set a benchmark for the acceptance of sukuk, and to broaden the investor base for the instrument,” Tokaş added.

“With Turkey, a regular borrower in sukuk, the instrument will gain access to new markets.”

Islamic finance to become ‘major source of long-term investments’

For Vahdettin Ertaş, chairman of the Capital Markets Board of Turkey (SPK), the country offers important opportunities for investment, particularly in the current challenging global climate.

“Islamic finance will become a major source for long-term investments,” Ertaş said, adding, “Because Islamic instruments are asset-based, and not debt-based, they manage risk well.”

Asset-based instruments are based on earnings from productive activity, as well as sharing risk and profit among investors.

“Islamic finance will play a vital role in Turkish infrastructure development,” Ertaş said. “The risk-sharing component is key. This will enable investors to control the complex challenges of large infrastructure projects more efficiently.”

Tokaş added Turkey now offers several financial structures for Islamic finance that are exempt from corporate tax. There are also no important restrictions on foreign participation, he added.

Zamir Iqbal, the head of the World Bank Global Islamic Finance Development Center, noted the Turkish presidency of the G-20 has helped to bring Islamic-finance development to the fore.

“The Turkish G-20 presidency has promoted a road map for development finance that has included Islamic finance,” Iqbal said.

“This has helped countries to take steps to improve the enabling environment for Islamic finance - regulatory, legal and fiscal - which need to be addressed if Islamic finance is to grow,” Iqbal said.

(Daily News / 19 November 2015)
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