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Islamic finance thriving in Australia

The population of Australia is 25 million people – of which 2.6 percent or around 650,000 place themselves as Muslims as per the latest census in 2016. Australia does not have dedicated Islamic finance laws and regulations as like in United Kingdom and some other European countries.

The Shariah-compliant finance scene is flourishing in line with Australia’s strong economic growth. Australia in fact has a significant number of Islamic finance service providers which offer a large sphere of Shariah-compliant finance products ranging from house financing, Islamic pensions, wealth management to Halal superannuation funds and Takaful.

Major industry players include Hejaz Financial Services in Thomastown, Victoria, one of the largest Islamic finance institutions in Australia; Melbourne-based MCCA Islamic Finance & Investments (formerly Muslim Community Cooperative of Australia); Islamic Co-Operative Finance Australia in Parramatta, Islamic home financing provider Iskan Finance and Islamic investment firm Crescent Wealth, both based in Sydney; Amanah Islamic Finance Australia based in Coburg, Victoria, as well as Islamic finance divisions of National Australia Bank and Westpac Banking Corp, which are mainly designing Muslim-friendly mortgage products to cater to the rising real estate market where one of the most popular Shariah-compliant products is declining Musharaka for home financing.

There are institutions such as the Australian Center for Islamic Finance in Melbourne, which offers Islamic finance skills training, the Islamic Financial Services Council of Australia, an industry body providing analysis, advice and advocacy for the Australian Islamic financial services industry, also based in Melbourne, and the National Center of Excellence for Islamic Studies funded by the Australian government and operating in a collaboration between the University of Melbourne, Griffith University and Western Sydney University.

The growth of Islamic finance in Australia is, first of all, owing to a growing number of Muslim immigrants over the past several years. Among the Muslim communities in Down Under, the largest are originating from Bosnia, Bangladesh, Egypt, Iraq, Lebanon, Turkey and Somalia.

There is also a Kurdish Muslim community, and more than 1,000 people identify themselves as Aboriginal Muslims, being descendants of Afghan cameleers who arrived in Melbourne in 1860, or have Indonesian ancestry.

Most of the growth in the number of Muslim Australians occurred in the recent past, with a 15 percent growth between the 2011 and 2016 census alone and a 40 percent growth from 2006. The Australian Muslim community has experienced rapid growth since the 1990s, both in number and wealth.

It was decided to establish Hejaz back in 2014 to provide complete Islamic financial services solutions under one roof. Hejaz is competitive with existing banks and is set to reach $1 billion in assets by 2021.

Aside from demand from domestic Muslims, as of late there is also strong interest from Shariah-compliant investors from Southeast Asia and the Middle East, particularly in Australia’s prospering real estate sector.

Malaysia’s Lembaga Tabung Haji, a fund facilitates savings for the pilgrimage to Makkah through investments in Shariah-compliant vehicles, is one of the biggest Islamic investors into Australia.

Institutional investors from the UAE and Saudi Arabia are also on the outlook for Islamic property investment in the country’s real estate famous spots Sydney, Melbourne, Brisbane, Adelaide, Perth, Darwin and Cairns.

The growing inflow of Shariah-compliant funds has encouraged Australia among the non-Muslims authority with the largest amount of Islamic assets under management besides the UK and Luxembourg. It is forecasted that the Australian Islamic investment fund industry to grow up to $22 billion in assets by 2020.

The continuous growth of Islamic finance in Australia is fascinating because the government did much to support the Islamic finance industry.

In September 2008, Canberra commissioned a report into how to position Australia as a financial services hub in the Asia-Pacific region.

The economist came up with a number of recommendations, including the development of Islamic finance.

The Australian government has been encouraging Muslim communities to set up their own financial services ecosystem, but the communities were overall slow in responding to the flourishing Shariah-compliant finance.

It remains a demanding for the expansion of Islamic finance into the non-Muslim financial market in Australia, which, like elsewhere, requires clear investment rules and regulations for legal reasons.

National Australia Bank Ltd (NAB) has closed its first onshore Islamic financing deal, A$19.9 million ($14.2 million) arrangement to fund a real estate purchase by Sydney-based asset manager Crescent Wealth.

The funding platform designed by NAB, the country’s No.4 lender by market value, could help open Australia to Islamic investors from the Gulf and Southeast Asia that seek to adhere to religious principles such as bans on interest and gambling.


Crescent Wealth used the four-year financing for A$30.75 million commercial property acquisition in South Melbourne, with plans to build a portfolio of commercial assets across the east coast.

Such deals had to be purely funded by equity, but the sharia-compliant structure would help to significantly remove transaction risk, in particular for foreign investors.

Crescent Wealth, established in 2011, currently has over A$100 million in assets under management across five Islamic funds which include cash, real estate and domestic and international equities.

The firm set up an office in Malaysia and is now considering applying for a boutique fund management license.

Islamic financing has struggled to gain adherence in Australia due in part to tax issues which can penalize the asset-based nature of such transactions. The Australian government has proposed removing tax blockade to asset-backed financing arrangements as part of its federal budget, a move likely aimed at facilitating interest-free transactions used in Islamic finance.

Islamic finance is gradually catching on in Australia, with National Australia Bank Ltd helping fund A$160 million ($114 million) Brisbane property purchase after its maiden Islamic finance deal.

Under its 2016-17 spending plan, the government would seek to ensure the tax treatment of asset backed financing is similar to other arrangements which are based on interest bearing loans. The measure would become effective and would apply to transactions supported by assets, including deferred payment arrangements and hire purchase arrangements.

The two most common Islamic finance contracts are Murabaha, where a client buys a commodity on a deferred-payment basis, and Ijara, an installment-based leasing arrangement. Islamic finance follows religious principles such as bans on interest and gambling but the asset-based nature of such contracts means they can incur double or triple tax charges because they require numerous transfers of titles of underlying assets.

The proposal comes almost five years after the Australian Tax Office first presented a paper on Islamic finance to the government for its review. Australia sees early stage growth in Islamic finance despite tax concerns.

National Australia Bank completes three deals while unit of Malaysian pilgrim fund also active in the country. Australia has begun to see a steady stream of property deals using Islamic financing as the attraction of low-risk tenants

National Australia Bank, one of the most active banks in the sector, helped fund A$160 million (HK$885 million) Brisbane property purchase, its third Islamic financing transaction. A lot of interest from Islamic investors who wanted to invest in Australia had to borrow from Islamic banks offshore. This was often expensive and complex. It’s not only in commercial property, but has seen an interest in Australian agriculture and infrastructure assets.

The emergence of such deals represents a gain for Gulf and Southeast Asian investors. The questions remain over how much strength will develop as Australia has yet to follow the lead of other jurisdictions like Britain and Hong Kong in passing tax law amendments to facilitate Islamic finance.

Islamic finance follows religious principles such as bans on interest and gambling but the asset-based nature of such contracts means they can incur double or triple normal tax charges. Even then, interest is strong.

The Properties, a unit of Malaysia’s pilgrims fund Tabung Haji, completed A$220 million Sydney development helped by A$96 million in financing from Mybank Islamic Bank. It also has more Australian projects in the pipeline with a gross development value of A$800 million, including A$500 million residential project in Sydney.

Prompted by investor demand, NAB has designed a funding tool using an agency-based contract known as Wakala, the first such committed funding platform in the country. The Australian Tax Office said it was considering the release of a paper on Islamic finance that had been submitted to the government in 2011, although Canberra has never responded to the paper.

Structures such as Sukuk, or Islamic bonds, can attract double or even triple tax charges because they require multiple transfers of title of the underlying asset.

The Australian Board of Taxation presented an Islamic finance paper to the government in June 2011 aiming to address such issues, but Canberra has yet to give a response or release the final review. In the meantime, Britain, Luxembourg, South Africa and Hong Kong have all passed tax amendments to facilitate such transactions. All have issued sukuk over the past year.

The NAB used a structure known as Wakala, where one party acts as an agent for another to manage a pool of assets. Wakala is widely used overseas, with Hong Kong using the format for its second issuance of Sukuk a $1 billion deal, which decided in this month.

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