For Australian Islamic finance and investment, 2022 was a watershed year notwithstanding the challenging economic environment. The annual inflation rate in Australia was trending to 7.3% over the year to September 2022 (ABS September 2022). This level of inflation was last seen in 1990. Primary causes of high inflation were higher prices for housing, petrol and food.
The Reserve Bank of Australia (RBA) has since April 2022 implemented a contractionary monetary policy. The current cash rate of 2.85% in November 2022 set by the RBA is well above the cash rate of 0.1% set at the start of the year. By August 2022, the previously booming housing market was showing signs of a slowdown with investment bank Goldman Sachs predicting in September 2022 that the Australian housing market will fall in value more than the housing market of other developed countries.
There is some uncertainty as to whether Australia will be in recession starting early 2023. Despite the economic uncertainty, the Australian Islamic finance and investment sector has never been stronger in terms of participants, financial performance and product offering.
Review of 2022
For much of 2022, Australian Islamic finance and investment entities offering housing finance had a stellar year. MCCA, Hejaz Financial Services and Amanah all had their best year for home finance in many years. Volumes were driven on the back of COVID-19 government stimulus directed at the housing sector. Low cost finance for the first half of 2022 encouraged demand for the Australian housing sector.
However, by November 2022, the tide has significantly changed. Increased finance costs have dampened demand for housing finance. Accordingly, the volumes of all Australian Islamic housing finance providers have decreased as 2022 is nearing its end.
There were some exciting developments in the Australian Islamic finance and investment sector in 2022. The Australian Financial Review in July 2022 reported that the Australian Prudential Regulation Authority granted the Islamic Bank of Australia (IBA) a restricted authorized deposit-taking license, which allows “IBA to start building and testing Shariah compliant retail banking products ahead of a full launch planned for next year”. While its banking license is restricted at this time, IBA will, with the support of its UAE backer in Abreco Group, seek to raise AU$20 million (US$13.34 million) over 2023 to enable it to obtain an unrestricted banking license.
Crescent Wealth and Hejaz Financial Services in 2022 continued to be the main providers of Shariah compliant superannuation in Australia. The future augurs well for Australian Shariah compliant superannuation. The Australian Muslim population stands in the order of 813,000 people according to the ABS Census 2021. More importantly, the Australian Muslim population has a younger demographic profile than the non Muslim Australian population. Accordingly, demand for superannuation will grow as these younger Australian Muslims enter the workforce.
In 2022, a new Islamic finance and investment product was released. Hejaz Financial Services in October 2022 launched its Shariah exchange-traded fund (ETF). Listed on the Australian Stock Exchange (ASX), this ETF represents the first time a Shariah compliant ‘index type fund’ is listed on the ASX. The listing of this fund on the ASX not only gives Hejaz Financial Services a presence in the mainstream Australian capital markets but also helps to give Shariah and Islamic finance/investment an enhanced profile and standing.
Older more established Shariah-based retail funds continued to be offered over 2022. The MCCA Income Fund, one of the first Shariah-registered managed investment funds, continued its steady growth. As at June 2022, funds under management were in the order of AU$84 million (US$56.04 million). Similarly, Healthbridge Investments (pharmacy/healthcare property-related investment fund manager) continued to offer its healthcare retail fund over 2022.
If there is one negative in 2022, it is that Islamic finance and investment still seems not of much interest to the Australian conventional banking sector. The expectation is that not much will change in this regard, at least in the short to medium term.
Preview of 2023
The Australian economy is bound to have many challenges in 2023. Higher interest rates, inflation and a weakening property market will continue. Despite these economic challenges, the outlook for Australian Islamic finance and investment looks good. Over the last 12 months, we have seen new finance and investment products, increased sector profitability and for the first time, the listing of Shariah ETFs on the ASX.
Hopefully, the first full Islamic digital banking license will be issued sometime in 2023. While the older more traditional Shariah finance products will continue their steady growth, the signs are for a more digital- and fintech-focused Islamic finance and investment sector in 2023.
Conclusion
2022 saw the ‘dawn’ of a new era in Australian Islamic finance and investment. No longer is Shariah finance and investment purely limited to home finance, superannuation and property investment. The sector has never been stronger in terms of profits and growth of assets under management. Despite tougher economic conditions expected in 2023, the demand for Islamic finance and investment is expected to continue strongly over the year. Listed funds, digital banking and fintech in general will be the new frontier in 2023 and beyond.
There is no doubt that Australian Islamic finance and investment is creating interest among the mainstream Australian financial services community, albeit not so much for the major banks. We hope that 2023 will be the year when the major Australian banks finally take Islamic finance and investment seriously. Time will tell.
The views expressed by the author are his own and not necessarily those of any fund or organization that he may be associated with.
Dr Pasquale Franzese is the head of regulatory compliance at MCCA. He can be contacted at [email protected].