How do Islamic finance products work?

Understanding how conventional finance products work can be difficult enough. The increasing popularity of sharia finance means there’s another set of products available for the public to consume, which work differently to how we’ve come to know banking and investments.

Islamic finance is by no means a new concept. According to one report, the first modern-day Islamic bank was founded in 1963, in the town of Mit Ghamr, 80km north of Cairo.

So sharia-compliant products have been around for years, but have increased in popularity since the 2008 financial crisis, when more investors started demanding a socially responsible and ethical form of banking and investing.

Sharia-compliant equity funds were the answer for some, as they must invest according to good business practices in Islamic financing.

The principles of sharia investing dictate that to be considered acceptable, companies must pass a certain set of criteria.

Jo-Anne Bailey, sales director and country manager for Africa at Franklin Templeton Investments, explains that: “Among them, the balance sheet structure should contain neither too many liquid assets nor debt and the company should not engage in haram (forbidden) industries such as alcohol, tobacco, gambling and specific foods considered non-halal, or unpure.”

Products are typically overseen by a sharia supervisory board that approves investment strategies and objectives.


“Sharia investing is for Muslims looking to invest based on Islamic principles, but it also appeals to non-Muslims looking to diversify their portfolios by tapping into an attractive pool of investment resources,” says Bailey.

Shaheen Suliman, head of FNB Islamic retail banking, emphasises that the product is open to all, even though FNB’s Islamic finance customer base is predominantly Muslim.

But, he believes this is all down to how the product is marketed. Internationally, global institutions tend not to market sharia-compliant products as aggressively to Muslim customers only, so there is more uptake among non-Muslim investors.

Suliman says Islamic finance products appeal to a variety of customers because of the certainty that they bring.

“For example, our current vehicle finance product is fixed for a five-year term, so interest rates don’t fluctuate. One customer, a divorced mother, liked the fact that instalments were fixed over the period, as it helped with her budgeting and cash flow,” he explains.


It’s not only Islamic funds and vehicle financing that are on offer. These days there is a plethora of sharia-compliant products, including cheque and savings accounts, insurance (home and car) and Islamic home loans. All these products are open to anyone to make use of.

CEO of FNB Islamic banking Amman Muhammad, explains how property finance works: “Property finance, in the traditional sense, is essentially the granting of a loan to a client for the purchase of a property. This loan needs to be paid back with interest over the term of the loan arrangement. The difference with Islamic property finance is that it is based on a concept called diminishing Musharaka.”

This means that the bank and the client enter into a co-ownership agreement over a property. Each party’s proportionate share in the property is based on their respective financial contribution to the arrangement.

While the instalment in a conventional property loan fluctuates based on the movement of the prime lending rate, the instalment in an Islamic property finance arrangement is fixed for 12 months at a time.

“The instalment is only subject to review on an annual basis.”


Suliman says there’s currently no sharia-compliant credit card available, but it is certainly on the cards.

“We still have a way to go relative to what foreign Islamic products offer. You have your cheque account and a few Islamic products, but there is no sharia-compliant credit card.”

He points out that much effort has gone into levelling the playing field between Islamic and conventional financial products, particularly when it comes to fees and reward schemes.

Now that Muslim customers have the same type of products and reward structures, the next step is investigating how new products can be launched into South Africa and the rest of the continent. It’s only a matter of time before South Africans can enjoy the same level of choice that international investors have.

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