9 June 2009 - 14 September 2010
Australia, Qatar and the Future of Islamic Finance
Speech to the Qatar Chamber of Commerce and Industry
Grand Hyatt Hotel, Doha, Qatar
27 April 2010
It's a great pleasure to be here tonight.
Salam alay kum (Peace be upon you)
It is my first time in Qatar and what I've seen so far is truly impressive.
I would first like to acknowledge the presence of Australia's Ambassador-designate to Qatar, His Excellency Doug Trappett.
I would also like to take this opportunity to thank the Australia and New Zealand Business Group in Qatar (ANZBIQ), and particularly your Chairman, Mr John Panteli.
Your assistance in organising this event has been instrumental.
We cannot, and the Australian Government does not, underestimate the vital role that business groups like ANZBIQ play in building business and people-to-people links between Australia and Qatar, about which I will say more shortly.
But first, I would also like to thank the Qatar Chamber of Commerce and Industry for your role in organising tonight.
The Chamber is your peak national business body and knowing you've been supportive of tonight's event is an important illustration of just how deep is the Australian-Qatar business and economic relationship.
I would like to point out that accompanying me here today is an Australian trade delegation.
Organised by Austrade, our national trade promotion agency, the delegation comprises representatives from Australian and international financial institutions, major Australian law firms, Australian funds management companies and investment houses and a representative from our peak superannuation (private pension) sector.
Thank you also Chaaban Omran, the Chief Executive Officer of Crescent Investments Australasia, who will say a few words later, on behalf of the group.
The focus of the delegation is Islamic finance. I also welcome them and I encourage everyone here today to take the opportunity to engage with such a high level group of business leaders from Australia.
The relationship between Australia and Qatar is underpinned by long-standing trade ties and also close defence cooperation.
Australia actively supported Qatar's accession to the World Trade Organisation in 1995, with Qatar of course hosting the fourth WTO Ministerial meeting in 2001.
We have much to gain from continuing to strengthen our trade links.
Qatar has enjoyed strong economic growth as a result of the massive investments in its hydrocarbons industry, notably natural gas, and GDP per capita is one of the highest in the world.
In 2008-09, two-way trade between Australia and Qatar was valued at A$566 million – and I see this figure only growing in the years to come.
And why do I think the trend is growth?
Well because when you look at the people-to-people and business connections, they are only increasing too – and sharply in some key regards.
Growing numbers of Australians live and work in Qatar, principally businesspeople working in Doha.
This Australian expatriate population – estimated at around 3,000 –has grown substantially since the 2006 Asian Games due to economic opportunities in Qatar in a variety of fields such as education, construction, banking, aviation and event management.
People-to-people links have been strengthened after Qatar Airways began direct flights to Melbourne late last year, and Doha-Sydney is planned shortly I am told.
And on trade and the economy specifically – the fundamentals are there for further significant growth.
Major Australian exports to Qatar include live animals, motor vehicles, namely Toyota and meat products.
And from Qatar we import substantial amounts of fertilisers, liquefied propane and butane, refined petroleum and inorganic chemical elements.
So when you look at this trade profile you can see the complementarities that will continue to drive a strong growth path.
This is of course another reason why I am here today and tomorrow.
I will be meeting the Qatari Prime Minister and Foreign Minister, and the Minister for Finance, and with those strategic discussions I am sure we can move our bilateral relationship even further ahead.
I should add that Australia is keen to further broaden and strengthen our relations with the Gulf Cooperation Council to cover foreign, trade, strategic and security cooperation.
Australia's Foreign Minister, Stephen Smith, sees the GCC-Australia Foreign Ministers Strategic Dialogue as an essential platform for promoting and facilitating closer engagement.
The inaugural Dialogue is scheduled for 2010.
The Australian economy
So now I would like to move onto describe just how we are doing back home in Australia.
Just last week Dun and Bradstreet declared Australia the world's best economy in which to invest.
That declaration didn't just happen by chance, I can assure you.
It came from Australia having the right fundamentals and the right policy settings.
Australia's economy grew by 0.9 per cent in the December quarter 2009, and 2.7 per cent through the year to the December quarter.
Last week's World Economic Outlook from the IMF noted Australia and the newly industrialised Asian economies will likely stay in the lead in the recovery.
The IMF forecasts that Australia will grow by 3.0 per cent in 2010 and 3.5 per cent in 2011. According to the IMF our growth outlook is stronger than that for other advanced economies as a whole, which are forecast to grow collectively by 2.3 per cent in 2010 and 2.4 per cent in 2011, after contracting by a record 3.2 per cent in 2009.
The latest forecasts (MYEFO) project the Budget to return to surplus by 2015-16, with net debt to peak at 9.6 per cent of GDP in 2013-14.
Australia will continue to have lower deficits and lower debt than the major advanced economies. The net debt of these countries will be an average 93 per cent of GDP in 2014 – in other words, Australia has one-tenth the average net debt of the major advanced economies.
Australia as a financial services centre
Australia's financial services industry is one of the world's most sophisticated, competitive and innovative.
It is also one of the safest.
The finance and insurance sector is now the largest contributor to the Australian economy.
In 2008-09, the sector generated about 10.8 per cent of GDP.
Over the past decade, the sector has grown by an average of 4.3 per cent a year — significantly above the average for all sectors.
Our banking system is extremely strong.
All four of the major Australian banks are AA-rated — out of a total of just nine rated AA worldwide, yes almost 50% of the AA-rated banks are from Australia, and this is just one indicator of the soundness of our financial and regulatory system.
In fact, the World Economic Forum's Financial Development Report 2009 ranked Australia as the second most developed financial centre in the world, behind the United Kingdom, but ahead of the United States.
We earned this ranking primarily due to the stability of our financial institutions over the last 12 months.
Another reason for our sound performance is the size and sophistication of our pool of managed funds, a direct result of Australia's compulsory superannuation system which has been in place since 1992.
At over $1 trillion and forecast to grow to four trillion within 20 years, Australia's pool of investment funds under management is the fourth largest in the world and the largest in Asia.
These funds have been at the disposal of the Australian economy.
The skills that we have developed in managing this massive pool of funds have been a vital factor in the growth of our financial services industry.
Our funds management industry has capability across liquid asset classes such as equities and fixed interest, as well as illiquid assets such as infrastructure and property.
As well as funds management, the sector has considerable expertise in developing innovative financial products in infrastructure, securitisation, property and trade finance.
So, while our finance and insurance sector already generates significant jobs and wealth, we recognise that it still has a great untapped potential.
That's why the Government of Prime Minister Kevin Rudd, through our Minister for Financial Services and myself, are working to build on this record and, in doing so, position Australia as a leading financial services centre.
In this regard, in September 2008, we commissioned a report into how we could better achieve that goal.
On 15 January this year, the Government released the final report of this process, known as the Australia as a Financial Centre (or the Johnson Report).
The report concluded that Australia has arguably the most efficient and competitive financial sector in the Asia-Pacific region, but there are further opportunities to expand our exports and imports of financial services.
And it made a range of important recommendations, including specific steps to ensure Islamic finance is enabled in Australia.
And that's exactly what I know want to address.
The competitiveness of Australia's financial services sector offers great opportunities for Islamic banks and financial institutions to do business in our country, or to export their products to Asia from a strong, stable and extremely well regulated regional base.
It, of course, also presents opportunities for Australian-based banks and financial institutions to develop Islamic or Shariah-compliant finance products for domestic and international markets.
Australia is well aware of the potential for Islamic finance in developing our nation as a financial services centre.
The Financial Centre Report I just mentioned includes two specific recommendations on Islamic finance.
First, the Report recommends the removal of regulatory barriers to the development of Islamic finance products in Australia.
Secondly, the Report calls for an inquiry by the Board of Taxation into whether Australian tax law needs to be amended to ensure that Islamic financial products have parity of treatment with conventional products.
It is with great pleasure I can confirm today here in Qatar that as the first major instalment in the Government's response to this landmark Report, I have directed the Board of Taxation to 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.
Australia's decision means we will be among the first OECD countries to conduct this kind of system-wide review and it will mean we are among the very first to get all the tax settings right.
I know the United Kingdom has acted on a few discrete areas, but the review I am announcing is thoroughly comprehensive.
Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position capitalise on that growth, but we have to ensure our tax system doesn't unnecessarily prevent that from happening.
Today's announcement is major step in ensuring that we get the settings right.
The Johnson Report stated:
"…another major source of offshore capital is the Middle East, reflecting the sharp rise in the world price of oil. The greatest opportunity for Australia in terms of accessing offshore capital pools at competitive rates would appear to be in the area of developing Shariah compliant wholesale investment products."
As many of you would know, the main tax issue faced in relation to accommodating Shariah-compliant financial products in most Western tax systems is the form-based nature of such instruments.
That is, whereas Western tax codes normally focus on the details of the transaction in question and levy tax accordingly, this approach may give rise to anomalous tax treatments for Islamic instruments.
In a strict "form" approach, a transaction may, on its face, indicate one tax outcome, while the economic substance of the transaction may indicate another.
I am very pleased to say that Australia has made major inroads into integrating an economic substance approach into our tax laws, particularly with the latest of what is known as the Taxation of Financial Arrangements (TOFA) legislative reforms that I have into our Parliament.
The reforms are squarely based on assessing the economic substance of a transaction rather than its legal form.
The Board of Taxation review I am announcing today will take this work to the next level by examining the Australian tax laws to make sure the wholesale market for Islamic instruments is not being hampered.
I would like to be clear, this is not about special treatment or concessions for Islamic finance or its providers – and no-one interested in this market back in Australia has ever come to me seeking special tax beneficial arrangements.
Our decision to review our entire tax code through the perspective of the treatment of Islamic financial instruments is about ensuring that our system doesn't unfairly disadvantage or preclude such instruments.
This will have a dual advantage – of course, if Australia's tax system continues down the path of accommodating this type of finance it will serve Australia in terms of capital attraction, jobs and growth.
Fostering Islamic finance in our country will also open up new education and training opportunities for our universities and tertiary institutions.
For example, just last year, La Trobe University launched Australia's first Masters Degree in Islamic Banking and Finance. And many universities now offer subjects on Islamic banking and finance as part of a commerce/accounting/finance degree.
Australia's major financial institutions are already moving into this area.
In February 2010, one of our top four banks, Westpac, was the first Australian bank to offer a short-term wholesale investment product structured specifically developed for Islamic financial institutions.
But in addition to all of this, it will serve the Islamic world both as another option to deliver a strong and diversified investment portfolio and as a critical stepping stone into the broader Asia-Pacific.
The detailed Terms of Reference of the important tax review, including the dates for reporting to Government, will be released in the near future and I look forward to further engaging with you all as we move forward on this issue.
The last area I wanted to touch on tonight was foreign investment.
Australia is and almost always has been a capital importing country.
This is not a bad thing, as some may have us believe.
For many decades this inwards flow of capital has been put to enormously productive, wealth-generating use.
In our resources and mining sectors, into construction, into infrastructure, into primary production, and into many other sectors.
These are real investments delivering real results for the Australian community and very healthy results for international investors.
As I have highlighted, we have well regulated economic system; we are stable system of laws; and we are extremely well situated for growth.
And our openness to investment extends to sovereign wealth funds and government instrumentalities and corporations, just as it does to private or public companies, or indeed to individuals.
As with all countries, we naturally monitor and review such investment and large scale investments are subject to appropriate examination.
In February 2008, the Treasurer published a set of guidelines that the he and I consider when evaluating the national interest implications of foreign government related investments.
These emphasise independence and commerciality, and their release promoted transparency in how the national interest test is applied.
We look specifically, for example, for evidence of a commercial basis for the investment.
We also look at the commercial and legal conduct of that company – do they adhere to the law, do they abide by common standards of business behaviour?
We look at competition, the impact on our revenue base, national security concerns and, of course, the impact of that investment on the Australian company, our economy and the broader community.
The guidelines are non-discriminatory – we apply them equally to investments by all foreign government entities.
They do not target or restrict any particular country.
During the global slowdown in world capital flows, we made a number of other reforms to demonstrate to the world that Australia remains a welcoming and competitive destination for foreign capital.
In September 2009, the Government lifted the monetary screening threshold for privately-owned foreign investors to $219 million, more than twice the previous threshold of $100 million.
We simplified the thresholds and indexed them to keep pace with inflation.
As this is indexed annually, the figure now stands at $231 million.
And we abolished the screening requirement on privately-owned new businesses over $10 million.
We believe these changes have been essential in ensuring Australia remains an attractive place to invest among a more competitive playing field for foreign investment following the global financial crisis.
And we encourage a diverse range of sources for our inward foreign investment.
I have met with many key investment houses and funds in the region over the past few days and I will meet with more in the next few days – and I have sent a clear message.
Investment from the GCC region is indeed welcome in Australia, just as our businesses are very keen to do big things right here.
The rapidly growing Islamic finance, banking and insurance market is worth almost $1 trillion and could reach as much as $5 trillion, according to Moody's Investor Services.
Qatar sits right in the centre of that.
Australia's open and stable economy, the sophistication and competitiveness of our financial services industry, the strength of our regulatory system and our unparalleled performance during and after the turmoil of the global financial crisis mean that we have a great deal to offer as a partner to this region.
Strengthening and deepening our economic ties can only benefit both our nations.
I hope my announcement today of the next step in Australia's role in the international Islamic finance market shows just how genuine we are.
Once again, I would like to thank you for inviting me to be here, for organising such a great dinner and for all coming along.
SHOOKRAN (Thank you)