Australia’s political stability, sizeable domestic economy, supportive infrastructure and developed financial system adds to its chance of becoming a hub for Islamic finance in the region. Nigel Denison discusses.
Islamic finance has a long history. However, it has only developed on a global scale over the last 30 years. In that relatively short space of time the industry has grown rapidly and the global market now exceeds US$1 trillion.
Many will find it surprising that Australia was one of the first developed countries to establish Islamic finance. Shariah compliant cooperatives have been offering personal and small business financial services such as mortgages from the 1990s. Since then growth has been modest; however we expect the pace of development to pick up exponentially in the coming years, with the Australian Islamic finance industry diversifying and expanding away from its traditional base of small cooperative offerings into larger financial organisations and asset managers.
This is already starting to happen with the first Australian Islamic fund launched in 2009. This fund was quickly followed by other Islamic funds including the first fully Shariah compliant cash management fund and the first Islamic international equity fund, launched by Crescent Wealth in 2012. We expect to see a similar growth trajectory to that of the UK which now has over 25 financial institutions offering Shariah compliant services and products.
Australia has a small but wealthy Muslim population that is the natural initial target client base. The last census indicated that there were just over 475,000 Australian Muslims, equalling approximately 1.7% of the total population. At first glance this may appear small when compared to other countries such as the UK which has a Muslim population in excess of 2.5 million. However it is a solid base from which to expand and it is also important to examine the wider potential market. At the Bank of London and The Middle East (BLME) we have found that all faiths and cultures are attracted to Islamic finance with the majority of our clients being non-Muslim.
Attraction to Islamic finance
So if clients are not choosing to use Islamic finance purely on religious grounds what is the attraction? From BLME’s experience, one of the primary motivating factors is financial. Clients are looking for competitive returns from their investments and competitive financing costs when they wish to borrow. It is vital that an Islamic bank or asset manager offers a comparable service, both in terms of product and performance, to their conventional counterparts in order to compete in the financial market place. BLME has found that by providing returns that meet or exceed those of conventional providers we have become an alternative option for any client seeking an investment or financing.
The strong similarities between Shariah and ethical principles are also attracting clients. Many people feel disillusioned with and disenfranchised by the large conventional banks and are turning to ethical providers. Islamic financial institutions seek to generate a fair and equitable return from transactions and funds that are backed by real assets. In addition they are prohibited from investing in conventional banking and insurance, weapons manufacturing, pork-related products, alcohol, pornography and gambling. Many of these prohibitions and the principles of fairness, integrity and transparency are shared with the ethical finance sector. Shariah compliant organisations also employ methods of financing that avoid speculation, short-selling and excessive credit creation and encourage sound risk-management procedures. These ethical principles will prove as attractive to the Australian market as they have in the UK. Ethical and responsible investment is well-established in Australia and according to the Responsible Investment Association Australasia (RIAA) has in many areas outperformed the conventional market. A 2011 RIAA report states that core responsible investment rose 8% between 2010 and 2011 from AU$18.12 billion (US$18.7 billion) to AU$19.55 billion (US$20.24 billion). Islamic financial institutions are well positioned to play a part in this market.
These markets will be the key drivers of growth for Islamic finance in Australia. In addition, Australia’s proximity to and growing relationships with Asia will be an important factor. For example the demand for commodities from developing counties such as China and India continues to increase and of Australia’s top 10 trading partners, eight are in the Asia Pacific region. Malaysia has a free trade agreement with Australia which provides a strong link to a country that has an established Islamic finance market. Indeed according to Standard Chartered Bank, Malaysia issued 62% of all sukuk between 2007-11. Indonesia has the largest Muslim population in the world but currently only 5% of the total banking assets are Shariah compliant (CityUK, 2011 Islamic Finance Report).
Future for Australia in islamic finance
Many of the key Asian economies have shown substantial and sustained growth in recent years and investors are looking for Islamic investment opportunities that balance their need for an attractive return with a low appetite for risk. Australia is tapping into this market with companies such as Crescent Wealth partnering with experienced providers such as BLME to offer investors access to the sukuk and Islamic equity markets via competitive and ethical funds.
Nigel Denison is the head of asset management and treasury at BLME.
This article first appeared in Islamic Finance News (7 November 2012, Volume 9, Issue 44, Page 15). For more information, please visit www.islamicfinancenews.com.