Academic journal article Journal of Economic and Social Development

When Abdul Meets David - Developing a Responsive Regulatory System for Islamic Financial Institutions: A Case Study of Australia

Academic journal article Journal of Economic and Social Development

When Abdul Meets David - Developing a Responsive Regulatory System for Islamic Financial Institutions: A Case Study of Australia

Article excerpt

Executive summary

The purpose of this paper was to identify the unmet regulatory needs of Islamic financial institutions in Australia and to develop policy options to cater to such unmet needs on the condition that no negative externalities were to incur to the existing financial service providers. Given the uniqueness of the Islamic financial institutions, this report challenged the extant 'one size fits all' regulatory model in the Australian financial service sector by proposing a new responsive regulatory framework which has a strong focus on the interests of stakeholders rather than shareholders. Furthermore, the paper argues that the responsive regulatory model yields more efficient outcomes in regulatory enforcement comparing to the other alternatives.

The paper analysed the demand and supply of Islamic finance in the global context and identified the potential opportunities for Australia. Then the paper went on to review the current financial regulatory and governance system in Australia (Figure 1) and identified the regulatory gap for Islamic financial institutions.

After taking both the distinct features of the Islamic financial institutions and their unmet financing needs into consideration, it is recommended that the proposed responsive regulatory framework would be the most suitable option due to its economic efficiency, suitability, accountability and sustainability features. A seven-stage model (Figure 4) is developed accordingly to operationalise the responsive regulatory model (Figure 3). The establishment of the Shariah Supervisory Board has been used as an example to illustrate how the proposed models may be applied to the improvement of governance and regulation of Islamic financial institutions in Australia.

1. Introduction

Abdul who come from an Islamic background in Australia is keen with establishing an Islamic financial service company to serve people with similar religious belief like him. He did not realise how few Islamic finance service providers are in Australia. He approached an Australian commercial banker David who comes from a Western background. David intends to introduce Islamic finance into his company. But both David and Abdul are not clear about the regulations that they may face and how they can lobby for a more pleasant regulatory environment. This paper intends to help David and Abdul to understand the regulation and propose a better regulatory framework to cater to the fast-growing Islamic financial service sector in Australia. Hence our research questions for this paper are:

i. How is the Islamic service sector regulated in Australia?; and,

ii. Given that the Islamic finance market is still premature in Australia, how should it be better regulated?

This paper aims to understand and develop a regulatory reform framework for Islamic finance sector in Australia. Acknowledging the heterogeneity of Islamic finance under different jurisdictions, this study is only scoped down to the analysis of development of Islamic finance in Australia. The case study adopts a problem-oriented method, with a particular interest in identifying the major regulatory challenges facing Islamic finance in Australia and in developing solutions to these problems.

The paper proceeds as follows, the rest of the section summarised the global development of the Islamic finance, identified opportunities for Islamic finance in Australia, reviewed Australian governments' supportive policies toward the Islamic finance and evaluates the regulation of the financial service providers in Australia. Section 2 reported the findings from the case study, including the shifting of the governance paradigm from the shareholder hegemony to a stakeholder interest, as well as that of the regulation from the 'one size fits all' model to a responsive regulation framework. Section 3 discussed the application of the proposed policy option based on two examples, corporate governance and stamp duty. …

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