Islamic finance in Australia
Australia has been slow to respond to the booming Islamic finance industry, but smaller institutions are ensuring that sharia-compliant banking and investment markets are available to the country’s growing Muslim population.
Islamic finance prohibits transactions involving interest (riba), speculation, investment in non-halal products such as alcohol, gambling or pork products, or those that involve excessive risk – these are haram (forbidden).
It has enjoyed a renaissance since the mid-1970s. From a market size of $150 billion in the mid-1990s, total global Islamic finance is likely to reach $6.5 trillion by 2020, according to a KFH research report.
Bank-avoidance paid dividends during the global financial crisis when many investors lost big. Global Islamic banking assets enjoyed an annual growth rate of 17 percent between 2009 and 2013, according to the World Islamic Banking Competitiveness Report 2014-15, by financial company EY.
“To make it permissible, Islam doesn’t want a person to make money from money. We must have an asset to buy or sell."
– Almir Colan, of the Australian Centre for Islamic Finance
'Fairy floss economy'
Almir Colan, of the Australian Centre for Islamic Finance, said, “The Koran states in several verses that interest is prohibited,” and added that in terms of rules and legislation, a hadith is just as important. And the hadith states, “When you buy gold for gold, the transaction should be equal hand to hand.”
“Money is a judge of other commodities. It stimulates the economy and helps us value other things – it’s a medium of exchange. Once we create a commodity out of that, money loses its value. Once you sell a judge, what’s the point of having a judge?”
Debt-based products that are sold at discounts to big investors are banned in Islamic finance, he said.
The inflated economy has become "like a fictional cloud we have created by selling debt," he said.
Financial derivatives are “creating products out of thin air” and leading to a “fairy floss economy”, Colan said, and while the world economy may have a real GDP of $50-60 trillion, derivatives turn this into $2,000 trillion. “Where does the profit come from? No real value is created at all. It’s madness and we are losing touch with reality.”
“To make it permissible, Islam doesn’t want a person to make money from money. We must have an asset to buy or sell. When money is buying something, we call it a permissible transaction and a contract must be according to that asset. We take away the idea of buying and selling money.”
Islamic banking leading the financial boom
The two most common forms of Islamic banking to avoid any interest are: firstly, diminishing mushakara, where two people share the equity on a purchase, such as real estate, until one party can buy the other out; and secondly, a hire-purchase arrangement where rent is paid until the leasee has paid enough to buy the product.
Banking has the lion’s share of the global Islamic financial economy, totalling 80 percent. The Islamic bond (sukuk) segment, at 15 percent, has been driven by surges of sharia-complaint investments globally, while insurance, or takaful, attracts a lesser portion of the market.
According to the Australian Board of Taxation’s 2010 white paper, taxation and legislative impediments have been removed in countries such as France, the UK, Ireland, South Korea and Singapore that have aimed to create a level playing field to accommodate Islamic banking products and ride the boom.
The Johnson Report, produced after an Australian government inquiry, identified impediments to the growth of Islamic finance in Australia, such as stamp duty being paid twice and capital gains tax being paid on co-operative purchases, yet Australia has been slow to implement these proposals.
Associate Professor Salim Farrar, in his 2012 paper ‘Accommodating Islamic Banking and Finance’ in the Sydney Law School journal, identified three organisations offering sharia-compliant finance: MCCA, Islamic Co-operative Finance Australia and Iskan Finance; as well as fund managers Crescent Investments and LM Investment.
He wrote that the sector was in an “embryonic stage” and “one reason for the relative absence of large-scale retail facility is the relative size and capacity of the Australian Muslim market.”
Climbing the 'pure chain'
MCCA remain the biggest financial player in Australia, with internal funds of around $20-30 million, and over 10 years they’ve funded $500 million worth of real estate, which according to Colan, gives room for competition in the market. But, according to Amir Colan, “starting a bank from scratch” is difficult and it’s hard for smaller institutions to compete with the big players in terms of expertise.
How organisations source their money is also a problem, Colan said, and “it’s hard to investigate in that detail. We want that whole chain to be ethical. Whoever is investing that money should not be charging interest.”
This "pure chain is not impossible” and “depends on how many people are willing to try new things.”
One institution making inroads into sharia-compliant investment principles is Crescent Wealth, an Islamic wealth manager that provides superannuation and managed funds. It's International Equity Fund has returned 61.7 percent on a total return basis since being launched in early 2012 - achieved by avoiding investing in companies associated with alcohol, tobacco, gambling, pork products, banks or those that take on excessive risk.
“It shows the competitiveness of applying Islamic principles to investments,” said Yema Akbar, of Crescent Wealth. “We give them an investment option that not only agrees with Muslims at a spiritual level, but also performs strongly.”
Its focus has been on superannuation, as compulsory super payments sees Australia boasting a market size of $2 trillion, and the Islamic end of that market is a bristling $12 billion.
Crescent Wealth established an ASX Islamic Index in 2011, known as the Thomson Reuters Crescent Wealth Islamic Australia Index, which enables Islamic investors to know what products align with sharia, as well as to scrutinise companies before admitting them or rejecting them on the index through transparent filters.
It also enables Islamic investors to track stocks against other sharia-aligned companies, which Akbar said is important for the financial infrastructure of local Islamic finance. “We track the performance of our equity fund against both the Islamic index as well as conventional ASX indexes.”
And while the fund invests in overseas Islamic bonds, Akbar said “Australia is a very attractive investment proposition to the rest of the world.” Islamic countries were “on our doorstep” and further efforts should be made to accommodate overseas Islamic funds entering the country, he said.
The partnerships of Islamic finance
“It’s a no-brainer that something should be done,” said Professor Michael Skully, an expert in Islamic financing at Monash University. “Australia has a Triple-A credit rating and it would be very interesting.”
“Islamic finance looks similar on the surface to venture capital” and is similar to “an equity investment, where funds are provided to see if the business prospers” and “if it works the way it’s meant to, has attractive features,” Skully said.
But, Skully explains, there are regulatory impediments to Islamic finance in Australia: in a re-purchase agreement, when you buy a home through a joint venture and want to eventually buy it outright, stamp duty would be paid on both transactions - Victoria has enacted legislation to create a level playing field here, but other states have been slow to follow.
Also, Skully said, capital gains tax is paid on such repurchases, and dividends too are taxed, while interest, which is forbidden in Islamic finance, is a tax deduction. The ATO has issued one-off arrangements and exemptions upon application, he added.
Islamic finance remains small and nowhere near comparable to Malaysia, Skully said, which has a “dual banking system and regulatory policies with some adjustment that applies to both institutions.”
“APRA (Australian Prudential Regulation Authority) have talked about (accommodating Islamic finance), but haven’t done it... It’s disappointing as Australia has 250,000 to 300,000 Muslims and we’re in a great position, but now “with excuses about terrorists and stuff, it’s hard.”
Takaful, or a type of mutual insurance, mirrors many mutual funds in Australia - before these companies privatised and had to attract investors through advertised dividends, Skully said. A policy is taken out, and “at the end of the year, we see what the claims are like, and if we’re lucky – after the manager has deducted his fee, we’ll get a return.”
A diverse future
Sheihk Abdul Azim, president of the Australian National Imams Council, who owns a home he bought through Islamic finance, said the sector needs to keep on growing in Australia. “It is important for Australian Muslims. Many have businesses and want to buy homes, but many can’t buy homes because of this issue.”
He added that banks are trying to accommodate the community and most Muslims can accept a fixed-interest arrangement with a financer. “(The banks) have a right to charge me money, as long as it’s done in a proper way. But (most) banks can’t do this beyond two or five years and not for 10.”
Australia has to take a much broader approach to Islamic finance, he said. “The country has to look at it. Let’s see if it’s good for the country – if it’s not, at least we have tried.”
Islamic finance is booming around the world but regulatory impediments are leaving Australia behind