Australia’s first Islamic Bank set to open soon

The Australian Prudential Regulation Authority (APRA) has officially authorised the first Australian Islamic bank to have a restricted deposit-taking license under the Banking Act.

The Islamic Bank Australia will offer banking services that are compliant with Sharia Law to a small number of customers starting in 2023.

Sharia Law offers Muslims a broad set of rules for living an ethical life. According to Islamic beliefs, using products that earn or pay interest is forbidden because it's viewed as exploitative, unfair and unjust. For example, being charged interest on a small loan that’s needed to meet basic financial needs is considered unethical. 

In Australia’s banking system, interest is implemented everywhere, making it difficult for the 3.2% of Australians identifying as Muslims to follow their own laws.

That’s where Islamic Bank Australia comes in, to offer Sharia-compliant options to those who want it. 

Though Islamic banks are not a new concept. There are hundreds of deposit-taking banks around the world that are Sharia-compliant. Islamic Bank Australia just happens to be the first one in Australia.

How will Islamic Bank Australia products work?

Initially, Islamic Bank Australia will offer everyday accounts, term deposits and home loans. It will operate like any other bank. The key difference is that nothing will earn interest. 

Instead of the typical interest earning products, Islamic Bank Australia will offer a lease-to-buy model for home loans and a profit pool for term deposits.

Home loans

The typical Australian home loan earns a certain amount of interest annually. That interest is the profit the financial institution makes when you borrow its money. 

To follow Sharia Law, Islamic Bank Australia will follow a lease-to-buy/co-ownership model that acts like paying a monthly rent until you pay off the equivalent of the property’s original price. 

How it works is that the bank buys the property for you in its entirety and owns part of the house with you. However, to avoid paying stamp duty twice, as you might through other Islamic financial institutions, you’ll buy the property directly and your name will be on the deed straight away. 

Then instead of having mortgage repayments, you’ll be paying rent as if leased. The cost will include the rental amount plus payment towards buying the bank’s ownership of the property.

According to Islamic Bank Australia, rent is only charged on the proportion of the property you don’t own. This means your rent should go down over time, and eventually you’ll have full ownership of the house.

Everyday banking

Typically everyday bank accounts under Sharia Law do not accumulate any interest. This particular account follows the Islamic principle of Wadiah–safe-keeping your funds with a financial institution–and is approved by several Islamic scholars. 

APRA will also regulate Islamic Bank accounts: the first $250,000 deposited in such an account will be protected by Australia’s Financial Claims Scheme (FCS).

Just like any other everyday account, you’ll have the option to have physical and digital cards. It’ll have no account keeping fees, and you can withdraw and deposit money using ATMs available in Australia.

Term deposits

Traditional term deposits in Australia are a secure type of investment that earns you interest over a period of time.

Islamic Bank Australia’s term deposits don’t earn interest. Instead, they follow Mudarabah principles and earn you money through profit shares. There’ll be term deposits available from 1 to 12 months, and an automated rollover feature that puts your money back in a term deposit when it hits its maturity date.

With regard to profit sharing, depositors’ funds are put into ethical profit-producing activities and any profits generated are shared with customers. “The original deposit amount will be guaranteed, but the actual profit returned over the term may vary,” as per the bank’s website.

Potentially, more information will be released closer to the bank’s opening date around profit sharing.

When will Islamic Bank Australia open?

As of now, the bank isn’t yet open for business. With its current APRA restricted licence, Islamic Bank Australia can only have a limited number of customers in 2023. The bank hopes to obtain APRA approval to offer its products to the general public by 2024.

If you want more information or have questions, check out Islamic Bank Australia’s website and contact them directly. In the meantime, stay up to date with the latest banking news on our bank account news and advice page.