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Australia could have its first Islamic bank within five years and become a major Islamic banking hub if regulatory hurdles can be addressed, say government and business leaders.
Assistant Treasurer Nick Sherry said on Monday the federal government was committed to making the regulatory framework governing banks flexible enough to accommodate Islamic banking products and services while still protecting consumers.
Senator Sherry said there were concerns that state stamp duty on property sales and other taxation may be hindering the development of Islamic finance in Australia and these issues needed to be addressed.
'Islamic banking has its own set of regulatory issues relating to capital adequacy and accounting requirements,' Senator Sherry told business leaders at an Islamic banking and finance conference in Melbourne.
Former Liberal Party leader and Global DC Pty Ltd chairman John Hewson said Australia was likely to have at least one Islamic bank within five years, if regulatory hurdles could be overcome.
'I believe strongly that not only will we see one or more Islamic banks in Australia but I think we could emerge as the dominant Islamic financial centre in the Asia Pacific region, ' Dr Hewson said.
He said the time was right to attract a foreign Islamic bank to Australia or to turn local Islamic banking co-operative, the Muslim Community Co-operative (Australia) Ltd (MCCA) into a bank.
Australia's need to fund major infrastructure projects over the next 20 years could see the wealth of the Middle East and Asia channelled into infrastructure funds if they were run in a Shariah-compliant manner, Dr Hewson said.
Islamic finance differs from conventional finance by complying with Shariah Islamic law and prohibiting all forms of interest charges.
Islamic banks are also governed by a supervisory board of Muslim clerics to ensure compliance with Shariah law as well as banking regulations in the countries in which they operate.
The London-based head of Islamic finance with global consultancy PricewaterhouseCoopers, Mohammed Amin, said Islamic finance was a subset of conventional finance.
'Anything you do in Islamic finance you can also do with conventional contracts, but not the other way round because large numbers of conventional contracts are simply prohibited in Islamic finance. Credit default swaps for example.'
Some Islamic contracts have fundmentally different risk profiles from those in conventional banking where the financier is sharing the risk, he said, citing Mudaraba contracts in which capital investors in businesses bear all losses and only get a return if the business was profitable.
Mr Amin said Islamic finance did not recognise the concept of caveat emptor ('let the buyer beware') in which risks can be transferred to unsuspecting buyers of products and services.
'An Islamic banker, as a matter of religious principle, must not lend money to the customer if that is against the customer's best interest.'
'That more than anything else, (that) by itself would have prevented the entire sub-prime financial crisis because Islamic banks simply wouldn't lend money to people who shouldn't be borrowing it.'
