Absa Islamic Banking plans to offer Islamic mortgages

Absa Islamic Banking, a unit of South Africa’s third-largest bank, plans to offer Islamic mortgages after the government introduces new tax rules next year.

The Treasury department said in August it will forgo charging tax on three Islamic structures to allow home loans. The government may sell Islamic bonds after deciding whether to make tax amendments in the middle of 2011, said Absa Islamic Managing Director Amman Muhammad, who is also a participant in the Treasury’s discussions on Islamic finance. Absa Islamic is a unit of Absa Group Ltd., which is controlled by Barclays Plc.

While its 737,000 Muslims account for just 1.5 percent of the country’s population according to CIA World  Factbook, South Africa is seeking to access a growing industry with global assets of $1 trillion. Albaraka Bank Ltd., a unit of Manama, Bahrain-based Albaraka Banking Group BSC and the African nation’s only Shariah compliant financial institution, will increase its capital next year to finance expansion, the group’s Chief Executive Officer Adnan Yousif said Oct. 31 in Kuwait.

“The minute the minister announces the first changes, we want to be in a position to start offering this  product,” said Johannesburg-based Muhammad in an interview in Dubai Oct. 27. “The tax amendments level the playing field, so if a customer chooses to bank Islamically, there should be no extra-burden from a tax perspective.” Finance Minister Pravin Gordhan is expected to announce the tax changes in February, possibly sooner, Muhammad said.

In the new tax plan, the Treasury will deem profit made from murabahah, mudarabah and diminishing musharaka deals as interest, exempting proceeds below 22,300 rand ($3,206) annually for investors under 65 years of  age from being taxed, according to documents the Treasury. Currently there are no tax exemptions on Islamic products, said Tasneem Gangat, an income tax consultant with Grant Thornton South Africa, part of Grant  Thornton International Ltd.

Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with  Shariah principles. A mudarabah is a partnership in profit, whereby one party provides capital and the other provides labor.

The taxation changes come as South Africa’s economy expands. The National Treasury raised its economic  growth estimate to 3 percent this year from 2.3 percent in its medium- term budget statement. It forecasts growth of 3.5 percent for next year. The country is the continent’s biggest economy.

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