Transcript

The future of Islamic Finance in Australia

Steve Lambert

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Transcript

Matt de Neef:

Hello and welcome to another La Trobe University podcast. My name's Matt de Neef and this evening I'm speaking with Steve Lambert. He is the Global Head of Debt Markets at the National Australia Bank and he's here at La Trobe to present a guest lecture to Islamic finance and banking students. Steve, thanks for your time tonight.

Steve Lambert:

Thanks very much, Matt.

Matt de Neef:

So in 2009 we saw the NAB introduced Shariah-compliant loans that don't charge interest. Can you tell us a little bit about how the Shariah-compliant loans work and how it's possible for NAB to make money from them if there's no interest being charged?

Steve Lambert:

Yeah, that's a good question. For a number of years, the Good Shepherd Society based in Melbourne has worked to provide no interest loans to needy people. It's been a program that has been going on for some time and working with a scholar, a chap called Imran Lum, who works in that area, we then turned that existing, if you like, product into a Shariah-component form and it's called a qard al-hasan structure.

So basically, that's the same things that we would do normally, so to all Muslims by providing a form that was civil for Muslims. So question is how does that make money? Fundamentally, we don't. You might have heard about microfinance. It's an idea for getting people who would normally not be out to entering in the banking system - an access point into banking.

Matt de Neef:

Do you expect to see other big banks start to offer similar sort of programs?

Steve Lambert:

I think all banks have different focus and emphasis on what they give in terms of to the community and in terms of social responsibility. So for us this was a product. Interestingly, NAB is actually probably the largest microfinance lender in a developed country which is something we don't talk about very often but this is just one part of banking equation. The interesting thing for us around this was that we've turned something that we're doing for the non-Muslims into a practice suitable for Muslims. So that gave us an interesting insight into how to do that and interesting insights into Islamic finance.

So what we're now doing is building on that. Thinking about like what other things can we do in the field of Islamic capital markets with Islamic finance. It's all come out of this base experience that we've had.

Matt de Neef:

A few months ago we had Emmanuel Alfieris, he's the head of Financial Institutions and Trade at Westpac, come out here to La Trobe to deliver a similar guest lecture to the one you're providing this evening and he spoke about how Australia is fertile ground for Islamic investment and finance particularly when it comes to investing in our natural resources. Would you agree that Australia provides a great opportunity for Shariah-compliant investors?

Steve Lambert:

I think so. I think that's the hypothesis that we are still working on as well as Emmanuel, who I know from other things in the market. I think the practical piece is - well, as NAB is probably the first to do this that might actually provide Shariah-compliant product and Westpac are working on a similar sort of commodity-based structure currently which may or may not work in terms of popularity or anything like that.

But the working hypothesis is that there is two large pools of Islamic cash, if you like, two large pools of investable funds, one in the Middle East and the other one at Malaysia/Indonesia. And particularly, that Malaysian-Indonesian side - Australia is very well positioned for that in terms of physical proximity but also from the Gulf because of the trade, particularly agricultural trade, we think there are some great opportunities to provide products from this region into both those centres. The form that product takes, I don't think anyone has really put that down and patch it and we're not really sure that the others – and that's the journey that we're on in the next few years, I think.

Matt de Neef:

So you said that it's not entirely sure that these certain products might even end up working in the long term. Do you think we're likely to still see Islamic finance and banking developing Australia or we're very much in an experimental sort of phase at the moment?

Steve Lambert:

Well, my bet is it will develop but the form from which it develops, I'm not surely sure of that. It's clear that the process will probably be trying to attract investable funds from overseas, from these pools rather than try to develop products specifically into the local markets.

I think most people feel like clear around we'll meet the first stage of that but exactly what the product is and exactly what market it taps, I don't think it's that clear right at the moment.

Matt de Neef:

In June of this year you were one of the speakers at a symposium jointly organized by La Trobe University that looked at how to integrate Islamic finance into the existing banking and finance system. Can you give us a bit of a sense of what you spoke about at the symposium in your spot and how well your topics were saved?

Steve Lambert:

What I probably talked about was some of the challenges. The practical reality is Islamic finance doesn't exist in a vacuum. And both for investors and for borrowers, they have other choices. So really the question is at what point of intersection do you have that it sort of works for both parties? I think that's the key.

The reason this hasn't sort of become larger to date is - one is definitely around the knowledge base. The knowledge base in Australia is quite shallow at the moment around Islamic finance and I think, yeah, La Trobe has to be congratulated in terms of being very innovative. People like Dr. Bhatti putting this program together at the Master's level, I think it's really, really innovative and it also points the way, I think, to the way the universities need to think going forward to really , really, get involved. I think this is some really interesting lessons out of that.

I think the issue is our knowledge base is shallow in general to some degree. Now we don't know what we don't know and there are some practical issues both from the tax point of view domestically as well as some legal issues in terms of beyond of making this a standard product. I think it was going to be a standard product for many, many years but that's the first step. So I think if we find something could be to do with agriculture, could be to do with the mining industry, could be to do with property, could be to do with the leasing.

As I said, I'm not actually sure what segment this is going to work in yet but once we find it I think it does offer some really interesting opportunities.

Matt de Neef:

You did touch on taxation there briefly. In early of this year the Board of Taxation announced there will be a comprehensive review of Australia's taxation law to ensure that the laws don't inhibit the expansion of Islamic finance. Could you explain how NAB was involved in getting that process started?

Steve Lambert:

We've been involved but in a broader sense working with other interested parties as well as within the finance industry through the Australian Financial Markets Association trying to lift this on the agenda because there are a number of issues - I'll give you a simple one. Just say for a company that borrows money it can claim its interest cost as a deduction on its expenses. So therefore, they claim it as a tax deduction. Of course, in Islamic finance the whole concept of interest is not there so what do you claim as the tax deduction? How do you do it? So these are the sort of things, it gets very complicated and when you get us going to GST, issues around GST, et cetera, et cetera.

So we've been both operating as NAB as an entity, you know, lobbying in certain cases or throughout representation in industry bodies just to say how wide this is an issue and something there, I think, as an industry we need to get involved in. Islamic finance has been called out by State Government particularly here in Victoria and in Federal Government is an area where Australia should be looking at and I think some expertise and I think if we have that desire as a country within they do - work through the issues.

Matt de Neef:

So the final findings for that review due to be completed by June of next year. Do you expect that they'll find that there needs to be some dramatic change to Australian taxation law?

Steve Lambert:

I think there's all different ways potentially you could go. I think the dramatic change is - I think we're always talking incremental and I haven't been briefed recently around the way we think but that it's a very topical thing and we'll probably hear a lot more about it probably in second quarter of next year, I think.

Matt de Neef:

Now with your involvement at a couple of symposiums, the lecture you're presenting tonight as well as providing generous scholarship funding, the NAB has had an ongoing relationship with La Trobe University and more specifically with Dr. Bhatti and the Master of Islamic and Banking and Finance Program. How do you see the relationship between NAB and La Trobe and how do you see that developing in the coming years?

Steve Lambert:

NAB is a strong supporter of various university programs in this field and in other related areas of finance. So Dr. Bhatti is a very enthusiastic chap and a very strong promoter of La Trobe as a brand and that Master's program. We're working with Dr. Bhatti the moment around offering an internship as well as the scholarship. In fact, the first scholar, Imran, who I mentioned, now works for NAB full-time. In fact, he's going to work for me, first of November, I think he starts with me.

The other thing, I think, that we should be doing some more work together is actually around picking some topics of mutual interest where either we can provide data. Data is expensive for most academics so we can - I think we can provide data and people could then maybe use some of that as undergraduate or postgraduate thesis and we want to be our work together on this possibly theoretical areas of interest to the University which we may have practical interest in.

I think the whole intersection between the product sector and universities is fertile ground for that stuff. Honestly, the more you talk together, the more you can so understand each other and then hopefully, the more ways you can find of doing business together.

Matt de Neef:

If you'd like to listen to the lecture Steve is presenting live this evening, it will be available through the university's iTunes U page and if you'd like to leave a comment about this or any other podcasts in the series, you can get in touch with us at podcast@latrobe.edu.au. Steve Lambert, thanks much for your time tonight.

Steve Lambert:

Thanks a lot, Matt.

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