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Islamic banking & finance in Australia

Islamic banking and finance in Australia

Islamic banking and finance has been available in Australia for the last 30 years via multiple funding lines. However, as of 2022 there is no official Islamic bank in Australia with a full unrestricted banking license.  There are, however, several banks and financial institutions that offer Islamic banking products in a limited and exclusive space, both locally and internationally. These can involve large types of funding, in the corporate institutional space, of $5mil and over, as well as internationally in some Islamic jurisdictions e.g. Malaysia and Gulf countries. 

In Australia, there a few funding lines originating from large banks, institutional funders, Australian capital funding bodies and Super Funds that Islamic banks & finance entities use to create Islamic Finance products. These entities are generally sharia compliant with Sharia Compliant Boards who oversee the products and structures developed.

These Funders have developed Islamic banking and finance products within their funding lines. They have distribution partners like Ijarah Finance and others, who are authorised non-bank financial entities who can offer these sharia-based finance products. Note that these funders generally do not offer these products directly to the public under their own branding or management.

Additionally, there are some co-operative schemes and investment funds involving community/investor funds that are used in some Islamic Finance arrangements in Australia. These are generally well structured and meet sharia requirements, however they lack large capital to service the broader community and therefore, extremely limited.

At Ijarah Finance, we are not a bank and are NOT limited to the amount of capital available as we have large funding bodies who support and underwrite our extensive product range.

Types of Islamic Banking & Finance in Australia

Islamic banks and Islamic non-bank finance entities in Australia generally use our Ijarah Finance methodology as a form of financing. This is primarily because it is the best method that works within current Australian credit and finance laws. Additionally, leasing as a form of financing has existed in Australia for over 50 years. It’s only that in the last 6 years that there have been some key legislative changes, thanks to Islamic finance lobbying, that have allowed contracts and instruments to be structured in a manner to ensure they are sharia compliant whilst working within Australian law. This has allowed Islamic banking and finance to flourish with a few key players now servicing the market involving bank and non-bank entities.

 

Islamic Finance

What makes Islamic Banking & Finance Products work in Australia

The key Islamic banking and finance products used in Australia is known as Ijarah Muntahia Bit Tamleek. You will find almost all Islamic banking and finance providers using this Ijarah Finance methodology.

How is it sharia compliant?

Primarily, it’s important to clearly identify that payments in your finance contracts are recorded and referred to as ‘Rental Payment(s)’, whilst your rate must be described as a ‘Rental Rate.’ Many customers are unaware this is recognised under Australian mortgage laws whilst also being compliant with sharia Islamic banking requirements.

Additionally, the customer is an agreed Purchasing and Custodian Agent (also known as a Wakeel or Wakala in Arabic) who holds the property on behalf of the funder. The customer will pay Rental Payments for the funders share in the property, and gradually acquire the full ownership of the asset over time, by making those rental payments. Eventually, full ownership is transferred to the customer on the final payment which fulfills the Exercise Price agreed between the parties upfront. This is known as a Rent to Own or Ijarah Muntahia Bit Tamleek which is what we at Ijarah Finance specialise in.

Within an Ijarah Finance contract, the funder and customer make a promise to one another (also known as Waad). In this case, the funder agrees to sell its share of the property to the customer over time, by accepting rent as a form of payment. Thus, with each rental payment made, the customer will own more equity in the property.

In Australia, Ijarah Financing methodology is recognised by the Australian National Consumer Credit Protection Act (NCCP).  

Will Islamic Banks flourish in Australia?

Provided there is a cost effective and good product range, Islamic banking and finance will have a good place in Australia servicing the needs of the Muslim community and others who would like to use this form of funding. The current product offerings, available with various players, covers almost all aspects of asset based finance required for the Muslim community which include the following:

  1. Home Finance
  2. Commercial Property Finance
  3. Construction 
  4. Equipment Finance

Compliance of Islamic Banking & Finance products in Australia

With the acceptance of rent as a form of payment instead of interest, a key component of Islamic banking and finance is recognised under Australian mortgage law. Additionally, Australia recognises your index rate as a Rental Rate. This avoids the use of interest or an interest rate which is impermissible in Islamic banking and finance.  

What are Islamic Home Loans?

With Islamic banks and Islamic non-bank funders in Australia, there is no such thing as an ‘interest-based loan’ or Islamic Home Loan. The Islamic banking or finance product must be an asset-based arrangement and hence revolve around having the asset as a subject matter in the relationship between the funder and customer. The customer will pay rental payments for the funders share in the asset or property.

This takes a different approach from a loan based on money for interest. Islamic banking and finance methodology does not involve interest as it is not permissible in Islam. In the context of Islamic banking and finance, the property is bought using a non-interest-based approach using the Asset as a partnership arrangement or Rent to Own arrangement. This differs from the lender-borrower paradigm which is found in traditional banks based on interest.

There are several other types of Islamic banking and finance products available although Ijarah Finance, as a methodology, works best in Australia. Primarily, this is because local credit laws and tax rules work best under the Ijarah Finance structure of Islamic banking and finance and fit within sharia compliant rules.

What are different types of Islamic Bank Structures?

  1. These are 5 other key Islamic bank type products:
  2. Murabaha: The Islamic bank or finance institution will buy the property and sell it back to you at a known upfront profit markup. Your monthly payments are fixed instalments without any interest as you are paying for the property on a pre agreed price. This could be a viewed as a cost + profit margin arrangement.
  1. Mudarabah: One partner invests money whilst another invest knowhow to make an investment in an asset or venture. This can also be seen somewhat like a venture capital & skill arrangement.
  1. Ijarah Finance: Two parties enter into an arrangement to buy a property or asset with a Waad (promise) by both parties to buy and sell the shares of this property over an agreed period to the other party using a Rent to Own arrangement. In this case, the Funder or Islamic bank will give you the house on lease and will transfer the ownership once final payment is completed by you. This works best in Australia because of the credit laws.
  1. Musharaka: The client and the Islamic bank or financier buy the property together. The client gradually buys the bank out of its shares using a co-ownership model. The more shares owned, the less the client has to pay the Islamic bank or financial institution over time. This type of methodology involves sharing the profits and losses according to shares owned between the parties, although some contracts could work differently based on some pre agreed aspects between the funder and customer. This type of arrangement could also be called Diminishing Musharakah or diminishing partnership between the 2 or more parties.
  1. Wakala: The bank becomes your agent, allowing them to use your money to invest in sharia compliant trading activities.
Ijarah Finance was established to help you purchase a property or asset without entering into an interest-based loan. Our Islamic banking & finance products are the most extensive in the Australian market and can be tailored to suit individual needs. For further information, please refer to:
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