There's good news for the Islamic banking system with the recent initiated change in the Islamic tax laws in South Africa. The tax exemption laws, which were discriminatory, will be reversed and this will perhaps pave the way for immediate growth in the Islamic banking sector. With the positive changes in the banking sector, banks will be more participant on providing debt help options to financially stressed consumers. The National Treasury is hoping to achieve this growth in the Islamic banking sector with the proposed amendments in the tax bill. This change in the tax laws will come into effect by the end of 2010. These new laws are intended to encourage the foreign investments in the South African Islamic market. An eminent spokesperson of the Islamic bank has reportedly said that the present Islamic tax laws are in favor of the Islamic finance and undermine the role of South Africa in non-western markets. According to Sharia law, all Islamic transactions should be backed by the required amount of tangible assets. Speculative investment is prohibited under Sharia law. As per the present tax laws, banks earn interests on all their investment and also earn tax exemptions. However, the Islamic banking clients do not receive any amount of interest in accordance with the principles of the Islamic law. The proposed new laws would bring a huge number of financial instruments under the tax net and hence reinforce South Africa's economy. After the new laws have been passed, it recognizes more and more Islamic investors and thereby makes South Africa on par with the global jurisdictions. In spite of the economic crunch, the Islamic market has been strong and retained its position in the investment market. Islamic finance has been derived from the Sharia and under this law, the payment and receiving of interest (also known as ‘riba') is strictly prevented. According to Sharia laws, transactions carrying interest result to economic ills like high rate of inflation and also unemployment. As per Sharia law that requires all transactions to be asset backed, it means that the financial institution will secure a home or a property against the transaction and the borrower has to pay it off until he becomes the owner. But with the new changes in the law, there are certain transfer costs. The proposed amendment in the Islamic tax laws may also abolish the double duty of transfer costs. A tax director of a law firm says that the Islamic law could not recognize the time value of money. They still regard it as a tool to measure value and not as an asset that should be treasured. This is the reason why a number of alternative financial instruments have been developed to be in accommodating to the Islamic law. ** Rose Anderson is a financial analyst, writing for investment and finance market. Her different article published in the different financial sites related to investment and finance market. BM
