The Australian Prudential Regulation Authority (APRA) has officially authorized the first Australian Islamic bank to have a restricted deposit-taking license under the Banking Act.
The Islamic Bank Australia will extend banking services that are compliant with the Sharia Law to a modest scale of customers commencing from 2023.
Sharia Law propounds Muslims a distinct set of rules for living a virtuous life.
According to Sharia principles, using products that earn or pay interest is outlawed as it is regarded as unjust, unfair, and exploitative. For example, charging interest on a small loan that is vital to meet basic economic needs is considered unethical.
In the Australian system of banking, interest is applied in all places, making it arduous for the 3.2 percent of Australian Muslims to follow their own principles.
That is where the Islamic Bank Australia offers Sharia-compliant options for those who need it.
The concept of Islamic banks is not new, there are many deposit-taking banks worldwide that are Sharia-complaint. The Islamic Bank comes into existence as one of the first in Australia.
How will the Australian Islamic Bank products work?
Primarily, the Islamic bank of Australia would extend term deposits, everyday accounts, and home loans which operate like any other banks. The key distinction is that none of these offerings will earn interest.
In lieu of the typical interest earning products, Islamic Bank of Australia will offer a profit pool for term deposits and lease-to-buy model for home loans.
The classic Australian home loan earns a certain amount of interest per annum. That interest is the profit the financial institution makes when the borrower takes a loan.
The Islamic bank of Australia would follow a lease-to-buy/co-ownership model to adhere to the Sharia law. The co-ownership model is like paying a monthly rent until the borrower pays off the equivalent of the property’s original price.
How it works is that the bank buys the property for you in its totality and retains the house partly with the borrower. Nevertheless, to prevent paying stamp duty twofold, as might be applicable across other Islamic financial institutions, the borrower would purchase the property directly and the name of the borrower will be on the deed instantly.
Then in lieu of having mortgage repayments, the borrower would pay rent as if leased. The cost would take account of the rental amount and payment towards buying the bank’s ownership of the property.
According to the Islamic Bank of Australia, rent is only charged on the proportion of the property not possessed by the owner. This implies that the rent will go down over time, and the borrower would have full ownership of the property.
Everyday bank accounts under Sharia Law do not accumulate any interest. This account follows the Islamic principle of Wadiah – safe-keeping funds with a financial institution, and is approved by several Islamic scholars.
The Australian Prudential Regulation Authority (APRA) will also regulate Islamic Bank accounts- the first USD 250,000 deposited in such an account will be protected by Australia’s Financial Claims Scheme (FCS).
Like any other everyday account, a customer would have the option to hold digital and physical cards. It will have no account keeping fees, and customers can withdraw and deposit money using cash machines available in Australia.
Traditional term deposits in Australia are a secure mode of investment that earns you interest over a period.
The Australian Islamic Bank’s term deposits desist earning interest. Rather, they adhere to Mudarabah principles and earn money by profit shares. Term deposits are obtainable from 1 to 12 months, and an automated rollover feature that sets money back in term deposits when it reaches its maturity date.
With reference to profit sharing, depositors’ funds are put into ethical profit-producing activities and any profits generated are shared with customers. As per the bank’s website, the original deposit amount would be guaranteed, but the actual profit returned over the term may differ.
When will Islamic Bank Australia open?
As of now, the bank is not yet open for business. With its existing APRA restricted licence, the Islamic Bank Australia can only have a limited number of customers in 2023. The bank expects to attain APRA approval to offer its products to the public by 2024.