Islamic Finance – Challenges & Opportunities

Chaaban Omran – Chief Executive Officer

1

About Crescent Investments Australasia

Newly established specialist investment firm focused on Shariah Compliant Australian wealth

management products

― Wholesale

― Retail

― Superannuation

Crescent Investments is focused on product design and distribution of Shariah compliant

investments

― Shariah Compliant Australian Equities

― Shariah Compliant Direct Property

― Shariah Compliant International Equities

― Shariah Compliant International Direct Property

2

About Crescent Investments Australasia

Current focus for Crescent Investments Australasia –

Shariah Compliant Australian Equity Fund

― Appeal to International Investors for Australia as

an ideal investment destination

― Appeal to Industry Superannuation Funds

― Appeal to Research Houses

― Appeal to Financial Planners to get onto their

recommended fund platforms

― Introduction

― The story so far... Headlines and latest development

― The Australian Market and the Landscape

― What is “Shariah Compliance”?

― Challenges

― Education: What is Islamic Finance?

― Key Legislative Challenges - Taxation

― Opportunities

― Islamic Finance

― Wealth Management

― Creating Jobs

― Way forward & Conclusion

College of Law – 9th September 2010

AgendaIslamic Finance – Challenges and Opportunities

3

4

The Story so far...Headlines in the press

The Story so far...Headlines in the press

5

Australia is missing out on a huge market in Islamic

financing

― JOINT MEDIA RELEASE WITH SENATOR THE HON NICK SHERRY

ASSISTANT TREASURER (from the desk of) The Hon Chris Bowen

MP (Speech transcript) NO.037

― BOARD OF TAXATION TO REVIEW AUSTRALIA'S TAX LAWS

TO ENSURE ISLAMIC FINANCE MARKET CAN EXPAND

― “The Assistant Treasurer, Senator Nick Sherry and the Minister for Financial

Services, Corporate Law and Superannuation, Chris Bowen, today announced

that the Board of Taxation would undertake a comprehensive review of Australia's

tax laws to ensure that, wherever possible, they do not inhibit the expansion of

Islamic finance, banking and insurance products.” 26 April 2010 (Delivered in Abu

Dhabi and Qatar)

― Islamic Finance Publication, Trade Commission – Hon Simon

Crean

The Story so far...Latest development at government level...

6

7

Australian Muslims – some facts

― Our estimates of up to 500,000 Muslims across 73,000 households;

― As a demographic group, recorded the second fastest growth rate of 40.2% sincethe 1996 Census;

― 50% of domiciled in the state of New South Wales („NSW‟), whilst 33% are residentin Victoria;

― 49.5% are below the age of 24, in comparison to 34.7% of their non-Muslimcounterparts;

― Collectively represent an annual household purchasing power of A$3.3 Billion, upfrom A$1.3 Billion in 1996;

― Collectively:

― faster growing;

― Younger;

― mostly domiciled in NSW and Victoria. Data based on last census (2006)

8

•Internationally the global finance industry is estimated at $US822

billion in 2009 (Standard & Poors, Islamic Finance Outlook 2009,

12 May 2009, p5)

•Islamic Finance will be used by our government so that Australia

can be a global financial services centre of SEA

•Australia to develop resources-related services and infrastructure

via Sukuk, Murabahah and Ijarah

•Australia‟s Muslim Population 365,000 (1.75 of total population (at

2006 Census) exceeds the combined Muslim population of Hong

Kong and Japan and is more than half of that of Singapore (Islamic

Finance publication – Trade Commission p05)

― Set of principles that adhere to Islamic Law which is sourced

from the Quran and the sayings of Prophet Mohammed

which prohibits “Interest”*

― Shariah Compliant Finance & Investments– next wave of

highly refined ethical investing

― Asset based transactions that need to be seen as

“Innovative” and not as a threat to financial services or

religious overtones

― Proven; it‟s not smoke and mirrors

― *Note: “Interest” is also referred to as “Usury” in the Old Testament and

is also prohibited in many other religions.

What is Shariah Compliance?

9

― The underlying tradable commodity must be an asset; substitution of real resources for money: MONEY CANNOT MAKE MONEY

― Islamic finance introduces such change:

―It replaces the lone classical lending contract with numerous finance contracts,

―“Interest” is replaced by:

―Profit rate on partnership finance,

―Markups on sale finance

―Rental rates on leasing finance

― In Islamic finance based on partnership, focus would be on profitability and the rate of return of the concerned investment. Risk is shared between all parties.

What is Islamic Finance?

10

― Self-Mitigated Risk

―When the bank maintains ownership until

repayment is complete

―When a real assets involved: use as collateral,

and pledge receivables.

― Motivational aspects to the customer

―Musharaka or Mudaraba, with a profit ceiling (they

know what they are in for) during product life

11

What is Islamic Finance?

― There are many types of contracts for innovative product development

― Murabaha: Investor charges cost plus markup

― Mudaraba: Client shares the profits

― Musharaka: Partnership of the asset

― Ijara: Rent/Lease to own (A$0.5B written in 7 years under UCCC, over

3,000 contracts)

― Sukuk: Securitisation of an asset – huge market worldwide, especially

Malaysia

― Takaful: Insurance based on mutual aid concept

― Wakala: Charging of fees to hold an asset

― Funders/Banks/Financiers can join in the profits as well as

increases in both equity and asset values over time-this

creates risk sharing12

Islamic Finance - Opportunities

Key Legislative Challenges affecting Islamic Banking and Finance

―Although the transactions are asset based, their purpose if

to provide finance

―This generates taxation implications

―Today any asset acquired for commercial reasons

generates impacts to:

― Income Taxation (“Rental” versus “Interest” deductions)

― Capital Gains Tax (no tax on gains since the essence of the

transaction was for finance purposes

― Goods and Services Tax (commercial property)

― Double Stamp Duty (Removal of stamp duty by Victorian State

Government: Insertion of S57A to S57F of the State Taxation Acts (Amendment)

Act 2004)

13

Summarising Islamic FinanceOpportunity

― So far in Australia with very limited products and using workarounds on

the UCCC legislation, there have been A$0.5 B in Ijara contracts (Lease

to Own contracts)

― A lot of interest is being shown from overseas Islamic Banks to enter the

market

― Shariah Compliance concept – better than Ethical since the rules are

divinely inspired

― Great opportunity for non-geared Property Funds

― Dow Jones Islamic index has consistently outperformed pre, during and

post GFC

14

15

Wealth Management – Equity Opportunities

― The global Islamic fund assets stagnated at $52.3 billion in 2009,

remaining at almost the same level as the $51.4 billion posted in 2008,

according to a report by Ernst & Young (E&Y)

(http://www.tradearabia.com/news/bank_180945.html)

― The following businesses are generally excluded (to name but some):

― Alcohol

― Tobacco

― Pork - related products

― Conventional financial services (banking, insurance, etc.)

― Weapons and defence

― Entertainment (e.g. casinos/gambling, pornography etc.)

― Dow Jones Islamic Index outperformed conventional Indices during GFC

16

Shariah Compliant Portfolio Characteristics

Portfolio Composition as at Jun-10

Resources

23%

Basic Materials

9%

Retail

9%Industrial Services

41%

Cash

18%

CrescentShariah Compliant Equity

Fund

ASX300 Composition as at Jun-10

Resources

24%

Basic Materials

3%

Retail

8%

Industrial Services

4%

Property

6%

Financials

32%

Telcos

4%

Other

19%

Source: Sigma Funds ManagementNote: No financials and geared

property sectors

17

Shariah Compliant Portfolio Characteristics

Portfolio Composition as at Jun-10

Small Caps

53%

Large Caps

29%

Cash

18%

Crescent Shariah Compliant Equity Fund

Portfolio Composition as at Jun-10

Small Caps

8%

Large Caps

92%

Source: Sigma Funds ManagementNote: Greater exposure to Small Caps due to

type of allowable investments

18

The Australian Islamic Superannuation market –Main Target for Wealth Management

― Retirement savings (superannuation) trends in Australia:

― Mandatory for wage earners since 1992 – currently 9% of gross wage-possiblyup to 12% under the Cooper Review;

― Currently, over A$1 Trillion in superannuation assets that is forecast to doublewithin the next 7 year and triple 4 – 5 years thereafter;

― Dominant fund type: 186 public offer/retail funds – 32.4% of all Super assets;

― Average household superannuation holding = A$63,000;

― The Islamic superannuation market in Australia:

― Estimated market = A$3 Billion – A$6 Billion within 7 years;

―Choice legislation means that super easilytransportable/transferred-studies show that there will be a 90% take up onceproducts are available

Summarising Wealth ManagementOpportunity

― Demand of A$3 B to A$6 Billion in Superannuation funds alone

― Shift from investing in Financial Services or highly geared entities into eg

Health, Resources and Industrials sectors

― Shariah Compliance concept – better than Ethical since the rules are

divinely inspired

― Great opportunity for non-geared Property Funds

― Dow Jones Islamic index has consistently outperformed pre, during and

post GFC

19

― Islamic Finance Training and Education

― Products and courses (La Trobe & Monash)

― Islamic Finance for newcomers (broad)

― Legal Advice; lawyers and legislators (Zaid Ibrahim has established itself in

Melbourne)

― Regulatory and Corporate Advisory Services

― Council of Islamic Finance – Australia

― Sales Force – Banks and Mortgage Managers

― Information Technology Research and Development Investment

― Government Supervision

― Audit, Accounting & Taxation – ATO and Tax Practices

― Management and Operational processes

― Leadership and Strategy

― Islamic Finance and Banking Associations & thinktanks

Opportunities: Opening Markets & Creating Jobs

20

―Challenges

―Education and Awareness on Islamic Banking, Finance & Investments

―Address Taxation implications

―Opportunities – New Innovative Markets

―Islamic Banking

―Islamic Finance

―Wealth Management

Way forward for Australia

21

Thank you

22

Way forward for Australia