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1. Introduction
The contemporary Islamic finance is no longer an uncertain experience but a reality
and is likely to keep growing at a rapid clip. Thus it cannot be dismissed as a passing
trend of what is described as a state of Islamic revivalism. Islamic finance has emerged
in recent decades as one of the most important trends in the financial world. There has
always been a demand among Muslims for financial products and services that
conform to the principles of Islamic Shariah[1]. While the global value of total assets
managed according to Islamic principles is still relatively small, these are growing at a
pace well above 15 per cent annually which, if sustained, will eventually lead to
amounts that are a significant proportion of global GDP. Approximate estimates place
it at about USD$260 billion according to estimates provided by the General Council for Humanomics
Vol. 25 No. 3, 2009
Islamic Banks and Financial Institutions (GCIBFI)[2]. A further $200 billion to $300 pp. 217-235
billion is managed by the Islamic banking branches and subsidiaries of international # Emerald Group Publishing Limited
0828-8666
banks in the world’s major financial centers such as New York, London, Paris, Geneva DOI 10.1108/08288660910986946
H and Tokyo (Banker Middle East, 2003). Although small in terms of the total global
25,3 assets managed by these financial intermediaries, the growth rate is impressive.[3] The
proponents and promoters of Islamic finance and banking are routinely characterizing
this growth as explosive. See for examples:
The market for Islamic Banking is worth more than US $200 billion and is expected to grow
at 13 to 16 per cent a year over the next eight to ten years. The target market consists of more
218 than 1.2 billion Muslims and the business is expected to have explosive growth (Global
Islamic Banking Consulting).
Mutual funds constitute one of the fastest growing areas of Islamic finance. Opinions vary
over the total value of equity funds under Islamic management with estimate ranging from
$1,000 million to $3,000 million. However, there is no dispute that the industry is expanding
rapidly . . . The growth of the sector has been explosive (Institute of Islamic Banking and
Insurance).
This is a clear recognition of the viability of Islamic financial industry and its firm
significance in today’s banking worldwide.
The contemporary Islamic financial institutions come in the shapes and forms of
banks and non-banks, large and small, specialised and diversified, traditional and
innovative, national and multinational, regulated and unrestrictive, etc. However,
Islamic finance is a vastly complicated phenomenon, and cannot be captured without a
full understanding of Islam and finance, and also law, economics, business and culture.
The objective of this paper is to examine the viability of Islamic financial
institutions vis-à-vis their microfinance facilities in the interest-based economy of
Australia, which contradicts the ideals of Islamic financial system. The examination
has been carried out within the general framework of Islamic financial principles and
precepts.
In line with the above objectives, this study offers an introduction to the emergence
and development of Islamic microfinance in Australia, focusing the needs of financing
a large and growing Muslim community in line with their Islamic tenets. It also studies
the current realities of the Islamic financial system of Australia from the perspective of
the theories of modern financial intermediation and Islamic microfinance contracting.
This paper explains the key role of Islamic financial services providers (IFSPs) in
Australia in fulfilling the microfinance needs of Muslim community. It also evaluates
the Islamic microfinance techniques used by the IFSPs of Australia.
The Islamic population in Australia has grown substantially in the last decade,
particularly due to immigration from South East Asia and the Middle East. According
to the Australian Bureau of Statistics, in 1991 there were 147,500 Islamic followers, and
in 1996 this grew to 200,900. Between 1996 and 2001, there were just over half a million
new arrivals to Australia. Of these, 9 per cent were affiliated to Islam.[4]
In response to the needs of this large and growing community mainly for
microfinance, the Islamic finance emerged through establishment of the Muslim
Community Co-operative (Australia) Limited, better known as MCCA in 1989.
Although a few other IFSPs are providing their services the MCCA is the largest in its
kind in this country and it caters for microfinance needs of Muslims looking based on
religious principles. In spite of the fact that the MCCA and other IFSPs who claim to
operate in line with the principles of Shariah have seemingly been operating
successfully and playing an increasing role in community development and the
country’s economic growth,[5] there has been little comprehensive research on Islamic
microfinance in Australia. This provides a proper field of study since to the Islamic
researcher’s knowledge; it has not been tackled before so extensively, as it deserves. microfinance
This study is limited in scope in a sense that it is not a comparative study of Islamic
financial system with doctrines of other religions, ideologies and systems. The paper
reviews within this limited scope and content the functions and practice of Australian
IFSPs in particular in Islamic microfinance.
Following the above introduction this paper discusses the issue in five major
sections as mentioned below:
219
(1) A general overview of Islamic financial system.
(2) Microfinance: Islamic perspectives.
(3) IFSPs in Australia: an introduction.
(4) Evaluating Islamic microfinance techniques used by the IFSPs in Australia.
(5) Summary, conclusion and recommendations.
Notes
1. Shariah is understood as Islamic law or the code of Muslim conduct outlined by the Qur’an
(the direct word of God) and the Sunnah of Prophet Muhammad (pbuh). The Shariah of the
prophets, from Adam to Muhammad (pbuh) is one in essence. It signifies the way to God, as
given by God. It is the Way which encompasses the totality of man’s life.
2. Incorporated in May 2001 the Bahrain-based GCIBFI is an international autonomous
non-profit corporate body aimed at promoting the Islamic financial industry in theory
and practice, and improving multilateral understanding between Islamic banks, their
customers and the public at large. For detailed information on the activities of the GCIBFI Islamic
see www.islamicfi.com/english/AlMajlis_Chamber/Our_Activities/index.asp?ID¼69772
microfinance
3. Figures of between $200 and $300 billion are commonly cited for the existing market
size as an annual growth rate of around 15 per cent. These figures need to be considered
as indicative only and not as an actual estimate of the industry’s size. Samuel L. Hayes
of Harvard University points out that assessing the market size is nearly impossible
because the information is scattered and hidden as a good bit of the money that is being
managed for Islamic investors is off-balance sheet. There is also a good amount – one 233
relatively reliable estimate is $50 billion – that is hidden in Switzerland that is also
managed Islamically. See Daan Keeler (2004).
4. The Australian Bureau of Statistics Census conducted in 1991 listed 281,576 Australian
Muslims, an increase of some 40 per cent in five years, while the Australian population
as a whole only grew by 5.7 per cent in the same period. These figures may be very
conservative as some recent estimates suggest that Australian Muslims now number
more than 300,000. See Department of Foreign Affairs and Trade, the Commonwealth
Government of Australia, Islam in Australia, available at: www. dfat.gov.au/facts/
islam_in_australia.html (accessed 29 December 2006).
5. According to a recent report provided by the Muslim Community Co-operative Australia
Ltd. (MCCA) – one of Australia’s leading Islamic financial services providers, its overall
financial performance for the year 2003-2004 has been remarkable in comparison to the
previous financial year. By June 2004, the MCCA had a total of 5,824 active members
and on average more than 60 new members were registered every month. In the
financial year ending 30 June 2004, its revenues increased by 19.45 per cent, profit from
ordinary activities grew by 50.64 per cent, total assets increased 11.22 per cent, net asset
had increased by 4.89 per cent and there was an increase in share capital by 4.74 per
cent. See MCCA, ‘‘Financial Highlights for the Year Ended 30 June 2004’’, Treasurer’s
Report.
6. According to the Consultative Group to Assist the Poor (CGAP), the clients of
microfinance – female heads of households, pensioners, displaced persons, retrenched
workers, small farmers and micro-entrepreneurs – fall into four poverty levels: destitute,
extreme poor, moderate poor and vulnerable non-poor. While repayment capacity,
collateral availability and data availability vary across these categories, methodologies
and operational structures have been developed that meet the financial needs of these
client groups in a sustainable manner. More formal and mainstream financial services
including collateral-based credit, payment services and credit card accounts may suit the
moderate poor. Financial services and delivery mechanisms for the extreme and
moderate poor may utilise group structures or more flexible forms of collateral and loan
analysis. The client group for a given financial service provider is primarily determined
by its mission, institutional form and methodology. Banks that scale down to serve the
poor tend to reach only the moderate poor. Credit union clients range from the moderate
poor to the vulnerable non-poor, although this varies by region and type of credit union.
NGOs, informal savings and loan groups, and community savings and credit
associations have a wide range of client profiles.
7. These people usually do not lack finance in a broad sense: they can borrow money from
friends, relatives or local money lenders, but of course they cannot access a wider and
safer range of services. They need a formal financial institution to rely on, to ask not
only for credit but also saving or insurance services, to deal with on a transparent basis
(usury is usually a high risk for these people). Microfinance is filling this vacuum, the
gap that until a few decades ago kept these people away from the realisation of their
own projects.
H 8. Under subsection 9(3) of the Banking Act 195, the MCCU was granted by the
Australian Prudential Authority (APRA) the ACN 089 927 837 (the ‘‘ADI’’), an authority
25,3 to carry on banking business in Australia.
9. Under paragraph 9(4) (a) of the above mentioned Act, the APRA imposed on the MCCU
among other conditions the condition of maintaining a minimum ratio of capital to risk-
weighted assets of 15 per cent at all times.
10. Fatwas are legal statements in Islam, issued by a scholar of Islamic laws, on a specific
234 issue. They are asked for by judges or individuals, and are needed in cases where an
issue of Islamic law and jurisprudence is undecided or uncertain. Lawsuits can be
settled on the basis of a fatwa.
11. It is an Australian taxation system under which taxes are payable towards taxpayers
expected tax liabilities on their businesses and investment incomes.
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