Islamic banking provides a solution

almir-colan-thumb Almir Colan
Email: a.colan@latrobe.edu.au

I love the banking ads. Barbara lives in bank world, but the opposition is determined to be different. They promise to fight in your corner, more give - less take, and will call you right back.  No doubt, advertising agencies get how we feel about banking -  but what should banking really look like in the future?

At a time when access to diverse sources of funding limits competition between banks, Islamic banking and finance globally represents one of the fastest growing financial industries.  The estimated size of the sector is more than $1 trillion. So understanding Islamic banking and finance might prove to be a competitive advantage with direct benefit for both Australian businesses and consumers.

By creating conditions that would facilitate and replicate this global success in Australia,   the Board of Taxation (BOT) recently issued a discussion paper as a way to introduce parity of tax treatment and level the playing field for Islamic finance products. The key reason is that The Middle East region represents a major source of offshore liquidity which, for a capital intensive Australian economy, is of great interest.

Islamic finance encourages mutual cooperation, generosity and risk sharing. Instead of charging interest, Islamic banks derive their profit by trading, investment or leasing. Since money is meant to be a medium of exchange and standard of value for other goods, all profit from interest payments are prohibited.

The wisdom behind prohibition of interest (usury), amongst other things, is to encourage enterprise and real economic activities that contribute to the welfare of society and reduce the possibility for injustice and exploitation. Other prohibitions include excessive uncertainty, unethical, immoral, and speculative activities some of which were the root cause of the GFC.

Islamic finance attracts both Muslims and non-Muslims due to its guiding principles. These were recognized by the Vatican's official newspaper when it said "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service".

A recent finding of the Infrastructure Partnership Australia report identifies severe constraints for Australian industry in securing debt for large infrastructure projects. The report warns that "If not acted upon soon, capacity constraints on existing infrastructure will significantly limit economic activity and restrict growth, adversely impacting our potential for economic recovery and productivity improvement",  with more than 160 critical projects and the shortfall of over $700 billion, major projects in their advanced stages of planning are already facing delays.

Countries, such as UK, understand that competition is good. The UK now has five fully Islamic banks, with 17 others opening Islamic finance windows.

There are some wholesale and retails Islamic finance products in Australia, with Super and equity funds slowly making inroads. But opportunities are still largely unrealized. With its resource-related economy, well-regulated financial system and strategic proximity to almost billion Muslims in the Asia Pacific region, the Government's strategy to make Australia a financial hub in the Asia Pacific region is a work in progress.

If, as suggested, Australia wants to tap into the offshore liquidity pool, we will have to invest more in research and human capital development.  It is clear that those who embrace Islamic banking products can anticipate new opportunities, a stronger customer base, wider knowledge and global brand recognition.

Almir Colan is researcher and lecturer (Islamic Finance) at La Trobe University (School of Economics and Finance)

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