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Islamic finance in Australia

Understand what Islamic finance is and how it works in Australia.

What is Islamic finance

Islamic finance – also known as shariah finance, interest-free banking and halal finance – involves the use of financial services and products which are designed to follow common ethical and moral principles of Islam.

The Islamic laws that many Muslims follow are commonly known as ‘shariah’. Islamic financial services are commonly referred to as ‘shariah-compliant’ – meaning they are designed to adhere to certain ethical and legal requirements outlined in common Islamic beliefs.

How Islamic finance is different to other types of finance

There are certain beliefs that underpin Islamic finance. One belief is to avoid products that pay or receive interest. There may be a preference not to use conventional banking products like savings accounts, term deposits, home loans or credit cards.

There may also be a preference not to use conventional managed investments or superannuation products, in order to avoid indirect investments in industries such as alcohol, tobacco and gambling. In some cases, shariah-compliant investing may overlap with environmental, social and governance (ESG) standards.

You do not have to be Muslim to use Islamic financial services and products – people may invest for a variety of reasons. For example, people may choose to use a particular product based on expected levels of risk and return, as well as whether it aligns with their own ethical principles.

Examples of Islamic finance products

In Australia, there are several Islamic finance products and services available. They are offered for credit, investments and superannuation.

Credit (borrowing/lending)

To avoid the collection or payment of interest, some Islamic finance businesses offer financing for the purchase of homes or cars using alternative business models.

For example, instead of taking a conventional mortgage on a home, some providers may instead purchase the home and then sell it to the consumer for a profit. The purchase price is then repaid in instalments.

Although a financing arrangement may be described as “interest free”, this does not mean that the provider does not receive a profit. A profit is received from the repayments paid by the consumer.

Managed investments and superannuation funds

Providers of Islamic finance managed investments and superannuation funds may structure their products to invest funds in a way that avoids profits from:

Generally, operators will have a screening process to ensure that the fund does not invest in unacceptable activities. They will also often provide some assurance from Islamic scholars that the screening process is appropriate for the fund.

Some people may choose to self-manage their super to invest in shariah-compliant investments, including managed investments. Before you do this, check if a self-managed super fund is right for you.

If you are considering Islamic finance products (whether or not you are already using conventional financial products), consider getting advice from a licensed financial adviser to ensure that they are suitable for you.

How Islamic finance is regulated in Australia

All providers of Islamic finance products in Australia must comply with Australian law.

In Australia, financial services providers and anyone providing financial advice must hold an Australian Financial Services (AFS) licence, or be an authorised representative of an AFS Licensee.
Here’s how to check that the company or person is licensed or authorised.

A financial adviser must act in the best interests of the investor and must provide advice that is appropriate. They must not mislead or deceive their clients.

Anyone providing credit to individuals for personal, domestic, or household purposes (such as buying a home or car) will need to hold an Australian Credit Licence (ACL) unless authorised or exempt.

Managed investment schemes offered to retail investors should be registered with ASIC. You can search ASIC registers to check whether a particular managed investment scheme is registered.

Financial products and services must provide supporting information, usually outlined in a Product Disclosure Statement (PDS).

The PDS must explain:

Spot the red flags for unsuitable or fraudulent financial products

No matter whether you're investing in Islamic finance products or something else, there are some common investment warning signs to be aware of.

No AFS licence

Anyone offering financial advice, services, or products must hold an AFS licence or be an authorised representative of an AFS Licensee. People who are licensed must:

  • be qualified to handle finances
  • understand how financial products and services work
  • be a member of the Australian Financial Complaints Authority (AFCA) for dispute resolution if they are dealing with you as a retail client
  • act in your best interests and make recommendations that are suitable for your needs.

If they are not licensed there is a risk that they:

  • do not understand the product or service, and make bad decisions (even if they are well-meaning)
  • may recommend illegal or high-risk products, or products that do not match your financial situation and needs
  • take advantage of you, as they know what you want (for example, sharia-compliant investments).

If something goes wrong, you may not be able to get your money back. Always get financial advice from a licensed professional financial adviser.

Here’s how to check that the company or person is licensed or authorised.

Being encouraged to move your super into a SMSF

If you’re being encouraged to move your super into a self-managed super fund, take time to fully consider what this means. Make sure you understand:

  • risks involved and if this aligns with your risk tolerance
  • consequences – for example, you may lose certain insurances in your super
  • time and knowledge required to successfully run a self-managed super fund
  • how much you need to do this (you can’t do it for small amounts)
  • how much it will cost you to do this – make sure you know all the fees and costs

Find out more about self-managed super funds and how to protect your super from pushy sales people. Also watch out for the warning signs of superannuation scams.

Confusing information, claims and documentation

Make sure you understand how the financial product works and that it is clearly explained to you.

Ask for supporting information such as a product disclosure statement (PDS) or prospectus and read any contracts carefully. If there is no supporting information, consider if this is a genuine financial product following correct procedures.

If there are claims being made such as ‘shariah compliant’ or ‘ethically approved’, look for evidence to support those claims.

For more guidance on what to check, see check before you invest.

Using the word 'bank' in their description or products

Some providers may suggest their products are just as safe as bank products. This isn’t necessarily true.

In Australia, deposits held by banks, credit unions and building societies are protected by the Australian Government’s Financial Claims Scheme (FCS), up to a maximum of $250,000. However, only certain institutions are covered under this scheme.

To check if a financial institution is covered by the FCS, see the list of authorised deposit-taking institutions on APRA's website.

Feeling pressured or like you are missing out

Often investment opportunities and financial products may be discussed within a community, and this may create a lot of excitement.

You may feel pressured to invest or made to feel guilty if you don’t. But it’s important to take time to consider your options and if this is the right decision for you.

For more information, see the tips to avoid getting burned by investment hype.

 

Sometimes within communities, financial products may be created by wanting to ‘help others’. For example, investors’ money may be withdrawn from superannuation funds and pooled together to fund a worthwhile local project. The products may not be legal and the people offering or promoting the products may not hold a financial licence.

Often these people may not realise they are actually breaking the law. However, investors may be left worse off financially and may not be able to recover their money if things go wrong.

Learn more about investing

Creating a plan can help you identify investments that fit your investing time frame and risk tolerance, to help you reach your financial goals sooner. Learn more about developing an investment plan, diversification, and keeping track of your investments.