Financing Commercial Property and Premises Without Interest in South Africa
South Africa’s Islamic commercial finance lets companies, trusts and professionals buy or refinance offices, retail units, warehouses and income-producing buildings through diminishing musharakah partnerships with a bank, rather than through an interest-bearing commercial mortgage bond.
Structuring a commercial deal on musharakah
The bank buys a share of the building alongside the business, then sells its units back over the agreed term. Monthly payments combine a charge for using the bank's share with the purchase of further units, until the business owns the property outright.
Rental income and the partnership
For investment property, tenants' rentals usually fund the business's payments to the bank. Sharia committees require the bank's share to carry genuine ownership risk, and the tenant mix must exclude prohibited activities such as liquor outlets, gambling or conventional lending.
Bond registration as security
Although the Sharia agreement is a partnership, South African practice secures the bank through a registered mortgage bond. Al Baraka, for example, offers discounted attorneys' bond registration fees on commercial purchases and refinancing, and finance is subject to a favourable bank valuation.
VAT and transfer duty on commercial property
Section 8A of the VAT Act and section 3A of the Transfer Duty Act deem the bank not to buy or sell property in a diminishing musharaka. The business is treated as buying directly from the seller, so no second VAT or duty charge arises.
Income-tax deductions for the business
Section 24JA of the Income Tax Act treats amounts paid to the bank for its share as financing charges. A trading company can therefore deduct the profit element in the same way as interest, while capital allowances depend on the building's use.
Lenders active in Islamic commercial property
Three banks publish Sharia-compliant commercial property finance: Standard Bank, Al Baraka Bank and HBZ Bank through its Sirat window. FNB lists commercial property finance within its Islamic business offer. Terms differ significantly in loan-to-value, minimum size and maximum tenor.
Comparing published terms
Standard Bank finances up to 70 percent of value or price, with a R5 million minimum. Al Baraka offers up to 120 months and 70 percent on refinance or switches. HBZ lends up to 10 years, at 65 percent for owner-occupied premises.
Credit law for business borrowers
Most commercial property agreements fall outside the National Credit Act because the borrower is a juristic person above the statutory size thresholds. Standard Bank states that its Shari'ah asset finance is for juristic entities outside the Act, so negotiation relies on contract terms.
Prudential oversight of the banks
All three lenders are registered banks supervised by the Prudential Authority at the South African Reserve Bank, and their conduct is supervised by the Financial Sector Conduct Authority. Each bank's Sharia committee certifies the product, and Standard Bank publishes annual compliance certificates.
Moving from enquiry to registration
Commercial transactions take longer than residential ones because the bank reviews the entity, the property and often the leases. A typical sequence for an owner-occupied or investment building, from first meeting to registration in the Deeds Office, is shown below.
- Approach a business banker with the property details, purchase price and intended use.
- Provide annual financial statements, management accounts and, for new ventures, cash-flow projections.
- Supply FICA documents for the entity, directors, members or trustees and the trading address.
- Allow the bank to value the property and review leases and tenant activities.
- Negotiate the bank's share, term, profit rate and buy-back options in the term sheet.
- Sign the musharakah agreement and bond documents and complete transfer at the Deeds Office.
Fees, contributions and paperwork
Banks quote customised mark-ups rather than a published rate card for commercial property. The table lists the main cost items and document requirements stated by the lenders, with qualitative descriptions where no figure is published.
| Item | What to expect | Note |
|---|---|---|
| Own contribution | Typically 30 to 35 percent or more | Based on 65 to 70 percent maximum finance |
| Profit rate | Customised, fixed or variable | Al Baraka fixes for 12 months, then reviews |
| Valuation | Bank-appointed valuer | Finance subject to favourable valuation |
| Legal costs | Transfer and bond registration | Al Baraka discounts bond fees |
| Entity documents | Signed financial statements, bank statements | Business plan for new ventures |
| FICA | Founding documents, IDs, proof of address | Not older than three months |
Where commercial applications go wrong
Rejections usually stem from cash flow, documentation or the property itself rather than the Sharia structure. The following issues come up regularly with business applicants, from small professional practices to property-owning companies and family trusts in Gauteng, KwaZulu-Natal and the Western Cape.
- Requesting more than the maximum finance-to-value ratio without extra collateral.
- Tenants whose activities a Sharia committee cannot accept, such as liquor or gambling.
- Unsigned or outdated annual financial statements.
- Deals below Standard Bank's R5 million minimum.
- Incomplete FICA records for trusts or multi-layer group structures.
Limits to keep in mind
Maximum terms of around ten years at Al Baraka and HBZ mean higher instalments than a 20-year conventional commercial bond. Deposits are substantial, and few lenders finance development risk, so property developers may need equity partners or specialist structures.
Can a company refinance an existing commercial bond?
Yes. Al Baraka offers refinancing through a musharakah purchase of additional equity and bond switching through a purchase of equity, each up to 70 percent of value. Standard Bank also supports refinancing, including capital raising against the property.
Are lump-sum payments allowed?
Al Baraka allows lump sums to shorten the term and states no early-settlement penalty. HBZ offers partial payments at no extra charge, and Standard Bank's buy-back feature gives access to additional payments made into the facility.
Does the property need to be owner-occupied?
No. Standard Bank finances both owner-occupied and commercial investment property. HBZ publishes a 65 percent ratio for owner-occupied premises and offers a separate product for income-generating properties, whose terms, ratios and tenors should be requested directly from its Durban head office.
Can trusts and partnerships apply?
Yes. Banks accept companies, close corporations, partnerships and trusts, provided founding documents and signatory authorities are in order. Trust deeds and letters of authority from the Master of the High Court are usually requested for trusts.
Where to access these solutions
- Standard Bank Shari'ah Commercial Property Finance — Diminishing musharakah finance for owner-occupied and investment property, up to 70 percent of value, minimum R5 million.
- Al Baraka Bank – Commercial Property Finance — Musharakah purchase, refinance or bond switch of commercial property, up to 120 months, fixed instalments reviewed yearly.
- HBZ Bank – Sirat Commercial Property Finance — Sirat diminishing musharakah for buying or renovating business premises, tenors up to 10 years, 65 percent for owner-occupied.
Official and legal references
- VAT Act, section 8A – Sharia compliant financing arrangements — Deems the bank not to supply goods in murabaha and diminishing musharaka, so the client is treated as buying directly.
- Transfer Duty Act, section 3A – Sharia compliant financing — Prevents a second transfer duty charge when a bank co-owns property under diminishing musharaka.
- Income Tax Act, section 24JA – Sharia compliant financing arrangements — Aligns the income-tax treatment of Islamic financing with conventional finance, relevant for deducting the profit element.