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. A regulatory framework ill-prepared to accommodate or supervise The Australian Prudential Regulation Authority regulates the activities of banks, insurers and superannuation funds 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? 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.
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.
Where reform is most needed 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. 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 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. Tax reform The Government asked the Board of Taxation to review the taxation treatment of Islamic finance products back in 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. A lack of skills, education and accreditation 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. A competitive edge for Australia 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. 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. Islamic finance could be just the difference that gives Australia a sustained competitive edge and see it become a genuine regional financial services centre. View Survey 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.