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Report Background

Describe about the Islamic Finance in Australia for Global Market.

Islamic Financial System has earned an excellent image in the global market due to its innovative products and services. The global Islamic finance market is estimated to grow up to US$ 2.6 trillion by the end of 2017. Hence, the demands for Islamic Financial products are increasing all across the globe (Mollah & Zaman, 2015). Though Australia has a minimum Muslim population of 2 percent, the market has a real potential to expand into the Islamic Finance. Hence, the paper has been developed to conduct a theoretical analysis and market research to observe the possibilities of growth for Islamic Finance in the Australian market.

The primary purpose of the report is to analyse the potentials for Islamic finance in the Australian market. The study has been conducted to examine the literature critically on Islamic finance and explain the role of Islamic corporate governance and Islamic financial products in the development of the financial market of Australia. Hence, the paper will present a critical evaluation of the financial services companies that operates in the Australian market under the Islamic corporate governance model and offers Islamic Financial products to the customers. It will help to analyse the demand for Islamic financial products and observe the potential to grow in the Australian market. The data has been collected through secondary sources such as articles, journals, books, company and government reports, and internet sources to conduct the literature review in the context of the whole world. On the other hand, a critical evaluation has been presented in context to the Australian market in the discussion and analysis section (Rini, 2014). The primary limitation of the research is the second handed information that can be minimised by conducting a research survey to increase the reliability and efficiency of the study.

Through the identification of corporate governance models and Islamic corporate governance, the role of the Sharia committee has been presented to understand the existing status of global Islamic finance market.

The corporate governance structure of a country has played a massive part in determining significant factors such as the legal and regulatory framework including the rights and accountability of each element associated with it. Meanwhile, there are three identified corporate governance models such as the Anglo-US model, the Japanese model, and the German model that have been utilised to control the capital market structure in developed countries (Hashim, Mahadi, & Amran, 2015).

Literature review

The Anglo-US Model: The Anglo-US model has been characterised by individual share ownership, a well-established legal framework determining the significant rights and accountabilities towards shareholders, organisational management and directors and the outside shareholders not associated with the organisation. The specific model has included three major players to manage the open market operations in the developed countries. Moreover, the share ownership pattern has got its influence on the organisation as an increase in ownership can result in the increase in the influence (Abu-Tapanjeh, 2009). On the basis of ownership increment, specific regulatory changes have been triggered to facilitate the corporate governance tactics.

The Japanese Model: The Japanese model has been identified by a premium level of stock ownership by associated organisations and banking corporations. Also, substantial public policy, legal framework and industrial proposition have provided significant connection to the financial banking systems and the corporations to create a trading relationship among industrial groups (Alam Choudhury & Nurul Alam, 2013). Such corporate governance model has got a central banking corporation at the centre stage and a financial network around the system namely keiretsu. Meanwhile, in Japanese model, the non-affiliated shareholders have got petite to say in the governance procedure.

The German Model: The German model has been characterised by two distinct boards such as a management board and a supervisory board. Such two-tiered board framework has efficiently managed the financial management as well as regulatory control in the market. Also, the voting right restrictions in the German model have limited the ownership structure of the shareholders to a certain extent (Mahmood, 2015). In the German model, the regulatory framework has been controlled by significant federal laws such as Commercial Law, The Stock Corporation Law and Stick Exchange Law.

Islamic corporate governance has followed strict standards and regulatory framework so that significant value of transparency, fairness and responsibility towards the shareholders can be incorporated. By managing financial risks to a certain order, the fundamental objective of Islamic corporate governance is to increase the shareholder’s value. In order to develop sustainable corporate governance, The Islamic Financial Services Board (IFSB) has published the guiding principles for corporate business organisations to maintain highest IFSE standards (Bhatti & Bhatti, 2009). By identifying the growing need for standardisation in the Islamic finance industry, the Islamic corporate governance structure has delivered efficient business standards incorporating business ethics, transparency and fair trading concepts among the financial institutes operating in the global market (Morrison, 2014).   

Corporate governance models

Understandably, the Sharia governance committee has played a crucial role in advising the Islamic financial institutions about the compliance of guiding principles (Ahmed, 2014). Thus, greater clarity has been achieved within the financial services in the Islamic corporate governance. The five specific elements of the Sharia committee such as general approach, competence, independence, confidentiality and consistency have mandated the operative procedure of the Islamic financial services (Casper, 2015). The Sharia Board has connected the Islamic financial governance to the IFSB standards so that the organisations can understand their liability and responsibility towards the shareholders (Bhatti & Bhatti, 2010). Moreover, the compliance of the Sharia Board has addressed significant issues associated with the financial governance securing transparency.

Islamic corporate governance in Australia

Governance is term that relates the government with its constituents. Therefore, corporate governance refers to the corporation and its constituents. It is important to understand who the constituents of a corporation are. Islamic corporate governance differs from that of corporate governance of conventional financial institutions. Islamic corporate governance mainly focuses on building a good relationship with entrepreneurs exploring for growth of businesses. The Islamic Financial institutions do not offer money in forms of debts, but believes in investing in potential projects in return of profit (Sukardi, 2013). The foremost difference is the risk level involved for the depositors of Islamic Banks when the bank invests on different projects. Hence, it can be seen that Banks or financial institutions opting for Islamic Financial products must be aware of the facts of high risk exposure that they tends to provide to the regular customers. Along with that, there is a need of proper approval of the Australian government before offering Islamic financial products in the Australian market.

One of the major examples of Islamic bank in Australia is the MCCA Islamic Finance and Investment (Australia). The company started its business in the year 1989 as a registered corporation in Melbourne with $20,000. MCCA started its business with a vision to meet the investment, banking and financial needs of the Muslims living in Australia (Wijethunga & Ekanayake, 2015). It offers all sorts of Islamic Financial products and has facilitated around $1 billion in home finance. Along with that, the financial institution also manages around $50 million in investment. Hence, it can be seen that Islamic Corporate has good opportunity to grow in the Australian market with upcoming projects available in the future.

Islamic corporate governance and the role of the Sharia Committee

Different Islamic Financial products can be offered by the Australian Banks to improve their positioning in the market. The Islamic Financial Products that can be offered by the Australian banks are discussed herein below:

Products based on Profit and Loss sharing: In place of providing loan in return of interest, the Australian Banks can offer investment on basis of profit and losses. It will reduce the risk of the entrepreneurs and ensure the banks a higher rate of return. Furthermore, the entrepreneurs will get technical assistance of the banks and it will develop a good relationship with the customers (Zain, Zulkarnain, & Hassan, 2015). Two different products can be offered namely Mudaraba Products that involves sharing of only profit and the second is Musharaka that is a termed used for joint ventures.

Products based on investing financing: Product based financing is used to earn fees by purchasing properties and selling them to a buyer who pays the price of the property in small instalments. In return of the investment, the financial institutions earn a good amount of fees. The ownership of the property is not transferred to the buyer unless he pays the full amount.

Alternative to Bonds: Another product is known as Sukuk that is a type of Islamic bond in which the investors are entitled with an ownership of a tangible asset, project, business, joint venture and service. It is important that every asset must be in compliance with the Sharia regulations (Srairi, 2015).

Conclusion and recommendation

The significant research on corporate governance models and the Islamic governance framework have provided the broader concept of corporate social responsibility among the financial services. Moreover, the IFSB standards and principle guidelines have incorporated significant strengths to the organisations operating in the Islamic finance industry proving transparency and fairness policy in business operations. Along with that, the Sharia Board has delivered ethical and moral standardisation among the Islamic corporate governance prohibiting any illegal business activities. Meanwhile, the existing Islamic corporate governance in Australia and the Islamic financial product discussion have pointed out the massive opportunities in the Australian market. Evidently, some of the fundamental recommendations have been included at the end of the paper to improve the current scenario.

Improve the current set of the Regulatory framework: Through the identification of indifferent risks associated with the financial industry such as liquidity risk, transparency risk, fiduciary risks and legal risks, the efficient regulatory framework must be promoted to the Islamic financial services. The regulatory framework must upgrade licensing, liquidity rules and capital structure of the financial organisations so that the Islamic banking structure and system can provide efficient services in the developed as well as emerging nations.

Strengthening supervision: By the help of the Sharia Board and IFSB standards, the Islamic financial governance structure has found solidity. Moreover, IBs and CBs supervision model must have been identified to provide right funding structure, efficient skills and management of services. Also, the operational independence through financial oversight can result in vigorous accountability practices to strengthen the corporate governance structure of the Islamic finance industry.

References

Abu-Tapanjeh, A. (2009). Corporate governance from the Islamic perspective: A comparative analysis with OECD principles. Critical Perspectives On Accounting, 20(5), 556-567. https://dx.doi.org/10.1016/j.cpa.2007.12.004

Ahmed, P. (2014). Corporate Governance and Ethics of Islamic Finance Institutions. Journal Of Islamic Economics Banking And Finance, 10(1), 32-55. https://dx.doi.org/10.12816/0025696

Alam Choudhury, M. & Nurul Alam, M. (2013). Corporate governance in Islamic perspective. I J Islam Mid East Fin And Mgt, 6(3), 180-199. https://dx.doi.org/10.1108/imefm-10-2012-0101

Bhatti, M. & Bhatti, I. (2009). Development in legal Issues of Corporate Governance in Islamic Finance. J Of Ec And Admin Sciences, 25(1), 67-91. https://dx.doi.org/10.1108/10264116200900004

Bhatti, M. & Bhatti, M. (2010). Toward Understanding Islamic Corporate Governance Issues in Islamic Finance. Asian Politics & Policy, 2(1), 25-38. https://dx.doi.org/10.1111/j.1943-0787.2009.01165.x

Casper, M. (2015), Sharia Boards and Sharia Compliance in the Context of European Corporate Governance.SSRN Electronic Journal. https://dx.doi.org/10.2139/ssrn.2179412

Hashim, F., Mahadi, N., & Amran, A. (2015). Corporate Governance and Sustainability Practices in Islamic Financial Institutions: The Role of Country of Origin. Procedia Economics And Finance,31, 36-43. https://dx.doi.org/10.1016/s2212-5671(15)01129-6

Mahmood, S. (2015), International Perspectives - Corporate Governance Regulations and Models. SSRN Electronic Journal. https://dx.doi.org/10.2139/ssrn.2423864

Mollah, S. & Zaman, M. (2015). Shari’ah supervision, corporate governance and performance: Conventional vs. Islamic banks. Journal Of Banking & Finance, 58, 418-435. https://dx.doi.org/10.1016/j.jbankfin.2015.04.030

Morrison, S. (2014). Shariah Boards and the Corporate Governance of Islamic Banks in the United Kingdom. Journal Of Islamic Economics Banking And Finance, 10(1), 96-109. https://dx.doi.org/10.12816/0025699

Rini, R. (2014). The effect of audit committee role and sharia supervisory board role on financial reporting quality at Islamic banks in Indonesia. Journal Of Economics, Business, And Accountancy | Ventura, 17(1), 145. https://dx.doi.org/10.14414/jebav.v17i1.273

Srairi, S. (2015). Corporate Governance Disclosure Practices and Performance of Islamic Banks in GCC Countries. JIF, 4(2), 1-17. https://dx.doi.org/10.12816/0024085

Sukardi, B. (2013). Corporate Governance Engineering of Islamic Banking and Finance: Tantangan Globalisasi Sistem Ekonomi dan Pasar Bebas. TSAQAFAH, 9(1), 149. https://dx.doi.org/10.21111/tsaqafah.v9i1.42

Wijethunga, I. & Ekanayake, E. (2015). Element of Corporate Governance in Islamic Banks vs Conventional Banks: A Case Study. Journal Of Islamic Banking And Finance, 3(1). https://dx.doi.org/10.15640/jibf.v3n1a5

Zain, N., Zulkarnain, I., & Hassan, P. (2015). Shari’ah Corporate Governance Structure of Malaysian Islamic Banking and Finance: The Traces of Shura. Journal Of Islamic Banking And Finance, 3(1). https://dx.doi.org/10.15640/jibf.v3n1a3

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