Transcript

Islamic banking in the Australian banking system

Emmanuel AlfierisEmmanuel Alfieris

Audio

You can also listen to the interview [MP3 9.6MB].

iTunes

Visit this channel at La Trobe on iTunesU.

Transcript

Matt de Neef:

Hello and welcome to the La Trobe University podcast series. I'm your host Matt de Neef, and today, I'm speaking with Emmanuel Alfieris. He's the head of Financial Institutions and Trade, Global Transactional Banking at Westpac Institutional Bank. Emmanuel, thanks so much for joining me today.

Emmanuel Alfieris:

My pleasure.

Matt de Neef:

I wonder if we could start with a brief look at the main differences between Islamic banking and a more traditional banking model.

Emmanuel Alfieris:

Sure.

Matt de Neef:

In traditional backing system, the banks get most of their money, from interest that people pay on their loans but in Islamic banking, receiving or paying interests isn't allowed. Can you tell me a little bit about how Islamic banking functions without the use of interests?

Emmanuel Alfieris:

Sure. I think, one of the key differentials - and I've shared this with our people, internally - when Islamic investors consider an investment, there's not, really, a concept of debt or equity. There's a participatory element to it. So, I, either, participate in the investment or I'm hands off in the investment; a non-participatory approach.

So, I think, that's the key difference. And yes, there are some principles underlying it - what is an investment in an Islamic context? And the nearest thing, in terms of conventional methodology, is really what's ethical investment.

Notwithstanding, that interest is one of the key components but there's other elements of Islamic finance that are also important. Particularly, with regards to, you know, what types of investments are deemed to be ethical. So, there's no investment in weaponry. There's no investment in…

Matt de Neef:

Pornography…

Emmanuel Alfieris:

That's right.

Matt de Neef:

Essentially, what it comes down to, from what I understand is, a business contract between the bank and the two parties. And then, they share the profit and loss. Is that, sort of, a fair summation of it?

Emmanuel Alfieris:

If you want to simplify it, yes. I think profit and loss is an easier way to talk about a participatory or non-participatory angle. But, you know, there's different elements of risk and there's a return based on that risk. From a financier's perspective, that's a better way to explain it.

From an accounting point of view, profit and loss is, absolutely, a same way of saying what we're saying in that context. But from an accounting point of view versus a financier's point of view.

Matt de Neef:

I like to talk, briefly, about the global financial process, if I may?

Emmanuel Alfieris:

Sure.

Matt de Neef:

In the US we saw the banks handing out loans to people that, essentially, couldn't afford the repayments. So a lot of people were defaulting on their loans and that started the ball rolling.

Emmanuel Alfieris:

Yeah.

Matt de Neef:

Presumably, with no interest charged and received, such a collapse wouldn't have happened under an Islamic banking system. Is that the way you see it?

Emmanuel Alfieris:

Not, necessarily, right? So, Islamic finance doesn't equal a free lunch. It's just another way of investing, in this case, in residential properties. In this case where people were obviously unable to sustain the repayments, whether interests or rental payments, they were unable to sustain those payments and you had an asset class that had it lost value. An asset class loses value whether it is Islamically financed or conventionally financed.

So, I think the difference would have been, is that there would have been more shared risks in an Islamically compliant investment versus a conventional; particularly, where a lot of these risks were sold in a derivative fashion. And that's, really, what caused the bulk of the global financial crisis.

Not so much, the underlying investment in residential properties; it was the derivatives that came from that. And derivatives of derivatives that came from that which, ultimately, you had this huge speculation on what was US residential asset classes that three derivatives down the track, obviously, means more leverage.

And when they did fall, and those investments lost their real value, the derivative outcomes that happened later on is what, really, spooked the market and caused the whole of that derivative market to incur significant loses.

Matt de Neef:

So, we said before that traditional banks make most of their money from the interests they receive. In an Islamic banking model, are banks able to make a similar, sort of, amount of profit? Or is the different business model, such that the profits aren't quite as high?

Emmanuel Alfieris:

In the theoretical concept, I think, they can make the same, sort of, profits and very sustainable profits. Because, obviously, one of the things that was really apparent in the aftermath of the GFC was that Islamic banks were, obviously, not caught in this derivative whirlwind that, sort of, overtook the world because it's not consistent with their investment principles. And having said that, most of the Australian banks were not caught in that whirlwind either.

But I think, the key thing that, I guess, is happening now with Islamic banks is that it's, probably, not enough product application for them to make their investments--or at least in a diversified manner. So, their profit opportunity is still the same and our theoretical bases that can still achieve the same outcomes.

The difference is they're limited in the scope of their investment profile, at the moment because that product is just not available. So, for example, an Islamic bank coming to Australia to finance mortgages is not an option for them. That does limit their scope.

Matt de Neef:

So, let's talk a little bit about Westpac. Can you tell me about what Westpac's interest is in Islamic banking? And what it has planned, in terms of Islamic banking in Australia?

Emmanuel Alfieris:

Sure. I'll be honest with you; it's still a fledgling opportunity for us. So, we've only just started. Let me start with why we got involved in this. And that is, we're very focused on being relevant to our clients. And I, at the time, as you can see, lead the financial institution businesses and the trade business.

And we realized that to be relevant to our clients in financial institutions, in key target areas of capital influx to Australia - like the Middle East or parts of Asia in particular - you need to be relevant in an Islamic manner, as well as, the conventional manner. And that's why we looked into the Islamic opportunity sets. And we do have some products elements, particularly, with regards to what we do with goods commodities that is relevant to our clients and that have a desire to have access to Islamic products.

So, we started with how we're relevant to our clients - our clients in Asia and the Middle East - and have an Islamic requirement or some of them do. And we want to be relevant to them. And that's why we developed, what is Australia's first inter-bank placement for financial institution, or Islamic bank institution.

Matt de Neef:

You said, it's a fledgling enterprise here in Australia. Has it taken off more in other countries? Are there countries where Islamic banking is starting to become one of the norms? Or is it still a traditional model that holds sway?

Emmanuel Alfieris:

Obviously, in some markets like Malaysia and, increasingly, Indonesia, in the Gulf States, Islamic banking is becoming the key financial industry in those markets. Some of the western economies have really focused on trying to provide value to that.

And London is a great example, in terms of what's happening in the UK. I think, UK is the fifth largest Islamic banking market in the world. For a western economy, that's pretty good. So, they've obviously seen the benefits of providing a market for Islamic investors to get access to western developed economy as a class. And there is demand for that.

I should mention, a lot of this growth in Islamic finances is not necessarily new money. Some of it is actually money that used to be in conventional asset classes and their swapping. And that's because, previously, there wasn't the same sort of availability of investments. So this money was actually being deployed in the conventional sense. Now, that there is an option, it is shifting.

Matt de Neef:

You mentioned Indonesia, briefly, there before. Of course, one of our nearest neighbours and it's the country with the largest Muslim population in the world. And it's also a country that Westpac has got a fair presence in. Does Westpac have any plans to develop in Indonesia in this way?

Emmanuel Alfieris:

Our presence there is limited to representative office. The banking rules in Indonesia are such that, if you wanted to have a presence there, the licensing requirements are quite, not onerous, but the amount of capital you need to deploy is quite significant. So there's probably other options about entering the Indonesian market than an organic growth story.

Having said that, we want to be relevant to our Indonesian clients and the financial institution clients. And we have relevant offerings out of our Singapore office and, also, here.

Matt de Neef:

So, what needs to happen, in terms of Australia in order to get Islamic banking or financial institutions off the ground and to start making them viable prospects?

Emmanuel Alfieris:

I think, the key thing that we need to really look at is, firstly, getting more knowledge. And I think what La Trobe is doing is fantastic. You see the first lot of grads who come out with, truly, highly technical Islamic finance skill sets.

There is a dearth of Islamic finance skills in Australia and we need to start with that knowledge base. Because that will help us, then, work through how we calibrate what opportunities there are in Australia in a compliant manner.

So, I know about this much, I know very little bit about Islamic finance and I'm purported to be an industry expert in Australia. And I'm a long way from that. So, knowledge is the first thing, investment and knowledge. The other thing that's worth investing in is investor relationships. They will help us - the investors will help us and indeed investors have helped us with our product offering. Investing in relationships, I think, is important.

And with investors in Malaysia, Indonesia, in the Gulf States, in particular, is worthy of our investment, in time and effort. And really the cultural investment is, also important to understand how the investor wants to invest in the way they want to do.

We'll also need to invest in the product offering in Australia. And we do have the opportunities. We have a great commodities economy in Australia, we have a great real estate investment trust in Australia, we have a strong capital equipment and capital building investment in Australia.

All of them lend themselves to Islamic finance. We just need - with the knowledge and investment together - to develop products that are relevant for them, as well.

Matt de Neef:

So, you mentioned there that La Trobe is, actually, the first university in the country to offer a master's in Islamic banking and finance. Is there any plan for Westpac to develop a, sort of, relationship with La Trobe that gets students experienced with Westpac with some sort of back and forth relationship with the university?

Emmanuel Alfieris:

I think, it's fair to say that it's a start of a relationship that we've built with… And I think, it makes sense to build upon that.

Now, whether it's a formalized program or something that has a dialog on an ongoing basis, like tonight – I've come out to speak to the guys. And certainly, where that leads to, in terms of value investment furthering our Islamic capabilities.

As I said, it's a short pool of talent, at the moment that has knowledge about this. And we won't look too far from, obviously, the grads that come out of this course.

Matt de Neef:

So as Emmanuel just mentioned he's speaking tonight to Islamic Banking students while he's here at La Trobe and you'll be able to hear that presentation on the University's iTunesU page. Emmanuel Alfieris, thanks so much for your time today.

Emmanuel Alfieris:

My pleasure, Thank you, Matt.