Islamic financial law proscribes transactions involving interest. The theory is that interest is a risk-free, exploitative tool, and that risk-sharing should be a feature of financial relationships. Accordingly, Islamic finance tends to be based on equity rather than debt.
This has, quite naturally, created difficulties for any aspiring Muslim homeowner. They are faced with the choice of abandoning Islamic financial norms by entering into an interest-based conventional mortgage, or locking themselves out of the property market. In response, Muslims have developed various alternative financial products that could circumvent this problem.
In the simplest of many possible examples of a typical Islamic financial arrangement, the financier would buy the property and resell it to the financee at a profit on a deferred payment basis over a fixed period. This requires legal title in the property to be transferred twice: once to the financier, and subsequently to the financee. The problem is that under Australian stamp-duty laws, both transfers are dutiable. This double stamp duty has often rendered such financial arrangements commercially unviable.
But recent legislative amendments to Victoria’s Duties Act 2000 remedy this problem in that state. In the above example, the amendments would exempt the second transfer of title from stamp duty, thereby placing the Islamic alternative on an equal footing with a conventional mortgage. The amendments also introduce other stamp-duty exemptions to make a range of different Islamic financial products practical.
At first blush, this might seem to be a relatively insignificant development, of interest only to a religious minority in Victoria. But it is more than that. It may represent the embryonic stages of an Islamic financial sector in Australia.
If overseas experience is any guide, Victoria has taken a very small step in a potentially lucrative direction. Islamic financial markets are growing at astonishing rates. Britain passed legislation facilitating Islamic consumer finance in 2001, before which its Islamic financial sector was, in effect, non-existent. Yet market researchers Datamonitor recently projected that in the UK alone, the Islamic consumer finance industry would be worth £4.6 billion ($12 billion) by 2006. By generating various Islamic banking products, major multinational banks such as Deutsche Bank, Citibank and especially HSBC have been beneficiaries of this boom. Meanwhile, in the United States, Freddie Mac has developed secondary markets for Islamic home mortgages.
This, of course, does not even contemplate the wholesale side of the Islamic financial sector. Include the capital markets generated in major Muslim financial centres such as Dubai, and we are talking about a sector worth about $US200 billion ($258 billion) worldwide. Again, this has grown from almost nothing in the space of a decade.
Clearly, major financial centres in the Muslim world are increasingly looking to do business within an Islamic financial framework. The size, and rapid growth, of this financial sector creates tremendous opportunities for foreign investment.
Meanwhile, Australia is a spectator. Given our geographical proximity to several Muslim majority nations, and given that some of our banks have the global presence to attract substantial business from the Middle East, this is a well of untapped potential. And thus it will remain unless Australian legislators, at both federal and state levels, follow the lead of other Western countries, and undertake the necessary law reform to build a legal and regulatory environment that is conducive to Islamic investment.
The Victorian amendment is therefore the tiniest of pixels in what could be an enormous picture. There are substantial Islamic financial opportunities in, for example, the superannuation and insurance industries. Then there are the opportunities to access capital markets.
Islamic funding alone accounted for 15 per cent ($US386 million) of the Emirates Group’s Airbus A330 financing last year. Riyaz Peermohamed, senior vice-president of Emirates’ corporate treasury, noted Emirates was looking to deepen its links with Islamic financiers. He said they would use this type of financing to fund future aircraft. Why would Australia not want a slice of the action?
Right now, the Muslim world, especially the Middle East, is going to the UK and the United States with their business. With some foresight, and law reform, it could be coming to Australia.