We are very pleased to present a guest post from Ozrisk. This is a reprint of an article published in Business Islamica Magazine.
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.
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.
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.
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.
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.
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.