Australia: Finance for a new world
Islamic finance is becoming a major area now even outside Islamic jurisdictions. Amal Awad takes a look at the first steps in Australia to create financial products compliant with Shariah law.
Arguably, the quintessential Aussie dream has always been to “own your own home”. With mortgages offered at all major banking and finance institutions, it’s certainly an attainable – albeit costly – one for many Australians. However, until recently, for many Australian Muslims this dream has proven even more difficult to realise due to the Islamic prohibition on dealing with interest.
Given that all Western banking and regulatory systems deal in interest, it has proven a significant challenge to develop and deliver sound “Shariah-compliant” products that will cater to observant Muslims’ unique needs.
Certainly, Islamic finance is gaining momentum and attention on the global stage. Besides catering to the Muslim markets throughout the world, particularly in the Middle East and South-East Asia, the combination of ethical, social and financial considerations make Islamic finance an increasingly attractive proposition.
Reports estimate there are approximately 300 Islamic financial institutions worldwide with assets amounting to more than US$300 billion ($333 billion) and financial investments estimated at US$400 billion ($445 billion). In 2006, there were 126 Islamic equity funds collectively valued at US$16 billion ($18 billion). The US is also host to a growing Islamic mortgage market.
Still, while increased demand for
halal (permissible) investment and lending options has precipitated an influx of
Shariah-compliant transactions overseas, the Islamic finance industry in Australia is small by comparison. We’re yet to see, for example, the establishment of an Islamic bank, and there are no
halal mainstream superannuation funds or insurance options (the Islamic concept of mutual insurance
takaful) for Muslim consumers.
Some might argue this is due to a lack of demand, yet there is no denying that Islamic finance is already taking shape in Australia – particularly in home lending.
KPMG has recognised the international growth in other areas too, and is currently involved in promoting Islamic finance to potential clients here.
“We’ve got a large Islamic finance group based in London and Malaysia – they’re the two main centres. In Australia ... we’ve been having some chats with the major banks,” says KPMG’s Andrew Reynolds, associate director, financial services, based in Perth.
“We’re doing some demographic studies and essentially we’re putting together a business case for [Islamic financial transactions] here.” While KPMG don’t offer financial services in Australia themselves, they act in an advisory or audit capacity to institutions that do offer them.
matter of interest
Beyond issues of ethical investment, Islamic finance develops and offers various systems designed to adhere to strict financial principles. This means no interest and favours a “profit-sharing” model and the sharing of financial risks.
Specifically, Muslims are instructed not to deal with
riba. This is most simply defined as “interest”, although its meaning runs deeper. “Different jurisprudential traditions have different perspectives over what exactly constitutes
riba. When I’m presenting on it, I say it’s normally defined as being interest but there are shades of grey,” says Reynolds, who has developed a level of expertise in the area of Islamic finance.
In addition to establishing Islamic finance initiatives with clients, Reynolds is a contributor to
Business Islamica magazine in Dubai, and in May 2007 he attended the World Islamic Funds Management conference in Bahrain as a speaker.
“In Australia we see two separate markets,” explains Reynolds. “One is the domestic Australian Muslim; those who live here, work here and require financial services. The other is essentially offering services to Muslims resident overseas.”
In the Persian Gulf alone there exists a pool of investable funds – estimates have it upwards of US$50 billion ($56 billion). “Obviously because they can’t take interest, when the funds are sitting uninvested, they’re completely idle. So part of what we can do is to work with our practices in Bahrain [and] Dubai ... and say ‘These are the investment opportunities for these funds’. And then work with our domestic clients who require funds to invest them here.”
So far, Islamic finance transactions are being offered in Australia by at least two small institutions. Iskan Finance (Iskan) and the Muslim Community Co-operative (Australia) Ltd (MCCA). Both offer mortgages based on Islamic systems of lending for homebuyers. With endorsement from Islamic scholars, their products are promoted as
Shariah-compliant and primarily cater to the Muslim market.
“Islamic finance is not a new phenomenon,” points out Neil Aykan, MCCA’s public relations manager. “The system has made a dramatic comeback in the past 20 years, fuelled [in part] by Islam emerging as the world’s fastest-growing religion, with more than 1 billion followers worldwide.”
In fact, MCCA has been running since 1989, as a credit provider and mortgage originator. Today it boasts 7,000 member shareholders who are also the customers of its finance and investment products.
“It is the product of the collective effort of Muslim community leaders, accountants, bankers and Islamic scholars over the past decade to develop financial solutions that meet the religious requirements of practising Muslims within a conventional framework,” says Aykan. “There is a huge demand both here in Australia and globally, due to the total potential size of the Muslim market and also due to Muslims now rediscovering their Islamic values.”
Its competitor, Iskan, was established in 2001 by econometrician Malik Helweh. Having worked in the Persian Gulf for more than 10 years, he gained experience working with Islamic bankers. “I identified the need to deliver a very high quality and a competitive housing finance instrument to enable Australian Muslims to own their own homes, exactly as all other Australian aspire,” says Helweh. Working throughout Australia, Iskan offers housing finance products that are
Shariah-compliant. “We are constantly researching the market and endeavour to produce appropriate funding instruments to satisfy the ever-growing community and its financial needs.”
With 2006 census figures numbering Australian Muslims at just over 340,000, there is a sizeable market, and these providers confirm that there is also substantial demand.
“For years Muslims have been using the conventional interest-based system due to a lack of choice. Today they have a real choice,” says Aykan.
He adds that MCCA is a competitive option because they do not prescribe ongoing fees and charges for their transactions, and they offer competitive rates. There is also a social and civic conscience. “MCCA is actively involved in the community, as it’s owned by the community,” says Aykan.
“There is a market here,” confirms KPMG’s Reynolds. But he is looking beyond basic banking and lending options. “What I’d like to be able to do is to work with our clients to bring to that market an appropriate array of products. They’re not difficult, they’re not expensive, and they may well be attractive to those of us who aren’t Muslim. A fully invested equity fund is likely to produce higher returns than one with a large chunk of bonds in there. They’re just going to be more volatile,” he explains.
The response
The emergence of
halal financial products in Australia is not without its share of scrutiny and resistance however, and debate surrounding these transactions is certainly robust. Even though these products require certification from qualified Islamic scholars in order to be deemed
Shariah-compliant, globally and locally, many question just how “
halal” some of these transactions really are.
“The main expression of concern is that we source our funds from an external, non-Muslim run investment firm,” says MCCA’s Aykan. “Ideally, we’d like to source our funds from an Islamic bank. But until an Islamic bank or an Islamic investment firm sets up shop in Australia, we don’t have an alternative.”
Originally, MCCA’s funding was all their own. He points out, however, that while they’ve had to source funding from a local investment firm to meet growing demand, that firm doesn’t provide money derived from Islamically impermissible transactions.
But given the diversity of transactions internationally, debate concentrates on more than mortgages.
“I would agree that there’s some cynicism and in some cases there may be grounds for that,” says Reynolds. “It is fairly complex which is why I feel people like myself who are experienced in financial services have a role to play. I’m not well-versed in
Shariah, but what I can do is work with the scholars to [explain] the sorts of issues that we typically see.”
Melbourne-based Muslim writer Amir Butler agrees. “Islamic finance is one of the most complex fields within Islamic law and therefore it is naturally controversial.”
In addition to concerns about the source of funds, as well as differences in scholarly opinion about fundamental aspects of Islamic finance, these products “are often more expensive than normal products because there is an increased transactional cost associated with them”, he says.
Overseas, Butler says
some products resemble normal riba-based products. For example, they might replace the word “interest” with “profit”, which he says is a fairly superficial change. “They are often described by some scholars as engaging in hila (trickery) by trying to turn a haram (forbidden) transaction into a halal one by playing with words and terms.”
Having written on the issue in the past, Butler notes the often controversial debate on these issues, but he doesn’t think it’s necessarily well-informed.
“Most people lack the Islamic knowledge to properly assess these products and many of those who might possess some knowledge about the Islamic aspects often lack in their understanding of finance or the legal framework in which Islamic banking must operate in the West,” he says.
Helweh, who says Islamic financial issues provoke both positive and negative responses from the community, similarly suggests that much of the debate stems from a lack of knowledge on Islamic finance in Australia. He says Iskan has scholarly backing. “Initially Iskan sought international help from individual scholars as well as Al-Azhar University [in Egypt]. We then formed our own
Shariah committee, which included local scholars. However, we maintained our links to the international scholars and we seek their opinions and advice whenever required.”
While MCCA’s scholarly advisers have approved their products, Aykan points out that other scholars may disagree with these rulings. “[Our advisers] have exercised their expert reasoning and ruled that MCCA’s product offerings as structured are permissible. This doesn’t preclude the possibility that other ... scholars may exercise their own independent reasoning and arrive at a different ruling.”
Ultimately, Muslims may scrutinise these products, but it may simply come down to what the local
sheikh says. While some will support the initiatives of existing institutions, others might forbid them.
“The problem,” says Butler, “is that there isn’t a great deal of knowledge about these issues in Australia and so you often end up with the perverse situation where all these people are clambering to denounce particular products but can never seem to explain what exactly needs to be done to make them
halal because they either don’t know or don’t understand that legislative and/or economic context that these products must operate in.”
Mind the gaps
Iskan’s Helweh is also at the helm of SalicSuper, a public superannuation fund which aims to provide Australian Muslims with access to
halal superannuation investment. “The product ... has been receiving significant support from the community and financial planners,” he says. “Our recent profits on all investment options within the fund were very encouraging indeed.”
Helweh has certainly identified a major gap in Muslim-friendly finance options. In addition to a dearth of
halal insurance products, none of the major superannuation funds offer
halal investment products.
“I don’t think any of the major superannuation providers have any products that are free of interest, never mind alcohol products and so on,” says KPMG’s Reynolds, referring to the Islamic prohibition on investing in alcohol, tobacco and gambling products. He adds: “None of the managed investment schemes [have
Shariah-compliant certification] – but quite a few of them are actually, I believe,
halal.”
Reynolds suggests that a
halal superannuation product is, at its simplest, another form of ethical investment. “A fully invested ASX 200 equity product, for example ... making sure that there [are] exclusions in there – so no Carlton United, no Fosters, etc, would work. And I think certification for that sort of product would be fairly simple. So there’s no real impediment to putting it together, it’s just that nobody’s done it.”
Another gap exists in the absence of basic Islamic banking options. Iskan and MCCA are not authorised deposit-taking institutions, however, as Reynolds points out, there are still some options for consumers not wishing to deal with interest. “There are several products that a conventional bank already offers that are
halal. [One] is a non-interest bearing cheque bank account. That’s perfectly acceptable. It pays no interest, it receives no interest and is a product that works.”