Review of 2017
The regulatory environment
There has been no real change in the regulatory environment during 2017.
The May 2016 federal budget (which set out the government spending priorities and programs for the coming year) made mention of recommendations to equalise tax treatment to facilitate asset-backed financing. But nothing happened. The May 2017 budget made no mention of finance and on the basis of a catch-all provision to cut any program which had not been introduced (the ‘Zombie savings’), it seems apparent that there will be no changes to taxation laws.
The banking regulator, the Australian Prudential Regulatory Authority (APRA) issued a discussion paper in August 2017 on the introduction of restricted licences for authorised deposit-taking institutions. This is aimed at reducing the regulatory burden on new license applicants and reducing the capital requirement from AU$50 million (US$39.17 million) to AU$3 million (US$2.35 million). This could assist the launch of an Islamic bank.
Islamic financial services and investments
There has been moderate growth in the Islamic financial services sector.
In late 2016, Crescent Wealth partnered with KAF Investment Funds of Malaysia to launch the KAF Australia Islamic Property Fund. The fund gives non-institutional investors access to the Australian commercial property market by feeding into the Crescent Wealth Diversified Property Fund.
In mid-2017, Hejaz Financial Services launched the Global Ethical Fund which follows an ‘ultra-ethical code of governance’ for the purposes of selecting, retaining or realising investments.
Property and construction finance
We saw significant financing activity over the past 12 months involving both domestic and international lenders.
National Australia Bank continues to lead the ‘Big 4’ in attracting Islamic borrowers with their Wakalah-based Shariah compliant financing facility. During 2017, the facility was utilised in the construction of an aged care facility, in the corporate and construction financing of pharmacy businesses and in commercial property acquisition.
It is understood that at least one other ‘Big 4’ bank dipped its toe into the Shariah compliant financing space in the past year. Other domestic lenders are looking at the sector with interest.
The year saw a contraction in bank participation in residential real estate development financing in Australia as a result of regulatory pressure from the APRA. This has led to an increase in the participation of second-tier lenders, mezzanine financiers and non-traditional lenders in this space. It also provides an opportunity for international Islamic banks to take a greater role.
This year saw the closing of the Wentworth Point residential development construction financing led by Maybank in Malaysia and utilising a commodity Murabahah structure. The transaction involved the property arm of Malaysia’s Lembaga Tabung Haji, TH Properties, through its relationship with Piety Capital.
Islamic real estate investment
Indicative of greater Islamic investment interest in the Australian property market, the year saw the arrival of leading ethical real estate advisors 90 North Group.
“In the last six months, we’ve seen significant interest from the Middle East – Saudi Arabia and Dubai in particular – [in] considering capital on a Shariah basis. We are very hopeful of the Middle East market and we think the market will continue to grow dramatically in terms of providing Shariah capital to Australia,” commented Michael Dowling, a partner and the head of Australia for 90 North Group.
We are also aware of broader interest in the Australian real estate market from a number of other Middle East and Southeast Asian investors, and further Shariah compliant property transactions, particularly in the commercial property space, are expected.
Preview of 2018
We expect the year ahead to offer more of the same.
Given the current dynamics of the federal parliament, it is safe to assume that Islamic finance and the necessary legislative amendments to the taxation regime at both the state and federal levels will not be a priority.
Further growth in Shariah compliant investment funds and superannuation is also likely; these are traditionally areas where Australian investors are heavily focused.
The pullback by the leading lenders in property development and construction financing will offer further opportunities for offshore Islamic lenders and Shariah compliant products.
Australia remains a jurisdiction with potential for growth in Islamic finance. Without regulatory or government assistance, this growth will continue to come from customer demand.
Partner – Banking & Finance
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Madison Marcus Law Firm produced this article. It is intended to provide general information in summary form on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.