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Following the publication of a document on Islamic Finance (IF) by Austrade this week, perhaps we may get something serious in the way of development of this area in Australia.
Interestingly, the Trade Minister, in releasing the document, announced the release of a new product by Westpac – I wonder when Westpac will get around to announcing it. I would not find anything on their website. My guess is that this is just a toe in the water, because if they expected it to be a significant part of their business, they would have to make an ASX release about it. In that, I think they are right. A single specialised product is not going to be big in the context of and institution that size. That said, getting some credibility and experience will be a good thing.
For those interested in the area, a full read of the Austrade publication would be a useful thing. It provides a decent discussion of the IF market (although some of the data seems a little out of date as market growth has been hit by the Dubai problems). The issues identified in it are similar to the ones I identified a while back – the tax and regulatory structures in Australia need to be changed to remove the artificial impediments, find or develop appropriately qualifies Islamic scholars and we need to increase the knowledge base of banking professionals in Australia.
None of this is impossible – the regulatory stuff can be done quickly by essentially copying (at the State level) what Victoria has done and, at the Federal level, copying what the UK has done in regulation terms. Improvements on these could be made, but this would be a good first step.
Good to see at least something happening, though. It is a fascinating area of banking. In the mean time, read the Austrade document. It is pretty good.
The “final” released standard on classification and measurement as released today is – not final. This is for the simple reason that financial liabilities have been specifically scoped out. The reason for this is simple – the IASB cannot figure out what do do about “own credit risk” on liability instruments. If you want a full(er) discussion on this, please have a look at my last post on this topic, here. Suffice to say they seem to have recognised that this is a problem they were not going to be able to solve in the time they had given themselves, so they dropped it.
I am not sure how they can claim to have completed the first phase when they have dropped part of it, but, given the number of projects I have been involved in that have had to drop deliverables to meet a self-imposed deadline I cannot say I am surprised.
Normally at this point I would link to the finished standard and then talk about it. This, however, I cannot do as the IASB, in line with normal practice, wants you to pay to get to the standard. So instead what I will do is copy the summary of significant decision and then talk about each one in order. Once I have a hard copy of the standard I will give a more rounded response. I am too cheap to pay for my own copy when I can get one in a day or so for nothing. Read the rest of this entry »
A piece in the AFR today (page 59 – no link if you are not a subscriber, if you are it is here) is, I think, a little premature. The NAB has for some time been supporting a charitable scheme run by a part of the Roman Catholic Church that is aimed at low income earners, helping them to borrow enough to get things like fridges and washing machines and then pay the money back over time without interest. The recent media release where they announced an expansion to the scheme seems to have been taken as an announcement that the NAB is serious about Islamic finance.
The thing to note about this scheme is that it is not an Islamic finance initiative – it is charitable giving. The NAB should be applauded for that charity (and I would like to see more of it from the other banks) but this cannot be taken, as the piece in the AFR seems to be saying, as a start in the Islamic finance area. It will not give them any experience in Islamic finance. Islamic Finance is a serious business, with profitability still expected from conducting it.
The way the scheme works is that the NAB hands money to the Good Shepherd Youth and Family Service who then lend it out. There is no return to the NAB so this is not a business.
That said, perhaps some good will be done as this gets through the NAB media reporting system. You can guarantee that a piece in the AFR reporting a possible new business initiative will have been seen by some very senior people in the NAB.
If it does get anywhere perhaps they will consider it. OTOH, one of the other banks may decide to take up the baton and give this a try. In the mean time, if you are looking to get this underway in Australia, there is already a mechanism in Australian law that would allow the Muslim community here to do it for themselves – the religious charitable fund, as I suggested nearly 3 years ago. If you (the Muslim community) want to do it I would be happy to be what help I can.
If NAB or one of the others want to do it, I would also be happy to help. Contact details are on the “Authors” page.
Quick poll on Islamic Finance (IF) and the current situation. If you want to know a bit more on IF, please see our category.
If you have a suggestion for a further poll, please leave it below. I would even countenance doing one on fractional reserve.
The speech given yesterday by the Archbishop of Canterbury is interesting – to say the least. He goes in great depth into many of the issues confronted by those trying to give some effect to Sharia in Western jurisdictions. For those interested in the area a close read is worthwhile. While his focus, given his background, is on family and allied areas of law, he does touch on other issues.
This blog’s focus is on financial matters I would be interested in feedback on the questions of what real impediments are there in Western (and in particular Australian) law to allowing Sharia to govern financial arrangements? Given there is wide freedom of contract (within the regulatory limits) I am not aware of many contractual problems – provided the parties to a contract agree to the terms then generally the courts here will enforce it – regardless of whether it is founded on Sharia or not.
Regulatory and taxation issues seem to be the big ones – the banking regulatory system as it stands essentially does not cope with many Sharia compliant frameworks.
A good example of this is a Sharia compliant mortgage institution, which would not be allowed to treat its mortgages in the same way as interest bearing ones and would be effectively penalised with a much heavier capital load. This can be fixed, though – the IFSB regulatory framework could be allowed in the same way that the Basel II one has been.
Insurance would be another regulatory issue. A Takaful structure is also not coped with under current APRA standards – but there is no reason why they cannot be. In theory at least, because a Takaful insurance structure is truly mutual it should be less likely to fall over that a traditional Western insurer.
Funds management and superannuation I have dealt with previously, but as these can be dealt with under the “ethical” banner these should be the least trouble of all.
Taxation is an issue. Like the UK, the tax law is not set up here for many of the Sharia structures – with the bond-like instruments a particular example. Again, like the regulatory issues, and like the UK, these could be dealt with through fairly simple legislative changes.
Malcolm Knight, General Manager of the Bank of International Settlements, gave a speech last Thursday to the 2nd Islamic Financial Services Board Forum, outlining how the IFSB, the BIS and the BCBS are working together on developing the institutional framework for the globalisation of Islamic Finance. He emphasises the areas the conventional and Islamic finance have in common – the needs for sound risk management, corporate governance and capital adequacy.
All I can do is encourage those interested in the area to read it.
Abstract:
Although there are differences between Islamic banking and “conventional” banking, there are some fundamental principles that apply equally to both. In particular, rigorous risk management and sound corporate governance help to ensure the safety and soundness of the international banking system. In the light of the growing importance of Islamic banks and Sharia-compliant financial innovation, the increasing integration of Islamic financial services into global financial markets serves to strengthen this point.
The Basel II framework improves the risk sensitivity and accuracy of the criteria for assessing banks’ capital adequacy. This framework is fundamentally about stronger and more effective risk management grounded in sound corporate governance and enhanced financial disclosure, the importance of which has been underscored by the recent problems that have arisen in the banking industry worldwide. The guidance provided by the Islamic Financial Services Board (IFSB) is a useful contribution to the realisation of these global goals. It will support the establishment of resilient financial market infrastructures and sound and robust core Islamic financial institutions operating according to safe and sound risk management practices.
I am in Bahrain for the (rather long named) World Islamic Funds Management and Capital Markets Conference. This morning we had the opening “Executive Summary” to set the scene. They touched on a few points I hope will be expanded over the next couple of days, but one point in particular I thought important. Read the rest of this entry »
This is a reprint of an article published in Business Islamica Magazine
Since the first large-scale Muslim migration to Australia occurred in the early 1970s, the Islamic community has grown from just a few thousand, concentrated in the suburbs of Melbourne, to become the second-largest religious group in Australia. Substantial migration to Australia was initially from Lebanon, with other notable immigration coming from many Muslim countries, including Indonesia, Bangladesh, Egypt, the Palestinian territories and, more recently, Afghanistan and Iraq.
The number of Australian residents identifying themselves as Muslim on the census increased by over 40 percent in the five years between 1996 and 2001, from 200,000 to 281,000. This growth has continued, to the point where the estimated number of Muslims in Australia was 350,000 in late 2006. Read the rest of this entry »
It may seem prosaic, but one of the problems that “Western” banks have with Islamic financial structures is the question of how to account for them. Under interest-based banking it is an easy call. In most of the world, you apply IAS 39 (AASB 139 as it is called in Australia) and in the US you apply FAS 133. The problem with Islamic finance is that it does not operate in the same way and a good, hard, detailed look at the way the arrangements will actually work is called for if you are using these standards, as most of the world’s banks do. Read the rest of this entry »
Deutsche Bank has joined the lists of those launching Shari’a compliant products, launching a series of mutual funds. These include a precious metals fund and several equity funds. The pity is that these are currently restricted to UAE and Bahrain investors only.
Who’s next?
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