If Australia’s desire to become a regional financial services centre is to ever progress beyond just rhetoric, then we must come to terms with our location. On our door step sits the world’s largest Muslim population with a growing demand for Islamic financial products and services. Australia can rise to become an important Islamic finance hub in Asia Pacific but it requires urgent regulatory and tax reform.
It was two years ago that the Board of Taxation first alerted the Government to the challenges facing Islamic finance in Australia. The Board recommended a raft of regulatory reforms designed to make it easier for Islamic products to be approved and supervised.
While it was an encouraging start, since then the Government has sat on its hands, putting off making the necessary regulatory and tax changes. Meanwhile, Malaysia continues to establish itself as a regional hub in Asia for Islamic finance.
If Canberra is genuinely committed to its vision of Australia as a financial services centre then it must rapidly confront the barriers that are discouraging the development of Islamic finance domestically – from regulation to education.
The Australian Prudential Regulation Authority regulates the activities of banks, insurers and superannuation funds in Australia. Together with the Australian Securities & Investments Commission and the Reserve Bank of Australia, these entities manage a sophisticated regulatory regime to approve and supervise the use of financial products for consumers and businesses.
This aspect of ‘supervision’ has proved to be a tough barrier to Islamic financial products gaining approval in Australia. Islamic finance uses a different legal and accounting framework, making it difficult for our regulatory bodies to effectively supervise these products.
But, is it such an insurmountable challenge?
Certainly, the Financial Services Council or other similar body could establish an Islamic finance branch that sets standards similar to or equivalent to the standards established by AAOIFI and the IFSB for the regulation of Islamic financial services entities in Australia.
The opportunities that would blossom from a flourishing Islamic finance market in Australia are so great that it’s hard to fathom why the government and regulators are dragging their heels. Australians will have more alternatives for managing their financial needs and Islamic investors overseas will look to Australia as an investment opportunity for the first time.
There is already latent demand for Shariah-compliant superannuation products from Australia’s growing numbers of Muslim superannuants. Fortunately, investment products like managed funds and superannuation require little reform.
Funds need only to ensure they comply with Shariah. They can achieve this by establishing Shariah boards and structuring products in a way that removes tainted income (that is any income derived from prohibited activities or interest – Refer to Part 1 of this series on Islamic finance for a list of prohibited activities).
In contrast, banking and insurance bodies will need to confront the differing treatment of interest in Islamic finance. Banking in Islamic finance is focussed on risk sharing of asset transactions by engaging in trade activities – i.e. money must be made from trade and not money.
In this area, reform is needed to permit transactions that are not structured in a conventional manner. In particular, with respect to credit products to which the consumer credit code applies (ie murabahah (cost plus) transactions).
It is entirely possible for international banks to establish an Islamic banking arm in Australia – the Muslim Community Credit Union was granted a licence permitting it to carry on a banking business in Australia back in 1999.
However, the compliance requirements (such as having adequate capital) and the timeframe for licence approval (around 18 months) generally discourage international banks from entering the Australian market. Institutions wishing to establish operations in Australia should be aware that it may be possible to obtain timeframe workarounds from regulators.
The Government asked the Board of Taxation to review the taxation treatment of Islamic finance products back in 2010. The Tax Board made a number of recommendations to the Government, none of which have been progressed.
Recommendations included changes required for the taxation of hire purchase arrangements, non-resident withholding tax, CGT, GST and stamp duty.
Australia need only look to the UK for a case study in the potential tax treatment of Islamic financial products. Revising the tax legislation to support “alternative finance arrangements”, within which Islamic financial products are caught, has allowed the relevant government bodies in the UK to manage the fairness between traditional financial products and Islamic financial offerings.
A yawning gap in knowledge and skills is another barrier that inhibits the Islamic finance market in this country. While some Islamic finance training courses have emerged, these are inadequate to build broad knowledge across the financial industry and as yet there are no formalised industry accreditation programs.
There are also very few financial planners competent in advising consumers on Islamic products. As the breadth of Islamic finance products grows, so too will the demand for Islamic financial planning services to complement these products. There is a real opportunity to develop programs that position Australia to become the regional leader in educating and overseeing the accreditation of providers of Islamic financial products.
There is ever present criticism that for all of the speculation and debate, Islamic financial products simply mimic conventional products.
That is not the case. Financial products that comply with Shariah principles offer a genuine alternative for both Australia’s Muslim and non-Muslim population.
As in any market, product providers who innovate and offer products consumers want build their reputation and take market share. The same goes for financial services.
If Australia wants to take a greater share of the Asia Pacific financial market, then it must offer the region’s populations something different.
Islamic finance could be just the difference that gives Australia a sustained competitive edge and see it become a genuine regional financial services centre.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.