Australia: Promising regulatory landscape for Islamic funds

Key highlights

• Relatively young Muslim population presents significant opportunity
• Conventional regulations pose challenges for Islamic funds
• Islamic funds have a combined AuM of US$306.86 million

Overview

While Muslims constitute only 3.2% of Australia’s population, the Islamic asset and investment sector has undergone notable evolution, marked by growing demand and broader acceptance within the overall financial ecosystem.

Despite this rising demand, there is currently no fully Islamic bank operational in the country. Instead, banks and financial institutions offer Islamic financial products within a limited and specialized scope, catering to both local and international investments.

The support of institutional funders, major banks, capital funding organizations and superannuation funds has contributed to the creation of various Islamic financial and investment products. Also, Australia has been a destination of choice for many Islamic investors – particularly in property investments.

In the absence of legislative reforms on Islamic finance, Australians uses the structured tax ruling system to provide tax treatments on the Islamic investments. However, this may be expensive and inefficient for time-sensitive transactions.

Regulatory issues

The Australian Prudential Regulation Authority (APRA) oversees the banking and finance sector, ensuring that institutions meet standard obligations. In the absence of specific APRA guidelines for Shariah compliance, Islamic financial institutions must adhere to APRA’s prudential standards for financial stability, capital adequacy and risk management.

These standards, however, are tailored for conventional finance and may not fully align with the distinct requirements of Shariah compliant practices. The Muslim Community Cooperative Australia (MCCA), Hejaz Financial Services and Crescent Wealth employ Shariah advisory boards to ensure their products comply well with Islamic principles.

In 2022, Islamic Bank Australia (IBA) received a restricted authorized deposit-taking institution license from APRA, with two years to demonstrate compliance with the banking framework. However, due to challenges in raising sufficient capital, IBA requested to surrendered its license in March 2024. It has since rebranded as Islamic Money and no longer operates as a bank.

Capital markets

Islamic financial products are typically traded on the Australian Securities Exchange (ASX), which offers Shariah compliant securities indices such as the S&P/ASX 200 Shariah Index and the S&P/ASX 300 Shariah Index. Shariah compliant funds must be registered with Australian Securities and Investments Commission.

As existing frameworks in Australia not fully accommodating towards the unique characteristics of Shariah-compliant investments, the launch of Crescent Wealth’s superannuation fund in 2012 underscored significant challenges in penetrating this market. This fund faced difficulties meeting APRA criteria due to higher fees and subpar investment returns compared to similar products, limiting its competitiveness and appeal.

As of 30^th September 2024, the IFN Investor Funds Database tracked eight Islamic funds totaling to US$306.86 million. The primary asset class for these Islamic funds are mixed assets, equities and real estate – reflecting the preferences of Australia’s younger Muslim demographic.

Hejaz and MCCA observed higher demands for balanced portfolios and real estate investments, which provided stable returns at a lower risk, noting a sizeable performance at 20.2% over the year.

The equities portfolio, represented by funds like the Hejaz Global Ethical Fund, slightly underperformed – due to the impact of Shariah compliant income and international securities across Australia, US and Europe – highlighting the challenges of maintaining competitive returns in a compliant framework.

Table 1: Top performing Islamic funds in Australia

Source: IFN Investor Funds Database

Outlook

Australia presents significant opportunities for the growth of its Islamic investments sector, driven by increasing demand for Shariah compliant products. With a well-regulated and robust financial system, the country is well-positioned to attract foreign direct investment and encourage financial institutions specializing in Islamic finance to establish operations locally.

To further enhance this sector, Australia is actively working to strengthen economic ties with Muslim-majority regions, including the GCC and Southeast Asia, to foster trade and investment. By drawing inspiration from successful initiatives in other nations, Australia aims to develop a comprehensive regulatory framework and funding mechanisms to boost awareness and support the expansion of Islamic investments.

In recent years, Australia has experienced notable changes in ethical financing. For one, the rise in digitalization is expanding the reach of the nation by investing in digital platforms and fintech solutions. This allows investors to manage and track investments, seek financial advice and allows access to Shariah compliant lending solutions.

Table 2: Islamic funds operational in Australia as at 30^th September 2024

Source: IFN Investor Funds Database