Islamic Finance in Australia
Dr Hayat Khan
In September 2008 the Australian government commissioned a report to guide Australia towards becoming a leading financial centre, known as the Johnson Report. One key issue considered in the report was the development of Islamic Finance in Australia.
Given Australia’s political stability, sizable domestic economy, advance supportive infrastructure, relatively developed financial system, and a bit of hard work, Australia is well-positioned to be a global financial center in the region. Australia is in close proximity to a region where more than 60 percent of the world’s Muslim population-with growing demand for Islamic finance-resides. The potential for the Islamic finance industry is huge. Islamic banks are expected to manage about 40% to 50% of total savings of the Muslim population in eight to ten years. The industry is currently sitting on more than a trillion dollars and with the potential to cross US$4 trillion by 2020. With this in mind, Australia’s ambition to become a hub for Islamic finance in the region has a strategic value.
There is more to it than just the “close-proximity” and “growing demand” arguments. Financial products structured by Islamic finance are believed to belong to a distinct asset class and as such would qualify as a good candidate for its credit market diversification commitment. Moreover, a key restriction on Islamic finance services is that it must target genuine economic activity through investing in real projects (which could be a good source of investment on the wholesale side, particularly, mineral resources, oil and gas, infrastructure and property). This implies refraining from financial gymnastics which merely add to volatility of the host market without a genuine desire to contribute to real production, such as short-selling and day-trading. This is a strict code which requires investors to be part of the real pain and pleasure through investing in what is real and sharing profit and loss.
Yet, another important argument in favour of taking interest in Islamic finance is the liquidity argument. The recent global financial crisis reminded us the importance of alternative sources of liquidity. The Muslim world, mainly Middle East, and China are the two major alternatives to the traditional sources of liquidity. Whereas the Chinese market is largely inaccessible, tapping into liquidity in the Muslim world would mostly involve making ties with Islamic Finance in a manner adapted by the UK and what is recommended by the Johnson Report.
The Johnson Report made two specific recommendations on Islamic finance; the removal of regulatory barriers to the development of Islamic finance products in Australia, and a call for an inquiry by the Board of Taxation into whether Australian tax law needs to be amended to ensure that Islamic financial products have parity of treatment with conventional products.
The focus of this report was not to give any special treatment to Islamic finance, but to make sure there is a level playing field for the development of Islamic Finance in Australia. This wouldn’t require large scale re-writing of the Australian law and merely requires targeting neutrality in treatment. For example, purchasing a home via an Islamic mortgage would result in double payment of stamp duty. This is because Shariah-compliance requires the asset to change hands twice. A neutral treatment would require amending the law such that the stamp duty is paid once or an equivalent amount in two instalments. The Victorian government has already introduced such changes after working together with the MCCA Group. Other states will have to follow suit.
In April 2010, the Government announced that the Board of Taxation would conduct a comprehensive analysis of Australia’s tax laws as recommended by the Johnson Report and identify areas which might need fine-tuning. On May 18, the Terms of Reference for this Review were announced. The Board was asked to make recommendations in respect of Commonwealth laws and findings in respect of State and Territory laws that will ensure, wherever possible, that Islamic financial products have parity of tax treatment with conventional products. The Board of Taxation was to report by June 2011. The report is however overdue, for some reasons, for almost a year now.
Professionals in the field are calling for action and believe that now is the time to act and be among the early movers to get strategic advantage. The sooner, the better.
Dr Hayat Khan, Lecturer, Department of Finance, La Trobe Business School, Faculty of Business Economics and Law, La Trobe University, Bundoora