Following on from some other discussions I started to think of possible ways for Islamic banking to get started in Australia. The main problems seem to stem from two, separate, pieces of legislation / regulation. For housing loans, as discussed earlier, there is the double stamp duty problem. In Victoria, at least, this problem has been dealt with. I believe that it has not been dealt with in other jurisdictions.
The other problem is the Australian prudential regulations, administered by APRA. These follow the current, Basel I, standards and are in the process of changing over to the Basel II standards. Neither of these makes provision for Sharia compliance. Both of the Accords treat these types of financial arrangements as equity, rather than credit – thus giving them a heavy capital treatment.
There may be a loophole, though, and one that is not well known.
This loophole is the exemption for religious charitable funds (AKA “Church Funds”), as discussed here. What may be possible (and further work to check on this will have to be done) would be to set up a charity, or series of charities, specifically with the object of lending to observant Muslims for the purpose of allowing them to observe their religion. Properly structured, and with some prudential oversight, there is no reason why these could not provide an appropriate framework.
By “prudential oversight” I do not mean a government body would (necessarily) be doing the regulation. If the various Muslim communities could meet and agree on a regulator, set up and run by themselves and providing some degree of assurance over these funds I am fairly confident that they would be allowed to grow to the sort of size where they could no longer be kept out of the mainstream of banking practice in Australia.
For such a regulator to work it would have to have broad agreement from most Muslims – Sunni and Shia alike. The board of the regulator could be composed of experts in Islamic jurisprudence from each of the major schools (I believe there are 4), a couple of lawyers well qualified in Australian law, two to three experts in banking practice and one or two others selected for their profile in the community. With a small staff they could then exercise oversight over the religious charities actually conducting the financial services.
It would be an interesting exercise in self-regulation.
It would then only be up to the States to get the stamp duty laws changed.
[UPDATE] Lloyds Bank in the UK have found a way to both achieve Sharia compliance and make it pay: look