Africa needs to be changed to accommodate interest-free and non-gambling transactions. South Africa’s legislators must enhance economic development by encouraging risk-sharing instead of debt-financing. This will result in reducing poverty and inequality and South Africa will achieve a better socio- economic development which will bring greater justice to the society as a whole. The Islamic banking and financial system can, therefore, be served as an instrument to endorse economic growth and benefit humankind since it positively contributes to macroeconomic stability. Our South African community is in much need for profit sharing and equity participation to replace the undue enrichment caused by the charging and receiving of interest.
5.8 The Challenges Faced by the South African Judiciary when applying Islamic law
Islamic finance, which is regulated and governed by Shariah law, is accepted in South Africa.450 The application of Islamic finance, the enforceability and
advancement in South Africa were raised for the first time, in the judgement in Lodhi 5 Properties Investments v First Rand Bank Limited (hereinafter referred to as the Lodhi case).451 This is the first matter held at the Supreme
Court of Appeal in South Africa, which dealt with the question whether the
449 C Rautenbach ”Muslim personal law in South Africa 2004” volume 7 No 2
450Hesse M “Finance is based on Shared Prosperity”http://www.iol.co.za/personal- finance/islamic-finance-is-based-on-shared-prosperity-9230978 personal Finance (accessed 12 July 2017)
129 prohibition against the charging of interest on a loan in terms of Shariah law may be a defence for a claim for mora interest of a loan agreement.452
The facts of the Lodhi case will be set out below. The parties approached the High court in three applications however; this dissertation will be limited to the courts approach, relating to the application of Islamic law of finance in South Africa. FirstRand Bank453 offers to its customers, specialized services and
products that are compliant with Shariah law. First Rand Bank entered into an interest free loan agreement as well as an “Agency and Administration Service Agreement” with Lodhi 5 Properties Investments. In accordance with the terms of the loan agreement, FirstRand Bank loaned a sum of R9.6 million to Lodhi 5 Properties investment for the purchase of properties. The loan amount would be payable in 120 instalments of R88 000.00.
According to the “agency agreement,”454 FirstRand Bank acted as an agent
and purchased the property on Lodhi 5’s behalf, in return for a fixed agency fee. Lodhi 5 will be responsible for the payment of an 8% administration fee which is payable in 120 instalments. Lodhi 5 Properties Investments defaulted on repayments and First Rand Bank applied to the High court, for an order to comply that Mr Lodhi pay the outstanding balance.455 The defendant Mr Lodhi
452 Maphuti DT Lodhi 5 Properties Investments v FirstRand Bank Limited (2015) 3 ALL SA 32 (SCA) and the enforcement of Islamic banking law in South Africa
453 FirstRand was created in its current form in February 1998 through the disposal of Anglo American's interests in First National Bank and Southern Life, and the merger of these assets with RMB and Momentum; one of the largest transactions in the history of local financial services.http://www.firstrand.co.za/AboutUs/Pages/ownership-structure-and-operating-
model.aspx (accessed 10 July 2017)
454 The term Wakala is used in Islamic finance to describe a contract of agency or delegated authority pursuant to which the principal appoints an agent to carry out a specific task on its behalf. The Wakala concept is used frequently in financing transactions, including sale and purchase (where the agent can buy or sell assets on behalf of the principal that appointed it), borrowing and lending of funds and assignment of debt, guarantees and pledges http://www.ifre.com/exploring-islamic agency/1611511.fullarticle (accessed 12 July 2017)
455 Maphuti DT Lodhi 5 Properties Investments v FirstRand Bank Limited ((2015) 3 ALL SA 32 (SCA) and the enforcement of Islamic banking law in South Africa
130 raised the defence that the loan and agency agreement are void as they are not Shariah compliant. The defendants further alleged that the agreements were not explained, no performance was rendered by First Rand Bank, and that the charging of administration fee amounts Riba, which were in conflict with Shariah law.456
The High Court approached the matter by analysing both the loan and agency agreements. The High Court concluded that the loan agreement was not a profit sharing agreement because both parties did not benefit from the agreement.457 The agreement was a residential property offered with a fixed
agency fee. The High Court further concluded that the loan and agency contracts were in accordance with Shariah.458 The court ordered Mr Lodhi to
make a payment to the applicant of the cumulative sum of R10 328 574, 25 plus interest at the rate of 15.5% per annum.459 The Supreme Court of appeal
also arrived at a similar decision.460
The Supreme Court of Appeal approached this matter by analysing the type of interest charged in terms of the agreement between the parties. The courts view, was the mora interest was not interest in terms of a loan contract but a form of damages due to the respondent failing to perform a contractual obligation within an agreed time. The court’s opinion is that this contractual obligation had “nothing to do with and is not affected by Shariah laws
456 Maphuti DT Lodhi 5 Properties Investments v FirstRand Bank Limited ((2015) 3 ALL SA 32 (SCA) and the enforcement of Islamic banking law in South Africa
457Lodhi 5 Properties Investments v FirstRand Bank Limited ((2015) 3 ALL SA 32 Paragraph 125
458Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 Paragraph 128
459Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 Paragraph 131
460Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 Paragraph 131
131 prohibition against payment of interest on a loan debt.”461 The Supreme court
of Appeal dismissed the debtors appeal and upheld that the debtor is liable to pay the interest claimed by the bank and applied the Prescribed Rate of Interest Act 55 of 1975.462
The decision in Lodhi 5 confirms the reluctance of courts to accept and enforce the application of Islamic law. The High Court and Supreme Courts were unfamiliar with the meaning of Shariah law and failed to consult with Muslim experts for guidance.463 The courts failed to decide on the
enforcement of Islamic law. The courts did not address the questions on prohibition of Riba, as well as whether agency fees are Shariah-compliant or not.464 This case also demonstrates the challenges that courts are faced with
when they are confronted with the interpretation and application of uncodified Shariah law, which has been the subject of various scholarly interpretations. It also illustrates the challenges encountered by common law courts with no expertise to interpret and enforce transactions which are subject to Sharia law.465 The High court and the Supreme Court of Appeal where unsuccessful
in addressing several issues which called for the interpretation of the relevant
461 Tuba MD " Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 (SCA) and the Enforcement of Islamic Banking Law in South Africa" PER / PELJ 2017(20) - DOI http://dx.doi.org/10.17159/1727-3781/2017/v20n0a1308 ( accessed 12 July 2017)
462. Section 1(1) of the Prescribed Rate of Interest Act 55 of 1975 provides that if a debt bears interest and the rate at which the interest is to be calculated is not governed by any other law or by an agreement or a trade custom or in any other manner, such interest shall be calculated at the rate prescribed under subsection (2) as at the time when such interest begins to run, unless a court of law, on grounds of special circumstances relating to that debt, orders otherwise.’
463 Ibid
464 Ibid
465 Tuba MD " Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 (SCA) and the Enforcement of Islamic Banking Law in South Africa" PER / PELJ 2017(20) - DOI http://dx.doi.org/10.17159/1727-3781/2017/v20n0a1308 (accessed 15 January 2018)
132 Islamic finance principles, and thus left more questions unresolved than those that were effectively answered.466
South African courts need to consider cultural relativism which means that a person's beliefs, values, and practices should be understood based on that person's own culture, rather than judged against the criteria of another.467 This can be used to answer the crux of the question as to whether or not the enforcement and application of an Islamic transaction is to be judged by Islamic law or South African Law.
5.8 Conclusion
In the development of Islamic compliant financial products in South Africa, various problems arise, with the undertaking to give legal effect, to a system modelled to execute Islamic law.468 Notwithstanding, the fact, that the
principle of freedom of contract allows Muslims the freedom to expand its commodities, the devising of an Islamic legal framework, in a manner that is secure and beneficial in South Africa is much sought after. Islamic law compliance is restricted to marketing material claims and without the claims trickling down to the composition of the commodities or to clear recognition as valid instruments by the law.469
There is a population of about 1 million Muslims in South Africa who have an interest in the recognition and acceptance of Islamic based insurance. The interest of this sector lies not just in the acceptance of financial instruments
466 Tuba MD " Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 (SCA) and the Enforcement of Islamic Banking Law in South Africa" PER / PELJ 2017(20) - DOI http://dx.doi.org/10.17159/1727-3781/2017/v20n0a1308 (accessed 15 January 2018)
467 Definition of Cultural Relativism http://www.chegg.com/homework-help/definitions/cultural- relativism-49 (accessed 28 September 2017)
468 Suleman S “Doing business with Muslim communities BG Bowman Gilfillan Attorneys” http://www.bowman.co.za/ezines/CorporateMarch.htm (accessed 25 March 2015)
133 based on Islamic law as part of South African law but through judicial recognition of their religious rights. Freedom of religion is not an absolute right and it is a challenge to implement the bill of rights, therefore the South African legislators have a daunting task ahead to balance the interests of justices against the interests of minorities.
134 CHAPTER SIX: SUMMARY AND RECOMMENDATIONS