The pioneers of Islamic finance in Australia have predicted that strong demand for their services can help prevent further global economic meltdowns.
Sharia-compliant banking is a multibillion-dollar worldwide industry, and while commonplace in Indonesia and Malaysia, it remains on the fringes of Australia’s financial sector. Its proponents believe that an ethical system that eschews the payment of interest in adherence to Islamic principles can help conventional banks steer a more stable and less greedy course.
"There have been many studies done to prove that Islamic banking could have avoided the global financial crisis. The Islamic banks have fared much, much better in this recession. There is a lot that the conventional world is now studying to see how it could do things better or differently to potentially avoid another global crisis," explained Nail Aykan, from the Muslim Community Co-operative in Melbourne, which has helped hundreds of Muslim families in Australia buy a home.
"As the Muslim world is rediscovering its faith, people are coming to the realisation that they must make every possible effort to avoid interest and, hence, in the last decade there has been an incredible demand from the Muslim world for an alternative banking model," he said.
The Muslim Community Co-operative was founded in the early 1990s. It was initially funded by shareholders but now borrows from non-banking lenders and has lofty ambitions.
"Our aim is to be the first Islamic bank in Australia," Mr Aykan asserted. "We have been around for 18 years and we hope the next step in our evolution will be to become a fully fledged retail bank."
"It will be a great opportunity because the demand is so huge. There are 400,000 Muslims living in Australia, which equates to about 80,000 families. It is estimated that around 80 per cent of those families own a home either outright or have a loan, so the market to refinance those conventional mortgages to Sharia-compliant finance is huge. The numbers speak for themselves," he added.
The community’s growing enthusiasm for religiously sensitive banking has been recognised by Melbourne’s La Trobe University, which has set up Australia’s first master’s programme in Islamic finance.
The curriculum has been devised by the associate professor Ishaq Bhatti, who will school his students in the rigorous disciplines of both Islamic and conventional economics, accounting, financial management and analysis.
"Islamic banking is, in fact, ethical banking when people get sick of mortgages and interest rates and so they look for an alternative and Islamic banking can do that," Mr Bhatti explained.
The aim of the postgraduate course is to train a generation of thinkers capable of developing and exploiting a fusion of different banking cultures.
"I argue that marrying or integrating conventional finance with Islamic finance would be better for the future of the [world’s] banking system. It has the potential to absorb such a financial shock we are facing now," Mr Bhatti said.
The capacity of a new banking structure to avoid succumbing to bad debt or toxic loans could depend on the renegotiation of contracts, which gives the Islamic model crucial flexibility, especially when times are hard.
"In a crisis when households are unable to pay their mortgages and businesses are unable to pay their interest, there is a possibility in Islamic finance to renegotiate the terms and conditions of the loan. It takes care of borrowers’ circumstances especially in the financial crisis we are currently facing," said Nauman Ejaz from Pakistan, a PhD student at La Trobe University who specialises in experimental economics.
"Since Islamic economics and banking both are based on some moral codes, in the current financial crisis we have felt that one of the major problems with the [conventional] system is that it is not ethically grounded and it does not have any humanist approach," Mr Ejaz said.
"When a system fails, people start looking for alternatives and Islamic banking has been there for more than three decades. As an alternative system it has a chance to succeed. Obviously it is not at that level where it can make enormous contributions right away, but in the next decade or so Islamic banking practices could contribute to the banking system of the world," he added.
The big international banks are exploring the opportunities that the Sharia system offers and in early July Australia hosted its largest ever seminar on Islamic finance, with more than 200 delegates and speakers from a range of countries, including the UAE and Saudi Arabia.
The government in Canberra has also expressed an interest in the development of Islamic banking as its popularity continues to grow in Australia.
"The symposium was outstanding. It was a great success," said Mr Aykan, who was one of the organisers. "There were many industry players who can see the potential to attract large funds to Australia from the Gulf states and the Asia-Pacific area. They are promoting and actively supporting the possibility of an Islamic bank opening up in Australia."