La Trobe University is planning to introduce the first course in Australia dedicated to Islamic banking and finance, joining a handful of universities in the West embracing this fast-growing segment of global finance.
The Master of Islamic Banking and Finance will provide students with postgraduate training in the technical skills demanded by Global Islamic capital markets and institutions.
Associate Professor Dr Ishaq Bhatti, of La Trobe’s Department of Economics and Finance, says the Masters program will appeal to international students from Asia wanting Islamic financial training in English and to local graduates keen to enter the growing sector in Australia. Several local banks – NAB, Kuwait Finance House, HSBC and Muslim Community Cooperative of Australia are active in the field.
The International Centre of Education in Islamic Finance, a training subsidiary of Bank Negara Malaysia, the equivalent to Australia’s Reserve Bank, will provide industry-based certification for graduates of the La Trobe course, opening up employment opportunities throughout the international banking and finance sector.
‘The Islamic banking and finance market has experienced substantial and unexpected growth in recent years, growing at a rate of ten to fifteen percent per year,’ Dr Bhatti says.
‘Today, more than 260 Islamic financial institutions are operating worldwide, which are claimed to manage assets worth no less than A$500 billion, while the assets held by Islamic financial institutions were only A$8.5 billion in 1985.
‘Such immense growth has brought Islamic finance to the attention of the international banking community, prompting the major banks to set up Islamic financial windows to take advantage of demand for Shariah compliant finance.’
Islamic banking has grown from Shariah law which traditionally bans usury – the charging of interest on loans, Dr Bhatti says. ‘Islamic banking is a community activity. It offers equity and security between lender and borrower. If a borrower runs into financial difficulty, it is the responsibility of the lender to help sort out his problems.’
The bank will reduce payments, offer moratoriums, give free financial planning advice and in some cases pay out the loan through the zakah, a fund set up out of the 2.5 per cent annual contribution from accumulated assets required by Shariah law which seeks to encourage the distribution of wealth.
In his recently-published book, Developments in Islamic Banking, Dr Bhatti calls this approach ‘a paradigm of fairness and equity’, contrasting it with conventional economics which has little interest in promoting benevolent behaviour in the market. The lender in Western financial systems enjoys an exclusive right to get back his rented capital with a predetermined interest income, whereas a borrower may bear interest risks out of all proportion to his abilities.
Islamic banking seeks to redress this imbalance by dividing the risk between lender and borrower. In the more intimate setting of the community, the lender will accompany the borrower and purchase the new car or computer on his or her behalf.
Repayments are set according to a formula which includes the purchase price of the item, the rate of inflation, bank costs and a profit margin. This margin is set at the time of the loan and is not subject to variation.
Similarly, in the case of the residential housing market, the bank will buy a house for the customer and rent it back at market value. Any additional repayments will come off the value of the loan. Western financial institutions have acknowledged the stability of the Islamic banking system and invested heavily in its bonds.
Dr Bhatti makes the point that maximising profit is not the major objective of this system.
‘In the conventional system the bank can lend more than their assets. They then issue bonds which are debit-based products to attract investors.’
Islamic banks are not debt-based but asset-based, he says. This makes their bonds attractive to low-risk investors. Western financial institutions such as Citibank have acknowledged the inherent economic stability of the Islamic banking system and invested heavily in their bonds, Dr Bhatti says.