Compliance of South African Legal and Financial Instruments with Shariah Law

Abstract

Islam, one of the major religions in the world, forbids the use of interest as a wealth generation mechanism. Instead, Islam promotes the idea of trade where wealth is created via profit or for services rendered. As a result of these teachings, banking and finance models based on Shariah Law were developed in countries ruled by Shariah Law. Regardless of which country Muslims live in, they all ascribe to the need of shariah compliant banking services. This need has expanded shariah banking services to many countries including South Africa. In South Africa, studies have shown that while a large percentage of the population know about shariah banking, a far smaller percentage are willing to use the services. This paper reviews the products for compliance in South Africa. Since Shariah Finance is based on a foreign judicial system, a full investigation of the legal system was conducted. This system was then compared to South Africa’s legal system to assess the similarities and differences concerning business transaction law. Once compliance was established, the research turned to in-depth interviews to discuss the differences found in the implementation of Shariah Finance in South Africa. The key findings of the paper are that South African business law allows for stricter shariah observance. However, in implementation, a few practises seem to contravene Shariah Law. While fractional reserve banking is an internationally adopted model that cannot easily be replaced other contraventions may be addressed by observing international trends and revising current business models. Transparency of operations and review of business models could support an increased acceptance of Shariah Finance in South Africa.