How Islamic Finance Can Boost Australia`s Financial Sector?

With the Islamic finance industry surpassing US$2 trillion in assets, and continuing to grow at a formidable pace despite global economic headwinds, experts are heralding the imperative for Australia to embrace Sharia-compliant financing to establish itself as a significant regional financial services power. The models set by Malaysia and the UK are compelling case studies for Australia’s policymakers.

According to Standard & Poor, Islamic finance, an industry that operates under Islamic principles such as risk-sharing, has been expanding at an annual rate of 10 to 20 percent since the turn of the century. Mohamed Damak, S&P’s global head of Islamic finance, predicts the sector to reach US$3 trillion in assets within the next decade.

Australia’s financial sector experts argue that the country should not allow its modest Muslim population, accounting for just over 2% of the total population, to deter it from capitalizing on this burgeoning industry. They suggest that Sharia-compliant products can cater to a broader audience beyond the Muslim community and that an offering of such products is vital for Australia’s vision to be a robust financial hub in the Asia-Pacific region.

Drawing from the UK’s initiative, Australia can consider incorporating Sharia-compliant equivalents of mainstream services such as mortgages and car loans. Notably, in 2014, the UK government issued a sovereign Sukuk – an Islamic bond – not out of financial necessity but as an avenue to bolster the Islamic capital market in London.

In addition, regulatory reforms such as addressing the issue of double taxation for Islamic securities could propel Australia forward. Almir Colan, the founder of the Australian Centre for Islamic Finance, emphasizes the importance of a clear regulatory framework. “Regulations give a signal,” he says, implying that certainty would encourage financial institutions to delve into this domain.

Looking at the global scenario, Sharia-compliant products have garnered attention even among conventional investors who appreciate the risk profile and yields. This trend has particularly been observed in the case of Sukuk issues from the Middle East and Asian countries.

Malaysia, a notable frontrunner in Islamic finance, has demonstrated the potential of the industry on an international scale. With Islamic assets making up a significant portion of the country’s fund management industry, and an impressive 53.7 percent of all outstanding bonds as of June 2015 being Sukuk, Malaysia has carved a prominent position in the global Islamic finance arena.

For Australia, the retail aspect of Islamic finance holds considerable potential. Sharia-compliant home financing, business financing, and insurance products could attract not only the Muslim population but a broader consumer base. The inclusivity of Sharia-compliant finance, which incorporates principles of risk and reward sharing, appeals to a diverse audience seeking ethical and equitable financial options.

Alex Malley, former chief executive of CPA Australia, sums up the sentiment in his op-ed for Malaysia’s New Straits Times, “Australia’s modest uptake is something of a missed opportunity… so, too, is the potential for enhanced business, finance and cultural linkages in key Asia-Pacific and Middle Eastern markets that would come with a deeper engagement in sharia-compliant finance.”

In an era where traditional financial services are undergoing scrutiny and transformation, Australia’s foray into Islamic finance could be a strategic move that enriches its financial landscape, fosters international collaboration, and places it at the forefront of an industry that is growing at a remarkable pace.