Thank you for your kind introduction Tim [Professor Tim Brown, Acting Vice-Chancellor of La Trobe University] and the opportunity to address this important conference.
I am delighted to be here today to talk about the future of Islamic Finance in Australia – a topic that is gaining increasing relevance as Australia seeks to become a regional financial centre.
Last July, I gave the opening address to the Symposium on Islamic Banking and Finance, jointly hosted La Trobe University. It is gratifying to be invited to return and it's interesting to reflect on the progress in this important area of international finance in this time.
There is no doubt there is a growing awareness – both in the community and also among policy makers – of the potential of Islamic finance here in Australia.
Most of what is happening is positive and constructive, with local firms setting up Islamic finance specialist units to take advantage of the opportunities this one-trillion-dollar sector offers.
There are, however, some lingering negative attitudes in the community and that is why I was pleased to launch last month the Demystifying Islamic Finance booklet.
Published by leading South East Asian law firm, Zaid Ibrahim & Co, with headquarters in Malaysia, the booklet aims to dispel the misconceptions which have built up around Islamic finance in some parts of our society.
The fact Asian and Middle-Eastern companies such as Zaid Ibrahim & Co have established offices in Australia is also proof of the generally positive trend in this area.
In April this year, I visited Abu Dhabi, Qatar and Bahrain and held a series of talks with the international leadership of the Islamic finance regulatory and banking sectors in each of those States.
My trip to the Middle East illustrated the vibrancy and dynamism of the Islamic finance sector and identified opportunities for Australia and the Middle East to work together in matters involving Islamic finance.
The Australian Economy
In looking at the future of Islamic finance I think it is first necessary to talk about the state of the Australian economy and how the Government is positioning Australia to be a regional financial centre.
While our economy slowed significantly during the global downturn, Australia weathered the crisis better than most other advanced economies.
In 2009, our economy grew by 1.3 per cent — 4½ percentage points above the average for all advanced economies.
And the latest National Accounts data released this month showed that Gross Domestic Product (GDP) grew by 0.5 per cent in the March quarter to be 2.7 per cent higher through the year.
Public investment grew by a strong 12.5 per cent in the quarter. Stimulus programs, including the Building the Education Revolution, are estimated to have contributed around 0.4 of a percentage point to GDP growth for the quarter.
This outcome provides tentative signs that a self-sustaining private sector recovery is in prospect, although growth still relies on public infrastructure investment.
The Rudd Government, by sticking to its very strict fiscal rules, is bringing the Budget back into surplus in 2012‑13 — three years ahead of schedule.
This will make Australia the first advanced economy in the world to return to surplus.
Our exemplary performance throughout the economic crisis has meant Australia largely avoided the business failures and large-scale employment losses seen in many other countries. This provided a solid foundation for our recovery.
In fact, the Australian economy is forecast to grow by 3¼ per cent in 2010-11, rising to four per cent in 2011-12. The increasing pace of this growth means the economy is expected to approach full capacity in 2011-12. This is much earlier than previously expected.
Our unemployment rate, already the second-lowest among the major advanced economies, is set to fall further, to 4¾ per cent by mid‑2012.
Forecast deficits are now lower across the forward estimates. An underlying cash deficit of $40.8 billion, or 2.9 per cent of GDP, is forecast in 2010‑11. This is $16.3 billion less than expected one year ago.
Net debt is projected to peak at just 6.1 per cent of GDP in 2011‑12. This is half of the level projected a year ago and less than one tenth of the average across the major advanced economies – their average debt will peak at 93 per cent. This gives us one of the strongest budget positions in the developed world.
The Government's stimulus strategy has been one of the main reasons for Australia being one of only three advanced economies to avoid recession.
Another major reason has been Australia's close economic links with the Asian region, particularly China. These countries outperformed the North American and European zones during the global recession and are leading the global recovery.
This global recovery is pushing up prices for Australia's key commodity exports and this is expected to cause a substantial rise in the terms of trade in 2010. In turn, this will support a recovery in incomes across the economy.
The terms of trade are expected to rebound by 23 per cent -14.25 per cent in year average terms in 2010-11- injecting $30 billion into the economy. This boost in incomes will help to reinvigorate the mining sector and general economic activity.
Australia's solid performance through the global financial crisis has meant that we have avoided the erosion of the skills base and loss of business capital seen in other countries and in previous downturns. This leaves Australian firms and workers in good shape to meet a recovery in demand.
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.
Australia is highly regarded internationally as a place to do business. In fact, the World Economic Forum recently ranked Australia as the second among the world's financial centres, behind only the United Kingdom, primarily due to the stability of our financial institutions over the past 12 months.
Australia has other competitive advantages in the Asia-Pacific region. These include having the largest funds management industry; the largest hedge funds industry, deploying the widest range of investment strategies; the largest Real Estate Investment Trusts market; and the largest pension fund industry (excluding Japan).
While our finance and insurance sector already generates significant jobs and wealth, we recognise that it has a great untapped potential.
That's why the Australian Government is working to position Australia as a leading financial services centre.
In September 2008, we commissioned a report into how we can work towards that goal. On 15 January this year, the Government released the report, Australia as a Financial Centre - Building on our Strengths, known as the Johnson Report.
The report concluded 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.
We have already made progress on the recommendations in the report, in addition to introducing other initiatives to improve our international competitiveness.
Last month, the Government responded to the Report, supporting eighteen of its nineteen recommendations.
One key issue in the report is Islamic finance. 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.
It also presents opportunities for Australian-based banks and financial institutions to develop Islamic or Shariah-compliant finance products for domestic and international markets.
Over the past ten years, Islamic finance has experienced rapid growth, with the value of worldwide Islamic finance assets projected to reach US$1.6 trillion by 2012, almost double the amount of today's assets.
A recent report by Moody's Investor Services said that Islamic financial bodies have a market potential of at least $US5 trillion. These types of growth projections show the enormous extent of the opportunities available for both business and government.
Australia is well aware of the potential for Islamic finance in developing our nation as a financial services centre.
The Johnson Report 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.
Second, the Report called 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.
On 26 April, the Government announced that the Board of Taxation would conduct the review recommended by the Johnson Report. This review is to be a comprehensive analysis of Australia's tax laws to ensure that, wherever possible, they do not inhibit the provision of Islamic finance, banking and insurance products.
On May 18, the Terms of Reference for this Review were announced. The Board has been asked to make recommendations in respect of Commonwealth laws and findings in respect of State and Territory laws that will ensure, wherever possible, that Islamic financial products have parity of tax treatment with conventional products. The Board of Taxation is to report by June 2011.
It is now over to the growing corpus of experts in Islamic finance in Australia – such as the many of you here today – to make thoughtful, forward-looking contributions to this comprehensive process.
I would add that this review doesn't mean tax reform to encourage Islamic finance offerings in Australia will stop until mid-2011 – I expect that a range of known measures will remain on the table and the Board of Taxation is free to provide earlier advice to the Government, on discrete areas if it is able.
In addition, the Government has established a cross agency interdepartmental process to examine whether there are any non-tax regulatory barriers to the development of Islamic finance in Australia.
So we have a complementary and comprehensive process underway.
The Rudd Government firmly believes that Islamic finance can increase the depth and sophistication of our financial markets.
Australia is well placed to take advantage of the opportunities resulting from the growth in Islamic finance.
Geographically, Australia is well positioned within the Asia Pacific region to expand already strong trade linkages with the region through the Islamic finance sector.
Sixty-two percent of the world's Muslim population lives in our region. We are right next door to the biggest Muslim nation – Indonesia.
Australia's Muslim population of around 400,000 (1.7 per cent of the total population), exceeds the combined Muslim population of Hong Kong and Japan and is more than half of that of Singapore.
We also have global leading skills in real estate and infrastructure financing – two areas with great potential in relation to wholesale Islamic finance activity as they both involve very real underlying assets, something we all know is needed in Shariah-compliant projects.
An opportunity for Australia to benefit from its advantages is in the funds management sector. Australia has expertise, experience and a well recognised reputation worldwide in funds management; diversifying the sources of debt finance.
Islamic finance could provide an alternative source of wholesale funds for Australia's financial institutions - particularly as a result of excess liquidity generated from oil revenues in the Middle East - and the increase in economic growth in countries with significant Muslim populations, such as Indonesia, India and Pakistan.
We also recognise there are Muslims in Australia who would use Islamic financial services if they were more accessible. Offering retail Islamic finance products may foster social inclusion, enabling Australian Muslims to access products that may be more consistent with their principles and beliefs.
As well, this would widen the choice of products for non-Muslims – for example, the increasing number of people in our community interested in socially responsible investments might be a natural fit with some of the fundamental tenets underlying Islamic finance.
And of course, this opportunity is not limited to domestic Australian markets. Leading Australian firms will seek out opportunities to become involved in offering Islamic finance products in the global market so they can tap alternative funding sources and invest in new areas.
The Rudd Government continues to work towards enhancing access to foreign markets for all Australian businesses.
Businesses that offer Islamic finance products should benefit from any successes we achieve in that sphere.
Fostering Islamic finance in our country will also open up new education and training opportunities for our universities and tertiary institutions. For example, La Trobe University has 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 'big four' banks, Westpac, was the first Australian bank to offer a short-term wholesale investment product structured specifically developed for Islamic financial institutions.
Australia's largest investment bank, Macquarie Group, has also announced plans for an Islamic finance joint venture with the Bahrain-based Gulf Finance House to target markets in the Middle East and North Africa.
There appears to be a number of specific opportunities in Australia for Islamic finance. These are:
- to attract foreign full-fledged Islamic banks and conventional banks' Islamic windows to establish operations in Australia;
- to attract investment in Australian assets and businesses from international Shariah investors and tap into new funding sources through Sukuk and other securitised issues;
- for Australian-based banks to provide a range of Shariah-compliant investment and financing products and services to Islamic banks, corporations and high net worth individuals, particularly for the wholesale market; and
- for fund managers to establish Shariah-compliant funds.
The Rudd Government is alive to these opportunities and we'll be pursuing them vigorously and ensuring our tax regulation system meets the challenge.
When I spoke at the Islamic finance symposium just 11 months ago, it was hard to imagine the growth in interest from all sides in this global phenomenon.
Whether because of, or despite, the global financial crisis, the need for greater accommodation of Islamic finance as a positive influence on our economy is being recognised by companies here and potential partners overseas.
Australia is at the forefront of efforts to engage with Islamic finance, for the benefit of all concerned.
The Rudd Government is acting to ensure our country is attractive to Islamic financial investment and facilitates greater involvement with this important sector of the global economy.
We have more to do – and some jurisdictions have a head start.
The Rudd Government recognises Islamic finance has great potential for creating jobs and wealth for Australians – and we are fully committed to this issue.
Let me assure you the Government is intent on developing Australia as a regional financial centre and it sees Islamic finance as a fundamental part of that endeavour.
I note that you have an interesting panel of speakers from Australia and overseas for this conference and that you will explore various facets of Islamic finance over the next 2 days.
I wish you well for the remainder of the conference.