Australia "natural" for Shariah finance: Malaysia

Australia's natural resources such as iron ore provide a wealth of assets for sukuk issuance but tax laws have to be amended for its Shariah finance market to flourish, Malaysia's central bank said on Thursday.

Trailing Muslim neighbors such as Malaysia and Indonesia, Australia has begun to look into developing Islamic finance to attract wealth and create jobs.

Australia's commodities such as gold, copper and nickel and its location near Asian economies are viewed as the country's strengths in its quest to claim a slice of the $1 trillion Islamic finance industry.

"Australia is a natural market for sukuk because it is full of iron ore and mines," Malaysian central bank deputy governor Mohd Razif Abdul Kadir said in an interview.

"Australia is blessed with wealth. For issuers, it diversifies the source of funds. For commercial investors, they don't care because credit risk is the same while the structure is different."

Malaysia has the world's largest Islamic bond market which has outstanding paper worth about $107 billion, and is regarded as a key Shariah banking hub, alongside Gulf economies such as Dubai and Bahrain.

Islamic finance does not give out loans in return for interest and financing, such as sukuk, typically involves the sale and purchase or lease of specific assets.

Globally, Shariah banks now rely mainly on assets such as real estate, aluminum and palm oil to underpin financing structures.

Australia is a natural market for sukuk because it is full of iron ore and mines

Malaysian central bank deputy governor Mohd Razif Abdul Kadir

Shariah finance limited so far

The Australian government has expressed interest in Islamic finance but so far, Shariah finance there is limited to entities such as the Muslim Community Cooperative (Australia) Ltd and Iskan Finance which offer home loans.

The biggest obstacle to the development of Australia's Islamic finance market is taxation laws which can make sukuk transactions more expensive than conventional issues, Razif said.

Islamic financing structures can be more expensive than conventional ones as they involve sale transactions which attract taxes at each level.

Only the Australian state of Victoria has amended its taxation laws in this respect, removing double stamp duty on property purchases since 2004, Razif said.

He said a Malaysian team comprising officials from the central bank, stock exchange operator, capital market regulator and investment banks would hold dialogues with the government in Melbourne and Sydney in early December.

"They are very interested," Razif said.

"We are bringing the private sector to Australia next month. We are paving the way for them to meet potential issuers. It is a request from Austrade (Australian Trade Commission)."

Australia's top investment bank Macquarie was earlier said to be considering an Islamic bond issue in Malaysia although the firm has not officially confirmed this.

Borrowing costs for corporate sukuk issuers in Malaysia are 4-5 basis points cheaper than conventional paper, Razif said.

We are bringing the private sector to Australia next month. We are paving the way for them to meet potential issuers. It is a request from Austrade (Australian Trade Commission)

Kadir