Islamic Fund Management
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Banking Sector
South Africa has a well-developed and efficiently regulated banking system consisting of a
central bank (the SARB), a few financially strong banks and investment institutions, and many
smaller banks. Based on Lafferty’s 2017 Global Bank Quality benchmarking study, which
analyses the quality of 100 banks across 32 countries, South African banks remained the
world’s most robust for a second year, despite a downgrade of its credit ratings.
As at end-2016, the South African banking sector constituted 17 registered banks, 3 mutual
banks, 15 local branches of foreign banks, 2 co-operative banks and 36 foreign banks with
approved local representative offices (South Africa Reserve Bank, 2016). As a result of being
consistently rated as one of the world’s most advanced and well-functioning banking systems,
the South African banking sector has been able to elicit solid interest from abroad, with a
portion of foreign banks establishing offices there and others acquiring stakes in major South
African banks (The Banking Association South Africa (2014).
On the Islamic banking side, there is at present only one full-fledged Islamic Bank, i.e. Al
Baraka Bank, which was established in 1989 and marked the beginning of Islamic finance in
South Africa. Other banks have also launched Islamic windows alongside their conventional
operations. There are currently four banks offering Shariah-compliant products through
Islamic windows, i.e. First National Bank (FNB), Absa Bank, HBZ Bank and Standard Bank. In
2014, Islamic banking assets only accounted for 1%-2% of the total banking assets in South
Africa.
Bond Market
In contrast to many emerging markets, South Africa’s domestic bond market is very well
developed based on the structural and regulatory perspectives. The existence of an established
base of local institutional investors has been the key to the market’s success. Other than that, a
wide variety of instruments and ample liquidity have also driven the domestic bond market to
become one of the world’s most sophisticated bond markets, which in turn provides essential
support to its broader economy. This is also partly attributable to historical reasons and
government preferences.
In the 1970s and 1980s, economic sanctions were enforced on South Africa. The country was
effectively denied access to international financial markets; this was aimed pressuring the
South African government to end apartheid (racial segregation) (Levy, 1999). This had forced
the government to fund its swelling deficit through the domestic bond market, which had then
contributed to the development of the industry (Mboweni, 2006). Interestingly, although there
was flexibility to invest offshore, most South African institutional investors and asset managers
lacked foreign appetite and preferred to invest in local markets, which led to high levels of
domestic investments.
To raise funds for sizeable capital projects such as roads, power stations and hospitals,
government entities had issued bonds and listed them on the Johannesburg Stock Exchange
(JSE) Debt Board. More than half of the debts listed on the JSE had been placed by the South
African government. The JSE regulates the largest listed debt market in Africa, both by market
capitalisation and liquidity. Currently, more than R1 trillion of government bonds are listed on
the JSE’s Debt Board; these instruments account for 90% of all liquidity reported to the JSE.