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Profiting from Shari’a: Islamic Banking and Finance in Australia

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The Sociology of Shari’a: Case Studies from around the World

Part of the book series: Boundaries of Religious Freedom: Regulating Religion in Diverse Societies ((BOREFRRERE,volume 1))

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Abstract

In addition to providing a general review of Islamic Banking and Finance (IBF) from a legal perspective, this chapter assesses the extent to which Australia’s financial and banking infrastructure obstructs the development of IBF. It also explores the possibility of, and options for, reform in the context of regional and global moves to accommodate this growing phenomenon.

This chapter is a revised and up-dated version of Farrar, S. (2011). Accommodating Islamic Banking and Finance in Australia. University of New South Wales Law Journal, 34 (1), 413–442. Acknowledgement is given to the Editorial Board of the University of New South Wales Law Journal.

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Notes

  1. 1.

    See El Baltaji (2010). For recent updates on projections and actual data, see further the World Islamic Banking Competitiveness Report 2013–2014.

  2. 2.

    According to Alex Regan, the head of Islamic Finance at Mallesons Stephen Jacques, “several days of structuring sessions with potential clients discussing potential transactions often end with them thinking that it’s too difficult in Australia” (Edmunds 2010).

  3. 3.

    In other words, IBF is a subset of the conventional banking and finance industry (Amin 2009).

  4. 4.

    This has been the case since the inception of modern Islamic banking was instigated (Humud 1976, as cited in Kahf and Khan 1992: 26–27).

  5. 5.

    Although the concept is permissible by consensus, the industrial application and documentation is problematic and has proved contentious in Malaysian courts. See Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd [2008] 5 MLJ 631; Bank Islam Malaysia Bhd v Lim Kok Hoe [2009] 6 CLJ 22; Bank Islam Malaysia Bhd v Azhar bin Osman [2010] 5 CLJ 54.

  6. 6.

    These alternative Arabic terms (their use depends on the jurisdiction) both indicate that the payment has been deferred.

  7. 7.

    This facility is expressly permitted by the Shariah Advisory Council of the Central Bank of Malaysia. The Fiqh Academy of the Organisation of the Islamic Conference (OIC) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the major regulatory body for countries in the GCC, expressly prohibit al-’in a h but permit tawarruq, with conditions. Their different approaches originate in doctrinal differences between the classical schools of Islamic thought and jurisprudence (see El-Gamal 2006: 70–73).

  8. 8.

    This is the position of the Shaf’i and Maliki schools. The Hanafi School allows mu da rabah contracts for manufacturing. See Saleh (1986: 104).

  9. 9.

    These can be general investment funds, where the bank chooses precisely where to invest; or specific investment funds where the investor is given a choice as to which projects he wants to invest in. See Saleh (1986: 102); Iqbal and Molyneux (2005: 21–22).

  10. 10.

    However, this has not stopped some Islamic banks from utilising ‘liberal’ interpretations in an attempt to guarantee profits in order to mirror the returns investors obtain in conventional banks (see Dar 2007: 85). See, also, Saleh (1986).

  11. 11.

    The main standards setting agency across the GCC, the AAOIFI, defines s u k u k as “certificates of equal value representing receipt of the value of the certificates, which value is applied to a planned and designated use, common title to shares and rights in tangible assets, usufructs and service, equity of a given project, or equity of a special investment activity” (McMillen 2007: 200, 227).

  12. 12.

    According to the Sharia Guidelines issued by AAOIFI in 2008, s uk u k holders should be ‘true owners’ and share in the liabilities as well as the benefits of ownership (cited in Yean 2010).

  13. 13.

    For further information, see Howladar (2009).

  14. 14.

    Current AAOIFI guidelines provide 14 eligible asset classes (cf. McMillen 2007: 228). For further details, including the Shari’a standards issued by AAOIFI, see AAOIFI (2010).

  15. 15.

    Where a s uk u k consists of a mixed portfolio and one of the projects is based upon a mur a ba h ah, IFSPs have tended to permit sale of that s uk u k on the secondary market where the mur a ba h ah comprised only a small proportion of the overall portfolio (AAOIFI 2010).

  16. 16.

    For a detailed analysis and critique of the practical operations and products offered by these three organisations, see Ahmad (2010).

  17. 17.

    See Islamic Co-operative Finance Australia Limited website.

  18. 18.

    See Iskan Finance website.

  19. 19.

    See Crescent Investments website.

  20. 20.

    See LM Investment Management Limited, Home Page.

  21. 21.

    See Australian Bureau of Statistics website for 2011 Census Data. For figures based on 2006 data, see Department of Immigration and Citizenship (Cth), Muslims in Australia—A Snapshot.

  22. 22.

    Department of Immigration and Citizenship (Cth), Fact Sheet2—Key Facts in Immigration

  23. 23.

    See Cahill (2012).

  24. 24.

    Further, it should not be assumed that all, or even a majority, of this population would be consumers of IBF products (see Rammal 2010: 13; Khan and Bhatti 2008: 181).

  25. 25.

    Low income has been cited as a reason for not taking up Islamic finance in other jurisdictions (see Zainuddin, Jahyd and Ramayah (2004), cited in Gait and Worthington (2007)).

  26. 26.

    For a case study of IBF in Australia see Saeed (2001).

  27. 27.

    See also Jalaluddin and Metwally (1999).

  28. 28.

    See Venardos (2005). The prevalence of non-Muslim investors in Malaysia’s AmIslamic Bank was also confirmed by: Interview with Mahdi Murad, Executive Director of AmBank (Kuala Lumpur, 13 August 2009); Interview with Jamaiyah Mohammed Nor, General Manager, AmIslamic Bank (Kuala Lumpur, 13 August 2009).

  29. 29.

    Interviews with Emmanuel Alfieris, Head of Financial Institutions and Trade, Global Transactional Banking Westpac Institutional Bank (31 July 2009), Rodney Maddock, Executive General Manager, Group Strategy Development, Commonwealth Bank (27 August 2009), and Imran Lum, Community and Development Manager, National Australia Bank (Melbourne, 7 October 2009) confirmed that the major banks had investigated the viability of a retail product but concluded there was an insufficient market.

  30. 30.

    IB Asia received a full banking licence from the Monetary Authority of Singapore (MAS) and was launched on 7 May 2007. The bank comprises 22 Middle Eastern investors from prominent families and groups in the GCC. See Thani, Abdullah and Hassan (2010: 326).

  31. 31.

    NCCPA sch I pt 2 div I ss 17(3)–(6).

  32. 32.

    For more detail on this issue, see Ahmad (2010: 166–168). The MCCA also allude to this difficulty on their website and explain that being required under Australian law to label a financial return as ‘interest’ does not mean that it is in Islamic teachings—it is the nature of the return that matters (which they maintain is ‘profit’), and not its form. See also the MCCA, ‘Frequently Asked Questions.’

  33. 33.

    See Bank Islam, Wadiah Savings Account-I website.

  34. 34.

    I owe a debt of gratitude to the industry of my research assistant, Fadi Schmeissen of BT Financial Group, for much of this section on Australian taxation law.

  35. 35.

    Duties Act 2000 (Vic) ss 57A–F.

  36. 36.

    The problems of competitive pricing of Islamic products in predominantly non-Muslim jurisdictions have been examined by other writers. See Balz (2007).

  37. 37.

    Convention between the Government of Australia and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 20 August 1980 [1981] ATS 16 (entered into force 26 June 1981).

  38. 38.

    See Taxation Administration Act 1953 (Cth) sch 1 ss 16–140.

  39. 39.

    See Australian Financial Centre Forum (Cth) (2009: 70–71 (Recommendation 3.6)).

  40. 40.

    See Sherry and Bowen (2010). The Board of Taxation completed its review for the federal government in June 2011. Its findings, however, have not been published.

  41. 41.

    See Board of Taxation (Cth) (2010).

  42. 42.

    See Moore, B. (2013). These recommendations have not been made public, however, nor is there any evidence the current government has acted upon them.

  43. 43.

    See Johnson Report, Australian Financial Centre Forum (Cth), (2009: 98 (Recommendation 4.8)).

  44. 44.

    For further detail on the UK approach, see Thani, Abdullah and Hassan (2010: 327–332).

  45. 45.

    According to Emmanuel Alfieris, Head of Financial Institutions and Trade, Global Transactional Banking, Westpac Institutional Bank, most overseas Islamic investors do not hold Australian dollars (Interview with Emmanuel Alfieris, Sydney, 31 July 2009). The deterrent effect of the high Australian dollar was also reiterated in roundtable discussions at the Islamic Finance News Roadshow, Melbourne Exhibition Centre, 9 May 2011.

  46. 46.

    A framework of tax incentives and exemptions has also been established for the mainland (see Thani et al. 2010: 131–136).

  47. 47.

    Labuan International Business and Financial Centre, Tax Benefits.

  48. 48.

    Malaysia is a member of the Organisation of the Islamic Conference, while Australia is not.

  49. 49.

    For example, Austrade was one of the facilitators for the Global Islamic Finance Forum, held in Kuala Lumpur on 25–28 October 2010.

  50. 50.

    Government attempts to pass legislation to facilitate the issuance of a local s uk u k were halted by local Christian Evangelist bodies (see Ramasamy and Yoon 2010).

  51. 51.

    For an example, see Bolt (2011).

  52. 52.

    On 30 November 2010 ASIC awarded Crescent Funds Management (Aust.) Ltd a licence to operate financial products in both wholesale and retail markets, opening up Shari’a Managed Funds to the Australian market for the first time (see Crescent Investments Australasia, Home Page).

  53. 53.

    See Black and Sadiq (2011).

References

Case Law

  • Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd [2008] 5 MLJ 631.

    Google Scholar 

  • Bank Islam Malaysia Bhd v Azhar bin Osman [2010] 5 CLJ 54.

    Google Scholar 

  • Bank Islam Malaysia Bhd v Lim Kok Hoe [2009] 6 CLJ 22.

    Google Scholar 

  • Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC [2004] EWCA Civ 19.

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  • Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV (Unreported, England and Wales High Court, Tomlinson J., 13 February 2002.

    Google Scholar 

Acts

Interviews

  • Interviews with Emmanuel Alfieris, Head of Financial Institutions and Trade, Global Transactional Banking Westpac Institutional Bank (31 July 2009).

    Google Scholar 

  • Interview with Imran Lum, Community and Development Manager, National Australia Bank (Melbourne, 7 October 2009).

    Google Scholar 

  • Interview with Rodney Maddock, Executive General Manager, Group Strategy Development, Commonwealth Bank (27 August 2009).

    Google Scholar 

  • Interview with Mahdi Murad, Executive Director of AmBank (Kuala Lumpur, 13 August 2009).

    Google Scholar 

  • Interview with Jamaiyah Mohammed Nor, General Manager, AmIslamic Bank (Kuala Lumpur, 13 August 2009).

    Google Scholar 

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Author information

Authors and Affiliations

  1. University of Sydney, Sydney, Australia

    Salim Farrar

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  1. Salim Farrar
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Correspondence to Salim Farrar .

Editor information

Editors and Affiliations

  1. Religion and Society Research Centre, University of Western Sydney, Sydney, New South Wales, Australia

    Adam Possamai

  2. Grant Sawyer Center for Justice Studies, University of Nevada, Reno, Nevada, USA

    James T Richardson

  3. City University of New York The Graduate Center, New York, New York, USA

    Bryan S. Turner

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Farrar, S. (2015). Profiting from Shari’a: Islamic Banking and Finance in Australia. In: Possamai, A., Richardson, J., Turner, B. (eds) The Sociology of Shari’a: Case Studies from around the World. Boundaries of Religious Freedom: Regulating Religion in Diverse Societies, vol 1. Springer, Cham. https://doi.org/10.1007/978-3-319-09605-6_16

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