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Sharia law holds that engaging in interest payments goes against Islam and, as such, Muslim Australians can have difficulty accessing financing from the major banks, Hadi Shehata, mortgage and securities manager at MCCA Islamic Finance and Investments, told The Adviser.
He said that demand for Sharia-compliant financing is growing. However, the Australian taxation system, which considers Islamic lending as trade and, as such, taxes some transactions at a higher rate, is preventing growth in the sector.
He explained: “When we speak with overseas institutions and things like that, [what they say] is that if the regulations [in Australia] were a bit more lenient, then there are opportunities where we can introduce more products in Australia with the support of large financial institutions from overseas and that can lead to greater—not just more choices in the Australian community—but also more employment in the community here, too.”
HSBC and Lloyds Bank in the UK are two examples of companies that have successfully entered the riba-free market. However, institutions like those are turned off by the Australian regulations which “stagnate growth”, Mr Shehata said.
Calling for a “level playing field” in Australia, he added: “Some of the financial institutions [like HSBC and Lloyds Bank] say, 'Okay. Then if I'm going to get charged extra tax here in Australia, obviously. Then why would they do it here? They would rather invest in the UK.”
For brokers looking to enter into the riba-free sector, the costs associated are also prohibitive, Mr Shehata said. There is a requirement that lenders are compliant with both Australian regulation and Sharia law, which impede lender growth and, therefore, the costs for a broker to set up a new business may not hold up under a cost-benefit analysis.
He said further: “You might say that we have a monopoly in the market, so if someone's going to come in they're going to have to invest a lot of money . . . in producing these products . . . and you're already going to be competing against an established institution [MCCA], so you have to do your own cost-benefit analysis.”
Riba-free financing functions as an exchange of equity. MCCA, and organisations like it will purchase the property on behalf of the client, in the client’s name, and the client then makes repayments in the form of rent until the loan is paid off. The house is then granted to the client as a gift. At MCCA, loans are funded either by investors investing in their property fund or through an agreement with non-bank lender Firstmac.