In the global Islamic economy, Australia is best known as a halal food exporter. Last year, it sold $1.45 billion worth of meats to countries of the Organisation of Islamic Cooperation, on top of $1.72 billion in cereals, live animals, and dairy.
At home, Australia’s domestic Islamic economy will soon get a boost with the launch of the country’s first full-fledged retail Islamic bank.
IBA, which will stand for Islamic Bank Australia, hopes to receive its banking licence from the Australian Prudential Regulation Authority (APRA) in early 2021, according to chief executive officer Dean Gillespie.
“COVID was an unexpected delay but we are working towards obtaining the licence and our launch,” Gillespie told Salaam Gateway. “As well as that we are planning to on-board customers. We have a strong waiting list.”
Once licensed, IBA’s banking app will be available on both Android and Apple’s iOS. Users will be able to register with a driving licence, passport or other forms of identification.
The lender also plans to open a physical branch in Sydney, New South Wales, where it is headquartered.
“We will offer retail term deposits as well as home financing via murabahah and diminishing musharakah,” said Gillespie, who is the former head of loan sales at Commonwealth Bank and head of mortgages at Bankwest. “Longer term, we plan to offer SME financing.”
A long-term aim is to offer managed funds, small business financing and advisory services. Gillespie also said IBA is looking at zakat and waqf in the longer term as these areas are big opportunities.
ISLAMIC FINANCE IN AUSTRALIA
IBA’s beginnings date back to 2012 when it was established by a group of Muslim Australians. However, the project really got going in 2017 and 2018, according to Gillespie.
A group of Australian Muslim investors provided 50% of the capital while the other half is from an undisclosed investor based in the UAE. IBA’s seed capital was AUS$20 million ($14.6 million).
Well-known Australian scholar Dr. Rashid Rasheed, who holds a PhD from the Macquarie University Law School, serves as the chair of the bank’s Shariah board.
In addition, Sultan Choudhury, former CEO of UK’s Al Rayan Bank, is a director.
Thankfully for IBA, it will not start from Islamic finance zero assets or awareness.
Islamic financial assets are estimated to be at least $2 billion in Australia. There are two major financial institutions: Crescent Wealth provides superannuation and Islamic investment services, and MCCA offers Shariah-compliant home mortgages.
“Australia can be conducive to Islamic finance, with the abundance of real assets, economic stability, robust legal framework, particularly with investments in the private equity space,” said Maya Marissa Malek, CEO of Dubai-based Amanie Advisors, who is familiar with the Australian Islamic finance sector.
Conventional institutions, including National Australia Bank, also offer Islamic financial services. Non-bank financial institutions like Hejaz Financial Services, Amanah, and Islamic Co-Operative Finance Australia also offer Shariah-compliant services.
IBA TARGET CUSTOMERS
IBA’s core customers will be Australia’s growing Muslim population, according to Gillespie.
Muslims made up 2.6% of the population of 26 million, according to the last census in 2016. This was up from 2.2% in the 2011 census.
“This is likely to increase to 3% in the next census in 2021. Adding to this, around 40% of the Muslim population are born in Australia; around 60% are immigrants,” said Gillespie.
“As well as Muslims, we are looking to target ethical customers who are discontent with existing lenders,” he added.
IBA has already started branding itself as “Australia’s ethical bank for Muslim Australians”. It will have environmental, social and governance (ESG) initiatives, according to the CEO.
“We will carve off portions of profits for ESG causes like planting trees,” he said.
In terms of demographics, digital customers are usually aged between 20-50 years. As a result, IBA is primarily looking to target people in their 20s and 30s looking to build deposits.
Industry and customer reaction to IBA has been positive overall.
Melbourne-based Halima Tatiana Craven, an F&B specialist for a global company that supplies equipment to the hospitality sector, said she was intrigued about IBA.
“I’m surprised it has taken this long for an Islamic bank to be formed in Australia,” she said. “I will look at it when it is available. The Muslim population is not well served.”
Almir Colan, Director of the Australian Centre for Islamic Finance (AUSCIF) said that IBA’s establishment is good news as the competition benefits development of the Islamic finance industry as well as the community as a whole.
“There is potential as long as there is a trust and understanding by customers of how things are done and communicated,” he said.
Whilst the general population’s perception of an Islamic lender will play a role, the actual offerings of the bank will prove more important.
“I’m not sure what kind of perception, from a political and racial perspective, the Islamic bank will have,” said Craven. “Overall, the general population doesn't care whether it’s Islamic or conventional as long as it's competitive in terms of price and service.”
She added that it would be good if they offer beyond the basics of deposits and home financing.
“Something available in sukuk or ethical investing would be attractive,” she said. “In addition with the growing importance of ESG, transparency will appeal to everyone.”
IBA will enter a relatively young Islamic finance market that still faces key challenges.
Maya Marissa Malek said that some widely-used Shariah contracts and structures face implementation challenges in order to suit the legal framework.
“As a result, additional mechanisms and changes need to be put in place in order to achieve the same economics without compromising on Shariah compliance and at the same time be legally valid and enforceable under Australian laws,” said the Islamic finance expert. “Hence, this development process consumes more time.”
In addition to implementation, Australia’s tax system makes Islamic products and services more expensive.
“Some of the challenges for Islamic finance in Australia are related to the tax treatment in certain Shariah contracts and transactions which may make Islamic products more expensive and less competitive,” said Malek.
She said it is important to ensure the legal framework makes Islamic finance competitive and can operate at a level playing field with conventional finance.
“In order to change, it can take time because it has to go through lengthy processes at the government level.”
Top-line, the situation is not unique to Australia and is similar to the experiences faced by new or young Islamic banking sectors, which makes having Sultan Choudhury as a director invaluable for IBA considering his experience with the UK’s first retail Islamic bank since its inception in 2004.
But Australia is its own unique market and as a first-mover, IBA must manage expectations of its own milestones and parameters of success.
“Most conventional banks finance around 50% from deposits,” said Almir Colan. “The rest comes from other areas like money markets. So if IBA can reach 25% of their home financing needs through deposits within five years, I would consider that a huge success.”
Colan does not think fintech alone can deliver a better way if it is not fundamentally a different way of banking.
“It is easier to switch to digital when customers feel there is a relationship of trust with the institution,” he said.
Adding to this, he said a bank entity taking deposits and offering home financing is a completely different business model to offering investment services.
“I would advise anyone starting with one business model to first focus and master one area before moving to another.”
Malek stresses that even with IBA, the Australian Islamic finance industry will need more time to develop.
“I don’t see Malaysian or Gulf Islamic banks setting up in Australia as yet, at least in the short term,” she said. “I think there will be a gradual introduction of product offerings. The growth of the industry in Australia will depend on supply and demand and also how competitive it is vis-à-vis the traditional financial products.”
IBA LONG-TERM PLANS
Gillespie said the initial plan is to launch, scale and break even within three years.
He maintained that because of IBA’s structure it has a competitive edge over conventional banks and other institutions offering Islamic financial products.
“We have a low-cost approach and are primarily cloud-focused, therefore we can keep our costs low and get to profit faster,” he said. “We will be able to offer competitive pricing in line with the rest of the market.”
IBA is currently raising more capital for growth, and there are conversations with investors in the UAE and Asia, according to the CEO.
Over the next 12-18 months it will employ 50 people, with further plans to expand its workforce.
In the longer term, IBA also has plans to expand beyond its borders, according to Gillespie.
“We will consider entering countries like New Zealand and Canada, once we are successful in Australia.”
(Reporting by Hassan Jivraj; Editing by Emmy Abdul Alim firstname.lastname@example.org)
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