Sherry reckons Australian banks might benefit from Islamic finance

According to a report in The Australian, 'The development of Islamic finance in Australia could provide banks with an alternative source of wholesale funding and draw Islamic banks to set up operations in the country, Assistant Treasurer Nick Sherry said today.

As part of a push to promote Sydney as a regional financial hub, the federal government has pledged to win a greater slice of the regional Islamic finance market by amending tax laws.

The government said such changes would draw fully-fledged Islamic banks to Australia, attract investment in Australian assets from Shariah investors, offer new funding routes through Sukuk bonds and allow the establishment of Shariah-compliant investment products.

"Islamic finance could provide an alternative source of wholesale funds for Australia's financial institutions -- particularly as a result of excess liquidity generated from oil revenues in the Middle East -- and the increase in economic growth in countries with significant Muslim populations, such as Indonesia, India and Pakistan," said Mr Sherry

He noted that the value of Islamic finance assets worldwide was projected to almost double to $US1.6 trillion ($1.96 trillion) by 2012, which shows the "enormous extent of the opportunities available for both business and government".

The government last month commissioned a Board of Taxation review to ensure that, where possible, Islamic financial products have tax parity with conventional products. The review is due to report back by June 2011.

Australia, which neighbours the world's biggest Muslim nation, Indonesia, was hoping to capitalize on its geographic advantage, mr Sherry said.

"We also have global leading skills in real estate and infrastructure financing -- two areas with great potential in relation to wholesale Islamic finance activity as they both involve very real underlying assets, something we all know is needed in Shariah-compliant projects," Mr Sherry said.

Australia's major financial institutions already are moving into the Islamic finance space.

That Austrade thing

In the interests of completeness for this particular blog, we should make some mention of the Austrade funded Islamic Finance in Australia report. The report is altogether rather neat (you can judge for yourself and download a copy from here) and covers a fair amount of ground over its 40 pages. This was the report that launched by Senator Simon Crean in Melbourne back in February.

The interesting part of the report is the eight pages in the middle in a section called ‘Opportunities in Australia’. As the report says, ‘Islamic finance is still a nascent industry in Australia but has great potential for development given Australia’s abundant resources and its strategic location in, and strong trade links with, the fastest growing region in the world. It has the potential to facilitate further innovation and competition in the wholesale and retail banking sectors and to support the Australian Government’s commitment towards credit market diversification’.

The real cherry in the pie, of course, is in the wholesale Islamic investment banking business – and the retail market is not likely to see much growth because it may never have sufficient scale in Australia – and this is reflected in the content of the report. The report was written in large part by John Masters formerly of PricewaterhouseCoopers.