Because Islam prohibits interest payments, many Muslims aren’t willing to accept standard loans in Australia. They prefer to lend using a method that is more in accordance with their religious beliefs. This new market for Islamic financing is expanding rapidly and could soon be expanded into Australia. Kit Kadlec reports.
“Those who charge riba are in the same position as those controlled by the devil’s influence… As for those who persist in riba, they incur Hell, wherein they abide forever” – Qur’an 2:275
This is a clear statement. The Qur’an contains strong language against “riba”, loosely translated as interest.
This poses a problem to Muslims in Australia who want to obtain a mortgage, but still adhere Islamic law. More than 340,000 Muslims inhabited Australia in 2006. The number of Muslims in Australia is increasing. Many of these people dream of owning a home and living the Australian dream. They are required to repay interest to local lenders and they must not violate Sharia or Islamic law.
Nail Aykan, MCCA marketing manager, says the difference between Islamic and Western banking lies in the concept of interest rate. “The Islamic beliefs do not allow the use interest rates. Therefore, there must be an alternative.”
By paying all the amount in cash, you can avoid interest payments. Unfortunately, not everyone can afford to do this in Australia. Borrowing from friends can be an alternative, but it is not always practical.
To address this problem, the MCCA offered Islamic finance to its customers. It is basically a way to avoid interest through entering into a partnership, and sharing the risks.
Until the time they become full-owners, they pay rent to MCCA and not interest.
Slow start in Australia
MCCA was established in 1989. It is Australia’s most well-known provider of Islamic finance. While the market is still very small, it is expanding rapidly. Iskan Home Finance, Sydney is the only competition. Although Islamic finance has had some success in the West (e.g. the United States and Britain), it is still very limited here. Aykan stated that there are approximately 1,500 MCCA member in the country. This is slightly less than 2% from the estimated 80,000 Muslim households.
The MCCA provides fewer services than banks larger in size, which is one of the obstacles to attracting customers.
Aykan stated that “if real banking services were available, we could easily penetrate 20% of the Muslim market” and that at most 50% of the Muslim population would be open for Islamic finance in Australia. The MCCA also aims to reach non-Muslim customers.
Although the Muslim community is growing, it is not fair to refer to it as one group. According to the MCCA, there are 55 languages and more 60 countries where they were born.
Another reason Australia hasn’t been able to grow its Islamic finance industry is that it doesn’t possess the connections to the Arab World like the U.S.A. and U.K. Bala Singam, who is also a Monash University Professor and Chairman of Accounting and Finance on Monash University’s Malaysian campus, said that Australia has been slow in growing this sector.
Shanmugam explained that the United States and Britain have always been seen as major destinations for petrodollars, which are a source of Arab money. They are working to preserve their position. Australia is not a hub for such funds. I don’t see this happening in a hurry.
Problem is, many Australian Muslims view traditional banking with banks as simpler and more affordable.
Shanmugam says that “Research has proven that Muslims as well as Muslims regard returns to be more important than religion when it comes to financial transactions.” This variable is more important than religion for patronizing banking types. Patrons who don’t receive tangible returns will not patronize banks.
Case study
Some Muslims, however, in Australia put religion first. Mohammad Tabiaat, a Lebanese American, borrowed through MCCA to purchase his first house.
He purchased a Campbellfield home with three bedrooms for $270,000 in December. A 20% deposit was also required. It is something that no other Australian would do to purchase a home such as this.
Tabiaat does not pay interest back. Tabiaat instead pays $1,600 per weeks rent through “Murabaha.” It’s a lease to own agreement where the borrower receives a fair rent.
Murabaha, an Islamic term, refers to a transaction in which the seller (in this case MCCA) discloses the cost and then adds some profits. You can choose to pay a lump sum or a percentage. The maximum amount this payment can be made must not exceed a specified amount.
Another option is Ijarah Bittamleek. This allows you to choose between fixed and variable payments. Clients are given the property as their final installment. Iskan Home Finance also offers three other products. They are all Sharia compliant.
Tabiaat will return his rent after 180 consecutive weeks. This amounts to $288,000 and a $54,000 deposit. Aykan explained that while not everyone can afford $1600 per week, it’s very common for Islamic finance lenders to quickly pay off debts.
Tabiaat bought the mortgage from the MCCA for its own account. The MCCA also had to take some risk. According to the MCCA, the mortgage can be seized and left with the borrower if it is registered for full mortgage securities entitlement. Third-party property can be used as security for a mortgage.
Tabiaat stated that he believes it would be simpler to use a traditional bank but prefers to adhere to Islamic law.
“It is an individual choice,” said he. “Some people are very conscious about the rate they pay. Others are happy to pay extra to comply.”
You can’t pay more for Islamic finance than this. According to Aykan, it is often very similar in terms of bottom line.
He said that although a traditional bank and a regular bank may offer the same rates of interest, the difference is in how they process the money.
Profit or Interest?
Together with Islamic finance lenders, the MCCA considers profit the amount they take over the purchase price. Although “interest” is prohibited in Australia, it is used in most cases. It is required that it be used in paperwork by the Australian government.
Aykan stated that while the MCCA aims to offer something within religious guidelines but cannot provide loans without making a profit.
He stated, “You need to remember that it is a company at its core.” It is not charity. But it’s not charity. Islamic banking adheres strictly to certain values and guidelines.
Profit is often used to describe how much an MCCA customer pays. They won’t see this on their paperwork.
Aykan said, “The MCCA had observed, since the whole conventional system is based upon understanding interest is that all our funders and regulators as a whole bunch other bodies all use interest.” They don’t know a better term.”
He expressed optimism that a new term will be permitted to appear on official forms of Islamic finance in the future.
Aykan stated, “We aren’t engaging in interest. However, that term remains, regardless of whether or not we like it.”
Aykan claims customers are given an explanation.
Shanmugam stated that he does not know why the wording is so problematic.
He said, “I don’t know why the mere usage of the world’s ‘interest could cause a conflict between Sharia law or Aussie law.” “Islamic finance found ways and means not to use the interest charging/paying mechanism to perform financial transactions. The U.K. and Singapore have amended their laws to accommodate Islamic finance.
Tabiaat stated that he would like to see Australia adopt the changes in language sooner than later.
He suggested, “Why not make these changes?” You can open your heart and accept it. It’s a blessing. If the law is amended, you will see increased investment in this country.
But it doesn’t matter what the statement says, not all Muslims consider Islamic finance banks institutions true Sharia followers. Critics say they are different banks that offer an alternative. They take in profit, hide “interest”, and use external funders who do not practice Sharia. Australia even has many websites where people take aim at the MCCA and other banks. They claim to have the same practices and procedures as traditional banks, but they wear a different cloak.
Shanmugam says, “This is an opinion matter.” “The Middle East is known for making the same criticisms about Malaysia. These remarks can be expected when religion serves as a guideline to economic activity. Liberals and conservatives may interpret religion in different ways.
There are some guidelines, but there has not yet been a uniform regulatory or legal framework in place to support an Islamic financial marketplace in Australia. Cooperatives Act 1992 issued licences to community-based Islamic financial cooperatives to operate cooperative businesses. They are subjected to the same regulations as other lending organizations.
But, there is an increasing demand for more consistent oversight in Islamic finance.
The future
Experts Shanmugam, among others, believe that Islamic finance is likely to expand rapidly in the coming years.
He claims that Islamic finance, although it has been around for over 40 years, has seen an incredible rise in popularity since 9/11. This is due in large part to the increase in Muslim interest and an Islamic Renaissance. It has been steadily growing over the years and is now moving at an impressive pace. Islamic Finance is not temporary, because it has the full support from resource-rich Arab nations. It is here to stay.”
Because Islamic finance banks are more risk-averse than traditional banks, they tend to be more cautious about what investments they make. They have managed to keep pace with other banks that have, in some cases including major U.S. banks, had to borrow too much or have collapsed.
Aykan explained that the MCCA intends to fill a niche and also gain a share of the Australian mainstream. He stated that customers need to be educated about Islamic finance.
He said that at the moment there isn’t much awareness about Islamic banking within the Muslim community. “Once you have these services and resources, word of mouth will spread quickly and branches will be opened in every city. The domino effect will soon follow.”
Islamic banking isn’t just for small businesses and cooperatives in Australia. Many potential suitors are available for Islamic finance. Recently, South Korea (and Malta) expressed interest in opening main branches. Major banks all over the world have signed up.
Shanmugam says that major global banks such as Citibank or HSBC have embraced Islamic Finance. This is due to supply and economic demand. If banks in Australia have high profit margins or a variable critical mass, this alternative financing option may be available.
While the National Bank of Australia (NAB), is beginning its efforts, it doesn’t yet offer Islamic funding. Since 2007, it has provided a $25,000 scholarship each year to young Australian Muslims to support their financial education. The bank will provide employment for the recipient.
Aykan says that the market is hugely potential. It is growing all over the world and there is only one way for it to continue to grow.
