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Sunday, 27 October 2013

Australia has chance to ride high on an Islamic finance wave

For the past couple of years, the Australian government – prodded by the financial sector – has been pondering the regulatory and taxation changes that would be necessary to create an Asia-Pacific Islamic financing powerhouse.

However, with the change of government last month and continuing concern over the effects of easing Chinese growth on Australia’s commodities-led economy, there is a danger that Islamic finance has been consigned to a back burner.

Australia’s stable political and social environment – and its highly advanced financial market – have long created interest among Islamic finance professionals in building the country as a hub to serve not only the domestic Muslim population but also the large and less financially sophisticated markets nearby, such as Indonesia and Malaysia.
Some in the Arabian Gulf region say Australia could be very conducive to Islamic financial products.

“Islamic financing advocates the ‘real’ economy and commodity financing,” says Hatim El Tahir, the director of the Islamic finance group at Deloitte, another consulting firm, in Bahrain. “Australia has a rich real economy,” he adds, citing its agriculture, livestock and minerals and metals as “good assets for Islamic finance”.

There have been encouraging developments in the local market: in December, Sydney-based Crescent Wealth, the country’s first dedicated Islamic investment firm, launched Australia’s first Islamic superannuation fund. 

Superannuation, known as “super”, is the country’s compulsory employee retirement fund.

“Sizeable superannuation or pension funds represent a large opportunity,” says Almir Colan, director of the Australian centre for Islamic finance and a consultant lecturer at La Trobe University in Melbourne.

“We are now seeing intense competition by fund managers to provide Sharia compliant alternatives.”

More recently, say observers, a number of institutional players have been investing, principally in property. “We believe current penetration is less than 1 per cent of its potential and hence we are excited about growth opportunities,” says Talal Yassine, Crescent Wealth’s managing director.

Mr Yassine estimates the current super savings of the Australian Islamic community at about A$11 billion (Dh38.87bn), a figure expected to double by 2020. “This is supported by the 40 per cent growth in the Islamic population in Australia since 2006,” he adds.

One relatively popular Islamic product in Australia is diminishing musharaka for home financing, says Matthew Stutsel, the national head of state tax at the accounting firm KPMG in Sydney. Some fund managers offer investments in Sharia-compliant investments, mostly equity funds.

Experts say Australia is well positioned for the development of several other Islamic financing instruments, including murabaha asset sales and purchases, ijarah leasing and mudaraba profit-sharing partnerships. One potential windfall could be the use of sukuk for large-scale projects.

“There is potentially a huge role for Islamic finance to play in helping to fund Australia’s infrastructure requirements,” says Alex Regan, a partner at the Corrs Chambers Westgarth law firm in Melbourne.

However, while such terminology is familiar in the Middle East, some asset managers warn exotic terms – like all financial jargon – can be off-putting to mainstream investors if Islamic finance seeks to move beyond Australia’s 400,000-strong Muslim community.

“In my view, Islamic finance and investment products need to be relaunched as ethical or responsible, without the unusual labels such as sukuk and musharaka,” says Glenn Woolley, the managing director of Intrinsic Investment Management, a Melbourne fund manager.

Mr Woolley, whose company caters to both Islamic and non-Islamic investors, says it is too early to identify any trends in Australia-based Islamic financing.

“There is interest in debt and equity funding as sources of capital,” he notes, however. “Equity portfolio management is growing.”

One major hurdle is taxation law. “Islamic finance’s very low penetration ... is largely due to the Australian tax legislation,” says Mr Regan. One such obstacle is the stamp duties applied to property transfers, a particular issue when Islamic finance requires multiple transfers of assets.

(The National / 26 Oct 2013)

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India: RBI supports Islamic banking

In its attempt to woo minority votes ahead of the 2014 General Elections, the Congress-led UPA is making every effort to introduce Islamic Banking in India.
The idea was first mooted by Raghuram Rajan in 2008 when he was Chief Economic Advisor to the Ministry of Finance. But the Rajan report did not get the stamp of approval from the RBI Governor of the time, D Subbarao. Rejecting the recommendations, Subbarao conveyed to the government that Islamic Banking was not legally feasible in the current statutory and regulatory framework. He had also made his stand public.
With the RBI governor taking a strong public position, the government too was forced to take a similar stand. With Rajan running the RBI, Minority Affairs Minister K Rahman Khan is now on overdrive to make Islamic Banking a reality. The minister told The Sunday Standard that it would not take much time before Islamic Banking becomes legal.
But the RBI did not confirm the ministry’s optimism. “There are no applications for any approvals lying with us for Islamic banking. Besides, it will take an amendment of the Regulations Act and the RBI Act to introduce Islamic Banking,” a RBI spokesperson told this paper. She said an approval given by RBI to a Kerala-based non-banking finance company that follows Islamic principles was not a blanket permission.
But the UPA is likely to go for it. “No political party, except BJP, will oppose such an amendment in this election year,” said a source in Khan’s office. He said there is a strong demand to introduce Islamic Banking in the country from various quarters. Muslim political parties, including IUML, had submitted a memorandum to the Planning Commission urging it to promote interest-free banking in the country, he said.
In case the government fails to bring in amendments, its next option is to allow more non-banking finance companies that adhere to Sharia principles. “The government shall take measures to permit delivery of interest-free finance on a larger scale, including through the banking system, which is in consonance with the objectives of inclusion and growth through innovation as recommended by Rajan,” said H Abdur Raqeeb, an Islamic Banking expert.
(The Sunday Standard / 27 Oct 2013)

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The rise of Islamic finance has exciting implications beyond the Muslim world

THE FINANCIAL crisis has made many question whether Western financial models can withstand future onslaughts, whether they are even fit for purpose. But Islamic finance (one of the fastest growing financial sectors) withstood the crisis comparatively well. A 2010 IMF study found that, on average, Islamic banks showed greater resilience than their conventional counterparts. So what are the implications of its rapid growth?
The philosophy of Islamic law promotes equity and justness. As such, Islamic finance disallows interest-based activities, gambling and speculation. Financing is allowed only to fund real economic activity, and funding or undertaking activities that do not yield real economic gains is prohibited. One example is derivatives trading. While Islamic finance recognises the use of derivatives for hedging purposes, it disallows naked trades of instruments deemed a speculative act.
But more broadly, Islamic finance is increasingly important in enhancing trade, cutting across borders, race and religious beliefs. According to Ernst & Young, 10 of the world’s 25 fastest-growing markets are in Muslim majority countries. Islamic financial tools will only boost trade between the Muslim and non-Muslim world. To date, global Islamic finance assets stand at $1.2 trillion (£743bn), and are expected to reach $2.6 trillion by 2017 according to a recent report from PwC.
And Malaysia has proven that Islamic finance can flourish alongside conventional financial markets. The sukuk market has been key to the development of Malaysia’s infrastructure and economy over the past two decades, constituting more than 65 per cent of Malaysia’s private debt securities. Islamic banking assets now make up 24.1 per cent of Malaysia’s total banking system, double the level a decade ago. Both systems work in parallel.
London is no stranger to Islamic banking. The UK is the leading western country for Islamic finance, with $19bn in reported assets. It has the largest number of Islamic financial institutions in any western country, and has reformed its tax laws to facilitate the sector. It can play the key role of global financial intermediary in promoting the use of Islamic finance worldwide.
I hope to see further developments. Employment opportunities in the industry could be plentiful, and gender neutral. A few years ago, a journalist came to Kuala Lumpur to write a cover on Islamic finance. She ended up writing a piece on women serving in senior positions in Malaysia’s Islamic finance industry. It was a revelation. The glass ceiling in a male-dominated industry had been shattered by women in a Muslim dominated state.
The Malaysian central bank governor is a woman (accorded “Grade A” status for the tenth time by Global Finance magazine), and is the country’s foremost supporter of Islamic finance. Malaysia also boasts female Shariah scholars and chief executives of Islamic banks. Close to half the Islamic banking population is made up of women.
I hope Malaysia’s story will inspire others to promote the development of the industry for the greater good.
Raja Teh is chief executive of Hong Leong Islamic Bank. She will be speaking at the World Islamic Economic Forum in London on 29 to 31 October.
(Business With Personality / 25 Oct 2013)
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