TIM DILLON shares his views on Australia and in particular Victoria’s capacity to embrace Islamic finance opportunities.
Furthermore, Australia’s economic strength and our commitment to growing the financial services sector has created opportunities for overseas institutions to be part of our growing and developing finance sector. Nowhere has this been more evident than in Victoria. The state’s role in developing Islamic finance has led to Victoria being widely recognized as Australia’s Islamic finance center.
This recognition is supported by a number of critical factors. Despite recent global uncertainty, the state has successfully maintained an ‘AAA’-rated, stable and growing economy and a strong financial services sector. Victoria’s average annual compound growth rate since 1998 has been 3.2%, which is considerably higher than other comparable states including New South Wales and South Australia.
It is a reliable and globally connected place to do business, with a state economy that is larger than Singapore’s, Ireland’s and Malaysia’s. And Victoria’s budget has been consistently in the black for 10 years. This strong Victorian performance is backed by an Australian average annual GDP growth rate of 3.3% since 1998.
Compared with the OECD average of just under 2%, this figure demonstrates the strength of the Australian economy and the opportunity it presents. Australia came through the 1997 Asian financial crisis, the 2001 dot-com bubble, and the global financial crisis without experiencing a single period of recession.
During the height of the financial crisis in 2009, Australia had the highest level of economic growth out of any developed nation, at around 1.3%. The country was also ranked by the IMD World Competitiveness Index as having the least amount of risk within its financial system in the world, and having the second most resilient economy to economic cycles.
These factors help paint the picture of a stable, resilient and growing economy. Australia’s healthy banking and finance sector has been instrumental in establishing this resilience.
Pension system
A key part of this buoyancy is the local policy settings within the banking and compulsory private pensions industries.
Australia’s pension sector has grown to have the world’s fourth largest pool of managed investment funds, with just over US$1.5 trillion dollars under management as of the first quarter of 2011.
This compares favorably with the local markets of Hong Kong, which has around US$999 billion, and Singapore at US$1,060 billion, and also with the UK, which had US$892 billion in funds under management as of the first quarter.
Banking
Australia also boasts one of the world’s most secure banking systems, with the nation’s largest four banks holding ‘AA’ ratings from Standard & Poor’s. Two of these, the National Australia Bank and ANZ Bank, are headquartered in Melbourne.
Our banks are also globally competitive with extensive networks throughout the Asia Pacific region. The Melbourne-based ANZ, for example, now has representation in 28 countries within the region.
According to the IMD World Competitiveness Index, Australia has the fifth most transparent financial institutions in the world, further confirming the nation’s world-renowned reputation for having a transparent and well-regulated financial services environment.
Education
A cornerstone of the Australian sector’s success is its world-class education, which caters to all facets of the financial services industry. Another key finding from the IMD World Competitiveness Index was the nation’s ranking as having the fourth highest level of finance skills in the world, and the seventh best education system to meet the needs of a competitive economy.
Further to this, Australia has a unique educational expertise in Islamic finance through Melbourne-based La Trobe University and its Masters program in Islamic finance, headed by associate professor Ishaq Bhatti. Also located in Melbourne is the National Center for Islamic Studies, which is focused on developing a coordinated national and regional response to needs in research, teaching and community.
The education system features a vibrant international student community. In fact Australia has the most inbound foreign tertiary students (per 1,000 inhabitants) of any other country in the world. These students are creating long-term links to both Australia and the Asian region.
Islamic finance in Australia
Of course Australia, and Victoria in particular, has moved towards creating a long-term Islamic finance sector: with firms such as Melbourne-based Kuwait Finance House and MCCA, as well as Sydney-based Crescent Investments. Other conventional institutions have also moved into the Islamic finance space, with one example being Melbourne-based Intrinsic Investment Management.
The organization won the 2010 Victorian Innovation in Funds Management Award for its Shariah compliant Crescent Ethical Account, recognizing the importance of Islamic finance as a method of driving product diversification. Driving this move towards Islamic finance are a number of factors including the opportunity for Australia to diversify its capital-raising sources to reduce its dependence on traditional sources, and the growing trend towards ethical investment products.
Another driver is the potential opportunity to work with Islamic finance institutions in financing infrastructure opportunities through Shariah compliant products. Growing economic connections between Australia and the Asian region, particularly with Southeast Asia, mean it is becoming easier and easier to do business here.
Regulatory approach
Another desirable factor is an open and transparent regulatory environment with established pathways for reform. Victoria’s early role as a state that accommodates Islamic finance has stood it in good stead.
Victoria was the first Australian jurisdiction to reform its property stamp duty laws to allow Islamic finance for residential properties. This reform has allowed Melbourne-based MCCA to provide approximately AUS425 million (US$437 million) of Shariah compliant funding since 2001 through its role as a mortgage manager and originator for third party external financiers. It is MCCA’s vision to become Australia’s first Islamic retail bank.
At the national level, Australia’s regulatory impediments have been recently reviewed by the Australian Board of Taxation, which considered the taxation treatment of Islamic finance products.
This review was aimed at identifying the federal regulatory reforms to assist with the sector’s growth, and its findings are currently being considered by the Australian federal government. This means that Victoria recognizes the principal of profit sharing and allows Islamic agreements to avoid terms that are not Shariah compliant.
Victorian finance sector
Our objective here is for Victoria’s financial services sector to remain globally connected, highly capable and robustly competitive. In particular the Victorian government has acted to build Melbourne’s reputation as a center of excellence in financial services innovation.
To this end Melbourne can boast that it is home to:
• The state government of Victoria’s AU$35 billion (US$36 billion) fund, the Victorian Funds Management Corporation;
• Major commercial investment managers such as Franklin Templeton, Vanguard Investments and Mercer Investment Management;
• The Australian headquarters of key service providers such as Northern Trust; and
• The global headquarters of three of Australia’s top five banks.
Meanwhile, Melbourne’s financial services sector has experienced tremendous growth, adding an estimated 37,000 new employees within the sector since November 2008.
With entry by new players to the Australian investment management market often focusing on the wholesale/institutional segments of the market, Victoria is seen as a perfect platform for growth by being the major center for these segments. This is highlighted by the fact that out of the 15 Australian pension funds listed in the P&I/TW Global Top 300 Pension Funds report, eight are located in Victoria.
Victorian government assistance
Local institutes wanting to know more about opportunities in Victoria will find a great deal of support and information at their local Victorian Government Business Office (VGBO). Located in Kuala Lumpur, Malaysia, the VGBO can assist in facilitating interactions and is able to provide advice on any incoming trade missions featuring relevant participants. VGBO staff are also able to help in insuring outgoing trade missions into Victoria are successful. Further VGBOs are located globally.
Tim Dillon is the trade commissioner for Southeast Asia for the state government of Victoria. He can be contacted at
[email protected]
.