Australia is eyeing a piece of the Islamic finance pie, and as NAZNEEN HALIM discovers, most of the groundwork has been laid out for a smooth take-off.

If anybody needs any proof that political will is a major catalyst behind the mobilization of Islamic finance in any country, look no further.

Australia’s present government – under the reign of Kevin Rudd, has in recent months produced a booklet on Islamic finance prepared by the Australian Trade Commission (Austrade), and has expressed immense interest in tapping the Asian and Middle Eastern market.

The government had also effectively removed stamp duty in the state of Victoria in 2004; a move that was successfully lobbied by the Muslim Community Cooperative Australia (MCCA).
Banks, law firms and financial institutions have also begun to rev up their Islamic finance capabilities, with much encouragement from the government. Zain El Hassan, Islamic finance partner at Melbourne-based law firm Clayton Utz revealed that the current government is seriously looking into developing free trade agreements with countries in Asia and the Middle East, and becoming an Islamic finance hub in the Asia Pacific region is part of the plan.

“The government wants to encourage investments into Australia via the provision of capital and finance into Australian projects which includes investment in agriculture assets, infrastructure and energy and resources; which is in line with project finance and acquisitions.
They are also encouraging Sukuk issues; both on the corporate and government side. Another area which they believe is of importance is having Australian financial institutions managing money on behalf of offshore investors and for investors in foreign jurisdictions like in Asia,” Zain elucidated.

The Johnson Report
In 2009, the Australian financial services sector saw the release of the Johnson Report which included recommendations on Islamic financial services and what the industry needs to boost its capabilities in this field.
The Report called for a Board of Taxation inquiry to investigate the treatment onto Islamic finance products by the Australian tax law, revealing issues with the existence of taxes associated with the transfer of assets. As with most other jurisdictions such as Indonesia and Korea, Shariah compliant products in Australia are subject to double taxation, creating a hindrance to the development of such products.
It also proposed the removal of present regulatory barriers to the development of Islamic financial products in Australia, including determining the regulatory framework applicable to Islamic banks, in terms of the specific activities of the bank and the role of depositors as investors.

Superannuation in the spotlight
Australia’s investment management industry is currently ranked fourth in the world, with a big chunk of contributions arising from superannuation funds. The superannuation fund is similar to a pension fund in which employees contribute 9% of their wages to be invested by the trustees of the pension fund in assets.

The industry which is currently estimated at AU$1.3 trillion (US$1.21 trillion), is, according to El Hassan of Clayton Utz, very much Shariah compliant: “The laws governing these funds are similar to Shariah law, in which these superannuation funds cannot borrow and cannot invest in speculation. They are also not allowed to hedge, and invests in asset-based investments rather than financial instruments.”

Recognizing the potential, Sydney-based Crescent Investments has revealed its plans to create Australia’s first Islamic superannuation fund, tapping into the 400,000 Muslim population and beyond. CEO Chabaan Omran disclosed that the company is currently in the process of organizing wholesale and retail share funds, as well as domestic and international investment funds to create a holistic investment service where corporate, individuals and the self-employed can invest under the umbrella of superannuation. “We are pitching our fund to the 21 million Australians, which translates to a potential fund value of AU$1.3 trillion (US$1.21 trillion). If our Shariah compliant superannuation fund can tap even 2% of that, the numbers will be very compelling,” Omran stated.

Perception issues?
According to Omran, Crescent Investment’s Shariah compliant funds will be marketed as outright Islamic funds instead of being placed under the banner of Ethical investments, as practiced in non-Muslim majority countries including Europe: “We will specifically call them Shariah compliant funds and investments, because we don’t think there is any stigma associated with the term. In all fairness, ethical investments have done well over the last 15 to 20 years in Australia, and have proven that it can weather the storm, and we expect Islamic investments to do the same.”

“Our view is that those who are currently demanding Shariah compliant products are resorting to conventional due to the current dearth in these products. Which is why we anticipate our products will create substantial demand from both Australia and New Zealand,” Omran added.

However, the country’s current concern when it comes to mobilizing Islamic finance is a shortage in skill and talent. El Hassan revealed: “We do not have many people who are experienced in Shariah law, nor do we have Shariah scholars. But that is where countries like Malaysia come in and are instrumental in the development of the Islamic finance industry in Australia.
Malaysia has a very similar legal and investment regime to Australia, and are in a similar time zone, which plays to our advantage. They also have a wealth of Shariah advisors who we can rely on to provide certification to the transactions that we’re doing.”

Looking up down under
Having been one of the G20 nations that did not take a good drubbing during the global recession and currently enjoying a resources boom led by demand from India and China, Australia is in a very strong position to capitalize on the Islamic finance boom. In line with this, the government, financial institutions and educational institutions have gradually begun initiatives to point the country in the right direction.

Westpac Banking Corporation had recently revealed plans to launch an interbank placement product for Islamic institutions, which involves a short-term wholesale investment structure for Islamic institutions based on the buying and selling of commodities. Universities such as La Trobe have also begun offering courses in Islamic finance, hoping to pique the interest of locals and international students.

“With Australia being an emerging market, it is an exciting time for industry participants to consider establishing branches here in Australia. We have seen lots of interest from various Islamic banks and law firms looking to establish offices here,” Omran elucidated.
El Hassan is also optimistic about the growth of the sector in the country, naming experience as one of the key factors behind its potential success: “There is a long history of Shariah compliant investments in Australia, going back to the early 80’s. I have been doing what I consider as Shariah compliant investments here for 20 years. There is a wealth of experience in Australia, and once we remove the barriers, there is nowhere to go but up.”