At midnight on the 31st December 2019, the upcoming 2020 year seemed to be difficult but certainly not catastrophic for the Australian economy. The extensive bushfires in New South Wales and Victoria during December 2019–January 2020 seemed bad enough to slow the economy. However, the ABS economic estimates for 2020 still had unemployment to be less than 6% of the total available Australian workforce and projected GDP annual growth to be subdued but in the range of 1.6% to 2% annual growth over 2020.
The COVID-19 pandemic changed that scenario. While China and Europe were initially affected by the pandemic, Australia experienced its first known cases of COVID-19 in late February 2020–early March 2020. By late March 2020, Australia was in the first stage of lockdown and the effect on business and unemployment was severe. For both conventional banks and Islamic finance investment, COVID-19 created a myriad of adverse economic conditions that were difficult to manage during 2020 and most likely in 2021 as well.
Review of 2020
COVID-19 affected the Australian economy in a manner that has not been seen since the Great Depression of the 1930s. When the first lockdown of the economy was implemented in late March, the Australian government provided employment stimulus in the form of job retention and job engagement programs referred to as ‘Job-keeper’ and ‘Job-seeker’. These programs provided employment subsidies paid to eligible employers to keep workers on for those businesses affected by the COVID-19 lockdown. Initially, the programs were meant to finish on the 30th September 2020 but these programs in a reduced form have been extended to the 31st March 2021.
Australian Treasury estimates show an annual budget deficit of AU$184 billion (US$130.83 billion) to account for all the economic stimuli provided by the Australian government to businesses and individuals. This equates to nearly 10% of the country’s national income. Deloitte Access Economics estimates annual GDP to reduce to 0.8% for the year to June 2021 and then a further 1.1% decrease in GDP for the year to June 2022.
The unemployment rate is estimated by Deloitte to increase to 10% for the current calendar year (compare this with 5% unemployment for 2017/2018). Deloitte and other commentators are less sure of the longer-term unemployment rate as government stimulus measures scale back. Businesses have also been assisted by rental waivers and bank debt repayment deferrals. The major Australian banks have experienced a downturn in annual profits to the 30th September 2020. Similarly, superfunds have had negative returns over 2020.
For the Crescent Islamic superannuation funds, 2020 has seen negative annual fund returns. Crescent is Australia’s largest and oldest Islamic superannuation fund. As at the 30th June 2020, the Crescent Wealth Superannuation Fund had AU$259 million (US$184.15 million) in member funds. Its returns have ranged from -2% to -3.3% for the year to the 30th June 2020.
Hejaz has not disclosed on its website its superfund return for 2020. However, the expectation is that the COVID-19 economic effects will similarly affect downwards the Hejaz returns.
The downturn in returns of the Australian Islamic superannuation funds during 2020 is consistent with the negative earnings return record of the larger mainstream Australian superannuation funds.
The Islamic home finance market has been resilient during 2020 despite the COVID-19 effects on the Australian job market and the general economic slowdown. MCCA and Amanah Finance have largely kept its home finance writing volumes consistent over the last 12 months. The MCCA Income Fund (Shariah compliant home finance) stood at AU$64 million (US$45 million) as at the 30th June 2020, a modest increase over the last 12 months.
Both Amanah Finance and MCCA appeared to manage their arrears book over the year. However, the challenge will come in 2021 when the government personal income support programs stop with potential adverse effects on client home finance repayments.
Despite the economic gloom, 2020 also proved to be positive for the Islamic finance and investment sector. The IBA Group is well advanced in its application for an Australian digital banking license. It expects, if all goes well, to start trading under the bank license during 2020.
Another exciting development during the year was the launch of the Thera Capital Management agriculture finance fund. This fund is to assist Australian primary producers fund their working capital and operational requirements. Its investors had included local and overseas wholesale and sophisticated investors. On the healthcare front, the Healthbridge Investment Fund was issued as an Islamic ethical investment fund catering to the Australian healthcare sector.
These three new products and services assist in providing Islamic finance and investment a broader audience than the traditional home finance and superannuation sectors where much of Australian Islamic finance and investment currently resides.
Preview of 2021
Australia in 2021 will still feel the adverse economic effects of the COVID-19 pandemic. Government stimulus programs will wind down from the 31st March 2021. This may create further economic turmoil. Unemployment is expected to peak during 2021 before some respite in 2022. However, the expectation from the Reserve Bank of Australia is that by late 2021 there is likely to be some economic rebound and improvement in annual GDP growth. This expectation according to the Reserve Bank needs to be cautioned by the success of COVID-19 control domestically and internationally over 2021.
It is true that 2020 has been a year of economic darkness and 2021 will also be difficult in economic terms. Yet, 2020 sowed the seeds for new Islamic financial products and hopefully this will provide further inspiration for other new products to be introduced in 2021.
The views expressed by Dr Franzese are his own and not necessarily those of any fund or organization that he may be associated with.