How relief measures impact Islamic banking clients

When you purchase a property, there is co-ownership between you and the bank

First National Bank has also offered its Islamic Banking clients separate relief options. 

Diminishing Musharakah means that when you purchase a property, there is co-ownership between you and the bank, where each party's share in the property is based on their respective financial contribution to the agreement. So, as the years progress, the bank’s share of co-ownership diminishes, and your share increases. Picture: 123RF/STEVANOVICIGOR
Diminishing Musharakah means that when you purchase a property, there is co-ownership between you and the bank, where each party's share in the property is based on their respective financial contribution to the agreement. So, as the years progress, the bank’s share of co-ownership diminishes, and your share increases. Picture: 123RF/STEVANOVICIGOR

As the Covid-19 pandemic continues its ruthless destruction without anyone knowing how long it will last, more and more South Africans are struggling to meet all the financial obligations due to mounting job losses on the back of the lockdown.

Since April, all banks have introduced measures to help customers struggling as a result of the pandemic. Relief measures included payment holidays, cashflow loans and debt restructuring. First National Bank has also offered its Islamic Banking clients separate relief options. 

Imaad Orrie, financial planner at Orico Wealth Investments says Islamic banking excludes any interest-bearing factors and money in the system will never be used to fund unethical industries and things impermissible to Muslims, such as investing in alcohol, gambling and gambling facilities, arms and weapons manufacturing and pornography. 

This does not mean Islamic banking services are exclusive to Muslims, he says.

Mohammed Ammen Hassen, head of Shari’ah banking at Standard Bank, says clients using its Shari’ah compliant banking solutions are not treated any differently in respect of Covid relief measures. “All measures that we have announced as a bank are applicable to clients that consume Shari’ah lending products as well.”

In addition to its relief measures FNB is  offering cashflow relief on Islamic residential or commercial property finance, Islamic vehicle and asset finance and Islamic trade finance. 

The bank has offered qualifying customers the opportunity to extend their relief agreement by another three months to the end of September, taking the payment break to six months. 

“Customers, who can demonstrate a material impact to their income as a result of Covid-19 and have honoured their finance agreements with the bank as at the end of February 2020, can apply for an extension on their cashflow relief agreements,” Amman Muhammed, chief financial officer at FNB Islamic Banking, says.

Explaining the relief on the bank’s Islamic banking products, Muhammed says if you request a three-month relief on a property finance product that has an instalment of R10,000 a month for example, which is based on the diminishing Musharakah or co-ownership structure, you would owe the bank R30,000 over those three months.

Diminishing Musharakah means that when you, as the customer, purchase a property, there is co-ownership between you and the bank, where each party's proportionate share in the property is based on their respective financial contribution to the co-ownership arrangement.

So, as the years progress, the bank’s share of co-ownership diminishes, and your share increases.

“If you had paid a 10% deposit and the bank has sold you 5% [of the property] each year until year three currently, the co-ownership ratio would now be 3:1, meaning the bank owns 75% of the property and you 25%. As part of the relief, the bank will purchase from your 25% an additional share to the value of R30,000 so you no longer owe the bank the actual money,” Muhammed explains.

What, however, does happen is that the co-ownership ratio changes.

If you’re looking for relief on you vehicle repayments, based on the Ijarah or lease structure, it's important to note that assets financed under this structure are acquired by the bank, which then charges a customer a fixed monthly rental amount for usage thereof and ownership is passed onto the client at the end of the contract.

If you have applied and qualified for relief, your debit orders are temporarily suspended for the duration of the payment relief period. You will then be required to settle your contract over an additional three months after the original expiry date. 

“This amendment will not impact the payment schedule of the original account and customers are required to honour their rentals via their debit orders, which will remain unchanged for the duration of the extended term,” Muhammed says.

He says the payment relief on the Ijarah structure will not affect your credit history negatively.

Hassen says if you need further relief you need to contact Standard Bank and the relief will be based on your personal circumstances and discussions with the bank.

He says it is important to note that while the relief measures are applicable to all Standard Bank clients, other products that have been specifically designed as part of the bank’s relief effort may not be Shari’ah compliant.

He advises clients to first check with his unit to confirm which of the bank’s relief efforts have been certified by its Shari’ah Advisory Committee as being compliant.

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