UAE's Islamic financial firms to bring changes in Canberra's financial services sector

UAE's Islamic financial firms, part of the delegation to Australia, have met with the Treasury officials in Canberra to discuss the current rules governing its financial services and incorporate Islamic financial products.

Jointly organised by EDC and the Australian Trade Commission (Austrade), the Trade Mission delegates are seeking to encourage changes in Australia's federal taxation which will allow Islamic financial products to be treated at par with conventional financial products. The Australian financial system, like most in other parts of the world, is based on the principle of payment and receipt of interest that disadvantages Shariah compliant financial products.

"One of the important aims of this mission is to initiate a dialogue between UAE's Islamic Financial firms and the Australian authorities so as to discuss changes that will allow Islamic Firms to be established in the country and to be treated on an equal footing with conventional financial firms,"

said Engineer Saed Al Awadi, Chief Executive Officer, EDC.

"Australia, with a Muslim population of about 400,000 people and growing at 20% per year, is an attractive market for UAE's Islamic Financial Firms. It is estimated that the annual household purchasing power of Australian Muslims is in excess of $3.3bn. Of course, Islamic Finance is not only limited to Muslims but is also popular to non-Muslims such as in the case of Dubai," he added.

With a federation of six states and two territories, Australia levies state and federal taxes hence, Islamic financial firms have to overcome both of them. This means that for Shariah compliant products such as Murabaha mortgages tend to pay stamp duty, the most important tax at the state level, twice ie at the time of purchase and then when the loan is paid off. This adds to the borrower's burden and makes Shariah financial products uncompetitive.

However, some states in Australia such as Victoria have approved the State Taxation Act (Amendment) Act 2004, through the State Legislative Assembly and Legislative Council, which abolished double stamp duty on Islamic home finance. Other states are also considering making similar changes to their state taxation in order to accommodate Shariah compliant home finance.

Another example of double taxation is the Islamic trading of commodities requires a physical holding of the asset, which is very different from conventional commodity trading whereby the asset need not exist. Similarly, Shariah compliant deposits pay a profit rather than interest and this should not disadvantage the investor.

Al Awadi explained that, "These challenges are being faced in most countries abroad. In 2005 and 2006, the UK government headed by the then Chancellor Gordon Brown introduced a legislation to incorporate Shariah compliant products into the UK financial services framework. Although, the UK does not mention Islamic finance it nevertheless used such contracts to base the changes in taxation. For example, the Finance Act 2005 under section 47 defines a purchase and resale contract which happens to correspond to a traditional murabaha contract. In a similar manner, a shariah compliant deposit is treated as a profit share return or in an Islamic context a Mudarabah contract.

"As a direct result of these changes, the UK now boasts two Islamic banks and a number of banks with Islamic windows. We hope to achieve similar modifications within the Australian financial system through our recent trade mission, eventually introducing Islamic financial products down under," he concluded.

Kym Hewett, Austrade Senior Trade Commissioner in Dubai, commented, "I am keen to see the positive experience the delegates on the initial mission translate into a great level of understanding on Islamic Financial products and deeper level of engagement between financial institutions in Australia and the UAE. Austrade's relationship with EDC continues to evolve since our Tradelink Partnership signing in 2008."