This may appear to some to be a reasonably good idea to ease the pressure on residents. However, as history has shown, when governments force people to sell products for a price that is at or below their natural market level, it creates a shortage: it will increase demand whilst simultaneously reduce the current and future supply of the product.

It will increase demand because by ensuring the price is kept artificially low, people will be encouraged to buy more than they might otherwise — in other words, the price system is no longer ‘rationing’ the product; this, in turn, decreases the supply in the shops because if more is bought, the shelves will empty more quickly. At the same time, importers and manufacturers are discouraged from importing or producing more of the product as their profit margins are reduced — due both to their inability to get the market price for their product but also because the cost of inputs, such as labour, transport, and raw materials, are not price fixed and will continue to rise (which also , in turn, encourages hording of raw materials).

The Omani government is also considering price controls on food. And, last week, it was reported that the Kuwaiti government could start imprisoning people for up to three years if they increase the price without justification (whatever that means) of any of 367 identified food products.

Reports from Qatar suggest the government is to ban landlords from raising rents for the next two years. The drastic action is to help combat record inflation rates. A 27.7 per cent surge in rents spurred inflation in the world’s largest exporter of liquefied natural gas to 13.74 per cent in December, the second-fastest pace on record.

Good idea?

Maybe not. As the great Henry Hazlitt pointed out a long time ago rent controls have a distorting effect on the housing market that is often extremely undesirable and counter-productive. Amongst its several possible effects is an overall decline in the quality of available housing. As Hazlitt wrote:

The housing situation will deteriorate in other ways. Most importantly, unless the appropriate rent increases are allowed, landlords will not trouble to remodel apartments or make other improvements in them. In fact, where rent control is particularly unrealistic or oppressive, landlords will not even keep rented houses or apartments in tolerable repair. Not only will they have no economic incentive to do so; they may not even have the funds.

See this study on the socialist Egyptian government’s use of rent controls; a policy that resulted in: landlords neglecting the maintenance of rental properties (for the reasons Hazlitt mentions above); decreased private investment in rental real estate resulting in a decrease in housing stock; and increased investment in the sub-standard informal housing sector.

And, this researcher noted [pdf], rather than reduce the overall cost to a tenant of renting a property, the Egyptian controls merely saw an increase in the side payments — “key money” — that a new tenant was required to pay to the landlord in order to circumvent the state controls on rent payments (in some cases making up to 70% of the discrepancy between the hypothetical market price and the controlled price for that property).

As is well known, charity plays a pivotal role in the faith of every Muslim — being, as it is, zakat, one of the five pillars of our faith — so it is surprising to see that there hasn’t been a similar innovation in terms of how we give charity. In Australia, for example, most Muslims would donate via an organisation such as Human Appeal International which then funds projects abroad, such as orphan sponsorship or well building.

However, I wonder if some of these models couldn’t also be extended or adapted to provide Muslims with an innovative service as well. For example, a number of the sites identified by Read/Write Web focus on ‘direct charity’ in which people post details of the project they wish to find and then others donate to it, using the site as an intermediary. DonorsChoose is an example of that, with the site allowing teachers at public schools in the United States to post their needs, such as funding for trips or materials, and others can choose to donate.

A variation on the DonorsChoose model might work well for Muslims. Organisastions could register projects with the site and then, once approved by the administrators as a bone fide project with appropriate documentation and controls, the project would be listed for others to donate to. For example, people in a particular community might be fund raising for a mosque or a Muslim school might want to take some underprivileged kids on a trip to the zoo. Projects could be classified based on whether they qualify for zakat, geography or the nature of the project.

Of course, there would need to be some controls to prevent the site becoming a vehicle for scammers but that could be addressed by controlling the organisations that are allowed to post projects and requiring them to provide some sort of documentary evidence of how the money has been used. Once a project is completed, these artifacts could be made available online so any future donor could check the history of the organisation they are considering supporting. Likewise, if a project failed to eventuate or if the organisation failed to provide the agreed documentation, that would also be recorded against the organisation.

A service such as this would provide Islamic organisations with an alternative to government funding for their projects and it would be appealing to many Muslims who would prefer some visibility over their charitable donations rather than just dropping some money in a tin at the local mosque.

Although there are differences between Islamic banking and “conventional” banking, there are some fundamental principles that apply equally to both. In particular, rigorous risk management and sound corporate governance help to ensure the safety and soundness of the international banking system. In the light of the growing importance of Islamic banks and Sharia-compliant financial innovation, the increasing integration of Islamic financial services into global financial markets serves to strengthen this point.

The Basel II framework improves the risk sensitivity and accuracy of the criteria for assessing banks’ capital adequacy. This framework is fundamentally about stronger and more effective risk management grounded in sound corporate governance and enhanced financial disclosure, the importance of which has been underscored by the recent problems that have arisen in the banking industry worldwide. The guidance provided by the Islamic Financial Services Board (IFSB) is a useful contribution to the realisation of these global goals. It will support the establishment of resilient financial market infrastructures and sound and robust core Islamic financial institutions operating according to safe and sound risk management practices.

For those who do not know, the Bank of International Settlements is, “an nternational organisation which fosters international monetary and financial cooperation and serves as a bank for central banks.”

(Thanks to Ozrisk)

Since the first large-scale Muslim migration to Australia occurred in the early 1970s, the Islamic community has grown from just a few thousand, concentrated in the suburbs of Melbourne, to become the second-largest religious group in Australia. Substantial migration to Australia was initially from Lebanon, with other notable immigration coming from many Muslim countries, including Indonesia, Bangladesh, Egypt, the Palestinian territories and, more recently, Afghanistan and Iraq.

The number of Australian residents identifying themselves as Muslim on the census increased by over 40 percent in the five years between 1996 and 2001, from 200,000 to 281,000. This growth has continued, to the point where the estimated number of Muslims in Australia was 350,000 in late 2006.

Baby Steps

However, Islamic finance is still in its infancy in Australia. Because of the nature of much of the migration here, many Muslims arriving in Australia have naturally been more concerned with how to provide for their families than with developing financial institutions. Nevertheless, several small ventures have started, with at least two currently in operation: the Muslim Community Cooperative (Australia) Ltd (MCCA) and Iskan Finance. MCCA is currently restricted to offering facilities to shareholders and cannot accept normal bank deposits under Australian law. Iskan works with a number of other providers and offers mortgage and leasing products.

Insurance is another area where a void currently exists. While there have been several attempts to establish Takaful funds, notably during the 1990s, these do not seem to have succeeded.

Obstacles to Overcome

The prohibition on receipt and payment of interest under Shariah creates some interesting challenges. The primary focus of Australia’s banking system, as in most countries founded on a Western banking tradition, is the receipt and payment of interest and this applies to the regulatory system as well.

There are also several more subtle impediments to many of the more common instruments used in Shariah-compliant financial arrangements. More may become apparent as the industry develops in Australia.

Taxation

Like the United States, Australia is a federation of states, each divided up into smaller, local government units. Taxation occurs at all three levels of government. The most obvious financial difficulty involves state taxation, which relies heavily on duties charged for the “stamping” of documents, such as land ownership transfers, as primary revenue sources. With several of the common Shariah-compliant products normally mandating a double transfer of ownership, this is a significant additional burden. A prime example is a Mudharaba mortgage, with the title to the land transferring both at the beginning and the end of the arrangement.

Several other potential problems exist with many of the taxes levied at the federal level; Sukuk bond arrangements, for example, may be subject to unfavourable taxation similar to that in the United Kingdom. however, as no formal investigation of these has been done, this is not certain. As a result, the cost of being a first mover on these issues may be significant and good advice essential.
Regulatory Issues

Another area of first-mover regulatory problems is in getting approval from the Australian Prudential Regulatory Authority (APRA) for an Islamic financial institution to operate as a bank normally would in taking deposits. In common with many countries, Australian law generally does not permit taking deposits without an appropriate license. These licenses (under section 66 of the Banking Act 1959) are not easy to obtain and require a detailed examination by the regulator of the proposed financial institution, with the typical application period taking up to 18 months.

The Basel Frameworks

The apparent incompatibility of the current Basel I and Basel II accords with Islamic finance are also issues in Australian regulation. Internationally, this drove the foundation of the Islamic Financial Services Board (IFSB). In Australia, this has not yet been addressed, as there have been no applications to the regulator to confront the issue as of yet.

Pensions

Superannuation is the Australian term for a personal pension. Australian law currently mandates that at least 9 percent of every employee’s wages or salaries are paid into a pension fund which, in most cases, cannot be accessed until the person retires at the age of 65.

The problem at the moment is quite simple: none of the superannuation funds currently being offered to the public are Shariah-compliant. The pension funds are typically invested in broad index-type products and include interest receipts.

This means that observant Muslims need to either try to calculate how much of the returns to their superannuation funds are due to Haram activities and then give that amount to charitable causes or try to manage their superannuation by themselves. The first option is difficult, if not impossible, and the second is expensive and time-consuming.

Moving to the Next Level

None of the regulatory impediments are insurmountable; they just require appropriate change from the various levels of government and a firm or lobby group to raise the matter. The government of the State of Victoria, for example, prompted in part by the MCCA, recently removed the double taxation problem by a simple change to its Stamp Duties Act. Other states are likely to follow once prompted to do so. Any federal taxation problems could also be dealt with in a similar way – but they need to be identified and investigated first.

As the Muslim community in Australia grows, both in size and economic importance, the need for further financial services will grow with it. As most of the mainstream banks are pleased to offer deposit accounts that pay no interest, in a Wadiah-style transaction, the more pressing needs are for:

• superannuation provision from a major provider
• more loan funds to be available, particularly for housing
• Takaful insurance

Establishing a dedicated, stand-alone, Shariah-compliant financial institution in Australia is likely to prove a time-consuming exercise – but one that will tap a steadily growing market. A more likely outcome could be for one of the existing licensed institutions to establish a line of Shariah-compliant products, with the most pressing need being for mortgage products.

In the longer term, some of the Shariah-compliant products may also appeal to non-Muslim borrowers. The sharing of risks inherent in many of these products is likely to appeal to borrowers uncertain of the future. A Mudharaba mortgage, for example, may be appealing to a person uncertain of the direction of real estate prices.

International Potential

The other area currently neglected is the potential for the sale of Australian-sourced financial products overseas. Australia offers well-established and stable political, regulatory and judicial systems. Returns on investments in Australia have, over the long terms favoured by Islamic investors, been very high and much of the investment in Australia is in Halal products such as land, mining and agriculture. The first company to issue products to investors globally is likely to encounter some regulatory hurdles, but they are also likely to tap into a deep and growing well of capital.