This document provides information about a group project on the history and development of Islamic finance in Australia. It contains an introduction on Islamic finance and the early history of banking in Australia. It then discusses the key organizations involved in establishing Islamic finance in Australia, including the Muslim Community Cooperative Australia and Muslim Community Credit Union. It also outlines some of the Islamic products offered in Australia and issues facing the development of Islamic finance, such as regulatory and tax challenges. The document contains an outline and is a source of information for the group project.

1. SUBJECT CODE ISF 1101
TITLE History and Development of Islamic Finance in Australia
LECTURER’S NAME Dr. Nor Azizan Binti Che Embi
SECTION NO 2
GROUP NO 1
MEMBERS OF THE GROUP 1. Hijaz Aasil (1610979)
2. Mohamed Gouda Ibrahim Attia (1614305)
3. Ain Atiya Azmi Binti Nazmi (1710222)
4. Nur Athirah Binti Azahar (1712140)
5. Nurul Aina Binti Shamsul (1714900)
6. Nurul Asnie Zulfa Binti Rushdi (1710838)

2. Table of content
No. Particulars Pages
1.0 Introduction 2-3
2.0 History and development of Islamic finance in Australia 4-5
2.1 The Growth and Financial Performance of Muslim Community Co-
operative (Australia) Limited (MCCA)
6
2.2 Islamic Banks that operates in Australia 6-7
2.3 Islamic Products Offered by the Banks in Australia 8-9
2.4 Issues of Islamic Finance in Australia 10-11
2.5 Society’s Feedback towards Islamic Finance in Australia 12-13
3.0 Conclusion 14
4.0 References 15

3. 1.0 INTRODUCTION
Islamic finance is a financial system that operates according to Islamic law (which is
called sharia) and is, therefore, sharia-compliant. Just like conventional financial systems,
Islamic finance features banks, capital markets, fund managers, investment firms, and insurance
companies. However, these entities are governed both by Islamic law and the finance industry
rules and regulations that apply to their conventional counterparts.
One major reason that growth in Islamic finance has lagged in Australia is that the sector
does not have the connections to the Arab world that the US and UK do. Banking in Australia is
dominated by four major banks: Australia and New Zealand Banking Group, Commonwealth
Bank of Australia, National Australia Bank and Westpac Banking Corporation.
Before Islamic finance exist, the history of the first bank in Australia can be traced back
to 1817 when Bank of New South Wales (BNSW) was formed in Sydney. In 1982, BNSW
merged with Commercial Bank of Australia. They were renamed to Westpac Banking
Corporation. On the other hand, National Bank Australia was originally formed in 1982 as a
merger between Commercial Banking of Sydney (1817) and National Bank of Australasia
(1858). In 1835, a London-based bank, Bank of Australasia was formed which later became the
Australia and New Zealand Bank.
In addition, Commonwealth Bank of Australia was founded by the government of
Australia in 1911. It had both savings and general business functions. It also was the first bank to
receive federal government guarantee. It acted as a central bank from 1920-1960. However,
following a controversy in 1958-1959 regarding its dual functions as both central and
commercial banks, the government had to split the bank. The central bank function was given to
Reserve Bank Australia while Commonwealth Banking Corporation was to retain its commercial
functions.
Moreover, the banks in Australia were separated into two categories: saving banks and
trading banks. Saving banks were mostly dedicated to offering mortgages, and they paid very
little interest on their deposits. Trading banks were merchant banks. Savings banks were owned
by the state government. Meanwhile, trading banks did not provide services to the general
public. However, in mid-1960s, deregulation of banks took place. The distinction between
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4. trading and savings banks was slowly removed. Banks are now able to operate in money market
which was traditionally the domain of merchant banks. In 1990, the "four pillars policy" came
into effect whereby the government will reject any mergers between the four major banks.
However, this policy did not deter the major banks from acquiring their small competitors.
Nowadays, aside from the four major banks, the banking sector consists of banks licensed
under the Banking Act 1959, foreign banks licensed to operate through a branch in Australia, and
Australian-incorporated foreign bank subsidiaries. There are also a large number of financial
institutions, such as credit unions, building societies, and mutual banks, which provide limited
banking-type services. It is not until February 1989 that the first financial service provider that
operated on Islamic principles was established and since then, religious compliant banks have
developed in Australia. This point will be discussed in details in the next entry.
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5. 2.0 History and development of Islamic finance in Australia
The competitiveness of Australia's financial services sector offers a great opportunities
for Islamic banks and financial institutions to do business and to export their products to Asia.
Australia is well aware of the potential for Islamic finance in developing their nation as a
financial services centre. Therefore, Muslim Community Cooperative Australia (MCCA) and
Muslim Community Credit Union (MCCU) plays the biggest role in bringing Islamic finance in
Australia. MCCA was first known as a cooperative- a group of members that collated their funds
together to fulfil the Islamic finance needs of fellow members. MCCA started business as a
registered cooperative in the inner Melbourne suburb of Burwood with a vision to address the
financial, banking and investment needs of the Australian Muslim community by offering
Islamic finance products. The organization began in 1989 with AU$22,300 worth of seeding
capital and by 2003, MCCA had 5,600 members and deposits worth AU$24 million. Majority of
the MCCA members are from Melbourne and Sydney where the organization has a physical
presence while MCCU was established in 1999. The MCCA offered a limited range of halal
financial services, and as the need for services grew, the MCCU was launched. Both service
providers operate today have their specific financial roles in the Muslim community. Other than
that, there are another two organisations that offers Islamic finance facilities which are Islamic
Co-operative Finance Australia Limited (‘ICFAL’) and Iskan Finance. There are also Crescent
Investments and LM Investment Ltd that exists as the sources of Islamic fund management.
In July 2003, a shared partnership scheme between home buyers and banks which was
very similar to the schemes that already being used by Islamic financial institution had been
confirmed by the Prime Minister John Howard. In addition, on 20 October 2006, a report
published in The Australian disclosed that the National Australia Bank (NAB) will look at
introducing Islamic financing into its product range to overcome an “untapped” market that
could be worth millions of dollars. “Untapped” market is basically demand that has not been met
by an existing product or brand, or a market that could use an existing product in an innovative
way. Therefore, Islamic finance is the best way to be implied since the number of Muslim
population in Australia is rising throughout the days. NAB also declared to offer a $25,000 post-
graduate scholarship to a member of the Muslim community for the year 2007 to further NAB’s
understanding of Islamic banking.
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6. The introduction of Islamic finance are also supported by the Australian Government. In
September 2008, the Australian government commissioned a report into how to position
Australia as a leading financial services hub in the Asia-Pacific region and as a result, the
Johnson Report was introduced on 17 November 2009. The Johnson report made two specific
recommendations on Islamic finance; the removal of regulatory barriers to the development of
Islamic finance products in Australia, and a call for an inquiry by the Board of Taxation into
whether Australian Tax law needs to be amended to ensure that Islamic financial products have
the same standard with conventional banking products.
In February 2010, one of Australia’s 'big four' banks, Westpac, was the first Australian
bank to offer a short-term wholesale investment product structured specifically developed for
Islamic financial institutions. Australia's largest investment bank, Macquarie Group, has also
announced plans for an Islamic finance joint venture with the Bahrain-based Gulf Finance House
to target markets in the Middle East and North Africa.
On 26 April 2010, the Government announced that the Board of Taxation would conduct
the review recommended by the Johnson Report. This review is to be a comprehensive analysis
of Australia's tax laws to ensure that, wherever possible, they do not inhibit the provision of
Islamic finance, banking and insurance products. On 18 May 2010, the Terms of Reference for
this Review were announced by the Assistant Treasury, Mr. Nick Sherry. The Board has been
asked to make recommendations in respect of Commonwealth laws and findings in respect of
State and Territory laws that will ensure, wherever possible, that Islamic financial products have
the same standard with conventional products. The Board of Taxation is to report by June 2011.
As for today, MCCA is a national organisation that has facilitated over $1 Billion in
Islamic home finance and manages close to $50 million in investments. There is a high potential
for Islamic banking, Islamic financial services and Islamic wealth management in Australia to
grow due to a sizeable Muslim population (market) and Muslim businesses in various sectors of
the economy.
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7. 2.1 The Growth and Financial Performance of Muslim Community Co-operative
(Australia) Limited (MCCA)
It is important to observe the historical growth and financial performance of the MCCA
prior to the establishment of the MCCU. The three years 1997 – 1999 in particular saw a
substantial growth in profits, assets and membership.
Table 2 highlights the growth in the MCCA from 1997 to 2000 in terms of profits, assets,
shareholders' equity, and membership. In addition, the MCCA achieved excellent returns for its
member investors. As the MCCA has a profit sharing arrangement in place, its dividend up to the
year 1997/8 averaged around 7%. These results compared favourably with returns made from
investments in traditional banks over the same time period. However, in 1998/99, the dividend
rate dropped to 4.01%. This decrease was due to the first impact of the provisions of Accounting
Standard AASB 1004: "Revenue", and the significant level of bad debts written off. In 1999 –
2000, this dividend again fell to 2% largely as a result of the full impact of applying Accounting
Standard AASB 1004, and again writing off bad debts.
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8. 2.2 Islamic Banks that operates in Australia
There are a few numbers of Islamic banks that operates in Australia and this report will
briefly discuss among the two of them. Before going further, there is an organization that aims
for raising the awareness of Islamic Finance by developing holistic and different educational
programs and research capabilities known as The Australian Centre for Islamic Finance
(AUSCIF). AUSCIF is the pre-eminent Australian organisation facilitating knowledge transfer
and thought leadership within the Islamic financial sector.
The first attempt to introduce Islamic financing products in Australia was made by the
Muslim Community Cooperative Australia (MCCA). As discussed earlier, MCCA started their
business in 1989 with a vision to address the financial, banking and investment needs of the
Australian Muslim community by offering Islamic finance products. Today, MCCA is a national
organisation that has facilitated over $1 Billion in Islamic home finance and manages close to
$50 million in investments.
Example of their services, the MCCA Income Fund provides finance facilities based on
Shariah finance principles and Australian finance and investment law. In line with Shariah
finance principles, the fund does not invest in activities that are considered immoral such as;
alcohol, gaming, pornography and weaponry. The assets of the fund consist of only registered
first mortgages and cash. The fund mostly invests in residential mortgages connected to
established residential properties located in major Australian capital cities. The fund invests in
registered first mortgages and for finance contracts where the property has been subject to
independent valuation.
Next, Amanah is a Mortgage Manager with an Australian Credit Licence that was formed
mainly to address the absence of a Shariah compliant home financing solution that meets the
standards of globally recognised Shariah scholars at the same time also complying with
Australian laws and credit regulations. Many Australian Muslims have been forced to stay out of
the housing market. This has resulted in a large number of Australians who are unable to enjoy
the benefits of home ownership. They are committed to finding financial solutions for the
Australian Muslim community that are consistent with their Islamic faith. Their home financing
solutions are endorsed by leading Islamic finance scholars such as Dr Mufti Imran Usmani who
has studied under and works under the administration of Justice (ret) Mufti Taqi Usmani. There
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9. are strict about ensuring the Shariah integrity of their products through Shariah audits and on-
going testing.
2.3 Islamic Products Offered by the Banks in Australia
Islamic financing is subject to religious principles under Shari'a law, which forbids interest
and gambling but allows for asset-backed financing arrangements. The most typically used
Islamic financing contract is either a murabaha, where a borrower purchases a commodity on a
deferred payment basis, or an ijara, which is effectively an instalment-based leasing
arrangement. Islamic finance contracts are based on acquiring interests in underlying assets or
revenues with a strong ethical and lower-risk focus.
The Islamic financing space is mature, competitive and yields numerous opportunities.
According to the Top 500 Islamic Financing Institutions report published by The Bankerin
November 2015, estimated global Shari'a compliant assets were worth $1,273 billion in 2015.
There is no bank that specifically identifies as purely Islamic in Australia, but there are a
number of institutions that are moving into the realm of Islamic finance in Australia.
The Australian taxation system presently does not accommodate non-interest bearing loans.
Islamic investors can therefore expect to accrue multiple capital gains tax, land tax and stamp
duty obligations as titles in assets often change hands - in some cases, multiple times.
Subject to the relevant bill being passed, this will change on 1 July 2018. The new laws will
apply to transactions supported by assets, including deferred payment arrangements and hire
purchase arrangements. As part of the Ten Year Enterprise Tax Plan, the Turnbull government
has committed to taxing asset-backed financing arrangements as if they were "traditional" loan
agreements.
These changes have the potential to significantly boost the Islamic funding sector and
revitalize capital markets in Australia. Financiers and borrowers alike should prepare for these
tax incentives which should create rising demand for Islamic funding, whilst increasing the
profitability of any current contracts on foot.
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10. This budget announcement are having broad implications for stimulating growth in long-
term projects in the infrastructure, agriculture and mining sectors, as well as for providing an
alternative funding source in the Australian property and development space.
Murabaha: This is where an asset is sold for a deferred payment or series of payments
which include a profit element. This type of transaction may be used, for example, in place of a
mortgage loan to enable a residential house purchase.
Tawarruq: This is also known as a commodity Murabaha where a party buys an asset
(typically a tradeable commodity such as platinum) on deferred payment terms, then
immediately sells that asset in order to obtain use of the cash.
Ijara muntahia bittamleek: This is essentially a finance lease arrangement where the lessor
makes a promise to transfer ownership of the asset at the end of the lease. There are differences
from the typical Western finance lease, in particular that the rental for the whole term must be
determined at the outset, and liabilities associated with ownership of the asset must be borne by
the lessor.
2.4 Issues of Islamic Finance in Australia
The embargo on receiving and paying riba under the Shari’ah resulted in some
remarkable challenges and impediments. The Australian banking system is primarily based, as in
most countries, on a Western banking tradition, which is founded on the receipt and payment of
interest and this applies to the regulatory system as well.
There are also quite a lot more subtle impediments to many of the more common
products and instruments used by the Shari’ah compliant financial services providers. More may
become perceptible as the Islamic finance industry grows in Australia. A brief discussion on
these issues and challenges follows.
Since Islamic finance is still in state of infancy in Australia, it has been facing a number
of problems and challenges, which can be identified as operational problems. The present section
of the report demonstrates some of the issues and challenges that come with introducing Islamic
finance into Australian financial market in the following sections.
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11. Firstly, the problem of operating as a bank. A major regulatory problem faced by Islamic
Financial Services Providers (IFSPs) in Australia is getting approval from the Australian
Prudential Regulation Authority (APRA) to operate as a fully-fledged bank normally would in
taking deposits. Like many countries, Australian law generally does not permit taking deposits
without having a license from the appropriate authority. In order to carry on banking business, a
financial institution has to obtain a license from the APRA under the Section 66 of the Banking
Act 1959[1]. These licences are not easy to get and have to have detailed examinations by the
regulator of the proposed financial institution, with the typical application period taking up to 18
months.
Besides that, regulatory change also one of the problems faced by the australian. The
absence of a regulatory and legal framework to support an Islamic banking system is a major
drawback in the proper implementation of Islamic financial practices in Australia. The main
problems in this regard seems to be a result of two separate pieces of legislation. For housing
loans, there is the double stamp duty problem. In Victoria, at least, this problem has been dealt
with, though it has not been dealt with yet in other jurisdictions. Although Shari’ah compliant
home financing already exists, various legal hurdles make it relatively expensive. Therefore,
regulatory changes would make it easier for Muslims in Australia to get financial products that
do not conflict with their beliefs. This would in turn help to make home-ownership more
accessible and affordable for Australia’s most significant religious minority.
Next problem is the incompatibility of the Basel accords. The apparent incompatibility of
the current Basel’s I and II accords with Islamic finance are also issues in Australian regulation.
The Australian prudential regulations that are essentially administered by the APRA follow the
current Basel I standards, and are in the process of changing over to the Basel II standards. Since
neither of these makes provision for Shari’ah compliance internationally, this has not yet been
addressed in Australia. Also, there have been no applications to the regulator to confront the
issue as of yet (APRA, 2006).
Other than that, the next obstacle of Islamic finance is the burden of additional stamp
duty on Islamic home financing. In the simplest of many possible examples of a typical Islamic
financial arrangement, the financier would buy the property and resell it to the customer at a
profit on a deferred payment basis over a fixed period. This requires legal title in the property to
be transferred twice: once to the financier, and subsequently to the customer, which means there
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12. is double stamp duty to pay. In all States of Australia, except for Victoria, the problem of double
stamp duty payment on Islamic housing finance exists. Indeed, it is a conflict in Islamic housing
finance, because in Islam, the payment or receipt of interest is strictly forbidden. Islamic housing
finance relies on the involvement of a financier who buys the property, and then sells it on to the
buyer and collects instalment payments (similar to traditional mortgage payments) for the
repayment of the capital. Instead of charging interest, the financier often sells the property for the
same price but then charges additional profit/rent on it for a specified period of time. Stamp duty
is, therefore, charged twice – as the ownership of the property transfers twice – first to the
financier, and then to the ultimate buyer. This has necessarily been reflected in the price of the
Islamic housing finance. Re-financing also presents a problem because the old lender has to sell
the property to the new lender and thus incur another charge of stamp duty.
Next issues is the absence of Islamic insurance. Insurance is another area where a void
currently exists in Australia. While there have been several attempts to establish Islamic
insurance funds, notably during the 1990s, these do not seem to have succeed because of the
regulatory constraints they had faced.
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13. 2.5 Society’s Feedback towards Islamic Finance in Australia
Experimental research on attitudes towards Islamic finance and banking has been limited
globally. In Australia, only two known studies have been executed to date (Farrar2011) and only
one on individual customers’ attitudes, by Rammal and Zurbruegg. Their exploration was done
in Adelaide in June 2004 and showed genuine interest amongst practising Muslims in the idea of
Islamic banking products – but a lack of familiarity with Islamic brands and understanding of
Islamic principles of financing Sain et al. /3rd Malaysian Postgraduate Conference (MPC2013)
pp. 139-157149 (Rammal & Zurbruegg 2007). The other study by Jalaluddin in 1999 surveyed
the attitudes towards profit and loss finance methods of 385 small businesses and 80 financial
Institutions in Sydney. He noted that 60 per cent of his small business respondents (the majority
of whom were non-Muslim) expressed an interest in profit and loss (ie, muđarabah) financial
arrangements and more than 40 per cent of the financial institutions were prepared to lend on that
basis (Jalaluddin 1999) . The latter study suggests policy makers should look beyond the actual
numbers of the Muslim population when determining the potential market; Islamic finance is not
just for Muslims. Evidence from Malaysia indicates a substantial take-up from non-Muslims
attracted by the fair terms and quality of Islamic finance products (Venardos 2006). As such, it is
imperative that addition steps to introduce Islamic finance in Australia to be taken so as to
increase awareness and disseminate the correct information to the public.
There are some review of users that using Islamic Finance and Investment (MCCA) in
Australia. From Ramzi Elyased, he said that “I chose to invest funds in the MCCA Income Fund.
I found all staff friendly and extremely accommodating to the extent where they even came to
me to have documentation signed. I would recommend everyone to invest in this fund without
hesitation. I think what it offers is the opportunity for someone with funds for short term or long
term investments because it will allow someone to obtain a halal return on funds which they may
not be able to obtain from conventional means. It’s not just about getting returns but it’s also the
flow on benefits beyond the halal returns and that includes hopefully gaining Allah’s pleasure
which hopefully leads to benefitting ones worldly and hereafter affairs.”
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14. 3.0 Conclusion
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15. 4.0 References
1) URL https://en.wikipedia.org/wiki/Banking_in_Australia Website Title Wikipedia Article
Title Banking in Australia Date Published October 23, 2017
2) https://www.auscif.com/
3) http://www.mcca.com.au/
4) http://amanah.com.au/
5) Legal and regulatory issues of Islamic finance in Australia. (n.d.).
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