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. Additionally, there are some Australia banks which have Islamic Banking divisions. These can involve large types of funding, in the corporate institutional space, of $5m 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 Banking & Finance entities use to create Islamic Finance products. These entities are generally shariah compliant with Shariah 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; 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.
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.
What makes Islamic Banking & Finance Products work in Australia
The key Islamic banking and finance products used in Australia by both Bank & Non-Bank entities 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, the Ijarah Financing methodology complies with National Consumer Credit Protection Act (NCCP).
Will Islamic Banks & Finance 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:
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?
There is no such thing as an ‘interest-based loan’ or ‘Islamic Home Loan with Interest’ with Islamic banks or non Bank funders in Australia. The only type of Islamic loan based on money is otherwise known as ‘Qard Hasan’ which is essentially an ‘interest-free-loan.’ The Islamic banking or finance product must be an asset-based arrangement and hence revolve around having the asset as the prime subject matter in the relationship between the Bank/Funder and customer. The customer will pay rental payments for the Banks/funders share in the asset or property, and therefore exchange money for an asset or use of an asset or service over time. This process or mechanism is a trade based arrangement as money is exchanged for an asset or service.
This takes a different approach from a loan based on money for interest as a margin. Islamic banking and finance 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, and therefore the customer uses money to acquire the property or asset over time from the bank or funder. This differs from the lender-borrower paradigm or arrangement which is found in conventional banks based on interest. A conventional loan based on interest involves putting a markup on money when it is lent & borrowed. The mark up, or margin loaded on money is called ‘Interest.’ When you markup money above its real value, this is not a trade. This markup becomes an increase in its own self, which is a form ‘Riba in Islam.’
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 due to the local credit laws and tax rules that 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?
These are several types of Islamic finance Structures. We have listed 4 other key Islamic bank type products:
- 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.
- 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.
- 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 as its very similar to a lease based arrangement with ownership rights at the end.
- 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.
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: