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is defined to equate a contract featuring ad- vanced payment against delivery of goods: the financing is usually used for commodi- ties. The former – intisar – is a contract un- der which a buyer place an order for goods to be manufactured for delivery at a future date. The upcoming directive is expected to boost national savings because first time de- positors are expected to be encouraged by the new Islamic bank offering. PM Meles re- cently said the next five year economic plans to boost the current 9.4 per cent of national saving shares in the economy to at least 17.4 per cent and to 21.3 per cent shares if possible.
Though new for Ethiopia, interest-free bank- ing has long global history. The first private interest-free bank, the Dubai Islamic Bank, was set up back in 1975 by a group of Mus- lim businessmen from several countries.
After the establishment of the first private commercial bank in Dubai, more than fifty interest-free banks were established in Mus- lim countries and as well as in European countries such as Denmark, Luxembourg, Switzerland and the UK.
Islamic Banking Tax Exemptions in South Africa
In May this year the National Treasury is- sued proposed tax amendments as part its stated intention of putting Islamic banks in South Africa on an equal footing with traditional conventional finance. National Treasury also stated that, “The develop- ment of Islamic finance in South Africa is critical to the expansion of National Treas- ury’s strategy to position South Africa as a gateway into Africa. The Treasury envis- ages South Africa being a central hub for Islamic product development and ensuring the rollout of such products into African markets.” The Proposed Tax Amendments address the Mudarabah (investment), Murabaha (mark- up financing transaction) and Diminishing Musharaka (partnership arrangements generally used for project or home financ- ing) financial structures. The proposed Tax Amendment document acknowledges that, “Tax has become a hindrance to the vibrant and growing Islamic financial market” in South Africa.
With regard to Islamic investments, it’s pro- posed that the profit share earned by the investor will benefit from the tax exemptions currently provided for interest earned. The exemption is currently between R22 300 and R32 000 per annum. Further proposed amendments apply to Diminishing Mush- araka, which is ideally suited to home mort- gages and other such long term projects.
8 Global Islamic Finance October 2010
The tax amendments propose that in Sha- riah financing, there should no longer be double transfer duty with the house first being transferred to the bank and then to the buyer. Also the rental portion of the pay- ments to the bank in a Diminishing Mush- araka structure would not attract additional indirect taxes, as is currently the case.
While these proposed amendments may sound complicated the critical elements for Muslims in South Africa are the real com- mitment of National Treasury to ensure that South African Muslims enjoy the same ben- efits from the formal banking sector that are currently enjoyed by other South Africans and that South Africa is positioned to be- come a key financial hub on the African con- tinent, where Islam is the majority religion.
Other benefits include increased ease of product structuring for Islamic banks so that the range of financial products offered to Muslims, will deliver at least as much choice as those offered by conventional banking.
As a member of the Banking Association committee on Islamic Banking, the Nation- al Treasury has broken new ground for the work being done on addressing the needs of Islamic financial institutions and their customers in South Africa. The proposed amendments will ensure that South Africa becomes an Islamic finance product devel- opment incubator for the rest of the conti- nent.
Maybank to Expand into Singapore and Indonesia
Malaysia’s largest lender Maybank today announced plans to expand its Islamic fi- nance business in Singapore and Indone- sia to tap the markets’ demand for such services. In Indonesia, home to the world’s largest Muslim population, the bank will open at least one new branch a week to increase its network from 290 to 450 eventually, Maybank chief executive Abdul Wahid Omar said. The lender is also planning to expand its Islamic services in Singapore, whose pop- ulation is 13 per cent Muslim.
Muslims from around the world also live and work in Singapore or use it as a regional business hub. Maybank is determined to become “the number one Islamic bank in ASEAN,” Abdul Wahid said, referring to the 10-member Association of Southeast Asian Nations. Islamic banking fuses principles of Islamic law, known as Sharia, and modern banking. Islamic funds are banned from investing in companies associated with to- bacco, alcohol or gambling.
The Sharia finance industry, which abides by religious laws that prohibit the payment and collection of interest, is a booming busi- ness, which Moody’s Investors Service esti- mates has a market potential of five trillion dollars. In Malaysia, Maybank had Syariah- compliant assets worth 10.67 billion dollars in 2009, placing it among the top 20 in the world. Bank Melli Iran is the global leader in Islamic finance with Syariah-compliant as- sets of US$59.62 billion.
Maybank is aiming to break into the world’s top 10 Islamic finance centres, Abdul Wahid said. “The growth of Islamic banking has typ- ically been double that of the conventional (banking industry) and we have seen that in Malaysia, we have seen that in Indonesia certainly,” he said. “Globally, we can there- fore expect a double digit growth in Islamic banking.
Ethiopian Financial Sector to Receive First Islamic Bank
Finally responding to a strong public de- mand, the National Bank of Ethiopia (NBE) is about to approve a directive that paves the way for the establishment of Islamic banks. The directive also opens doors for currently operational commercial banks to create an interest-free banking wing. “Existing banks may create interest-free banking windows and Ethiopian nationals may establish a bank exclusively engaged in interest-free banking,” the NBE draft di- rective reads. To accommodate Muslims, who are by Sharia’h – Islamic law – prohibited from taking or giving interest (riba), commercial banks are currently offering zero interest. However, fully-fledged establishments of Islamic banks, which offers the owners of capital to share the profits made by the en- trepreneur who comes up with investment projects, is an untapped concept for the lo- cal financial sector.
The sector will, according to Prime Minister Meles Zenawi, remain closed from foreign banks involvement. The 2008 Banking Busi- ness Proclamation has already crafted a room for non interest banking. However, par- ticulars on the regulations of such services were left to be covered by National Bank directive which, two years late, has come now.
According to sources, NBE’s two page draft directive entitled Directives for Conducting Interest-Free Banking, has already received feedback from stakeholders and should be approved in a few weeks time. The impend- ing approval is expected to enable some already under progress initiatives that en- visages establishing Islamic banks. As per
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