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Islamic Finance

The Australian Experience

Elsayed Kandil


Muslim Community Cooperative (Australia) Inc. (MCCA) is an Islamic Finance organization that was established in 1989 in Melbourne, Australia. Starting with few dedicated members and a modest capital of about $A20,000 it expanded to a membership of over 1600 and a capital of over $A8,000,000 by 1997. Its declared primary objective was "to provide a comprehensive Islamic alternative for all financing needs of the Muslim community in Australia".

A resolution to expand into Sydney, New South Wales, was adopted by the Board of Directors. A steering Committee consisting of 5 volunteer members from within the Sydney Muslim community was formed to follow up implementation of the expansion resolution. The Committee carried out its task with regular weekly meetings in Sydney. A convenient site for the new branch was bought and relevant recommendations were passed to MCCA main office in Melbourne. The new branch started its operations on March 17, 1997.

This paper aims at highlighting problem areas that were encountered, proposing effective and efficient remedies, and offering suggestions for a more competitive and efficient Islamic Finance organization in Australia.



There are certain areas where improvement would greatly enhance an Islamic-financing organization in Australia. These include the organizational structure, and assessment and decision-making on applications.

1.1. Organizational Structure.

An efficient organizational structure of any institution is always linked to the objectives of that institution. For an Islamic financial institution in an Australian environment, it seems that the organizational structure should serve to achieve, among other things, the following objectives:

1.1.1. Securing a Reliable Source of Capital

It is understood that an internal source is far more preferable to an external one. Should that prove to be hard in terms of amount and/or liquidity of money, there should be no reason why an external source may not be explored. However, an internal or external source would require, among other things, a solid base of trust in quality, reliability, efficiency, and a high level of performance of those managing the financial institution.

Proposal: Thorough, impeccable, and merit-based criteria for recruiting the staff at all levels have to be clearly defined and firmly adhered to.

1.1.2. Prompt and Efficient Service to Members

Setting up clear and well-documented functions and procedures for dealing with the various areas of activities are vital conditions for success. Moreover, the smooth and efficient delivery of services at all levels must not be interrupted in case of any staff being temporarily or permanently unavailable for work. Well-planned on-going training programs must be carried out.

Proposal: Staff members should be trained for alternative duties, as need be, to ensure continuity of an efficient delivery of services at all times and all levels.

1.1.3. Appropriate Supervisory and Executive Structure

Members of the organization may elect members of the Board of Directors who perform monitoring, supervisory and strategic policy-setting functions. Election may be at suitably spaced regular periods in a way that guarantees continuity of those functions. An Executive Branch, headed by a Chief Executive Officer would regularly report to the Board of Directors. The Board of Directors must approve initial appointment of the Managing Director. He/she is hence responsible for running the day-to-day affairs of the institution in line with recommended policies set by the Board.

Proposal: Clear distinction should be maintained between the functions, responsibilities and roles of the Board of Directors on one hand and the Executive Branch on the other.

1.1.4. Empowerment of Branch Offices(1) To maximize their contributions, staff members need to believe what they are doing is meaningful, contributing towards achievment of an Islamic vision of the enterprise, thus providing rewards and motivation. When the vision for the work process is clear, individuals or teams should have freedom to improve work methods so as to achieve those results.

Proposal: This freedom motivates the challenge to be creative in achieving results that have meaning in the context of the vision. It is reasonable, for a small organization, to centralize the timing of releasing funds in response to successful applications for finance as a Main Office function. Delays resulting from overloading the Main Office with having the final decision on Branch management issues, including, among other things, approval/disapproval of applications, may be damaging to the image of the Branch Office concerned. This becomes even more essential, as the organization becomes larger and the number of branches increases.

Proposal: Delegation for responsibility of achieving well-defined and mutually agreeable results within an Islamic vision, together with appropriate resources for implementation, should be the target for Main Office Viz Branch Office organizational structure.

1.1.5. Readily Available Expert Advice

Situations may arise where an application for finance is touching upon an otherwise not commonly known and/or not clearly defined area of business transactions. Legal, professional and/or specific business areas may well be beyond the area of expertise of the staff concerned. Consultation and advice should be readily available to them.

Proposal: An Expert Advisory Panel should be readily available to offer competent and on the spot advice and/or consultation as and when necessary. Outcomes of such advice/consultation may be appropriately documented and made accessible to the Main Office and all other Branches.

1.1.6. Islamic Supervisory Committee

All financial transactions carried out by the organization must be within the guidelines of lawful Islamic transactions allowed by Shariah. If and when disagreement occurs between the organization and member(s), the dispute will be presented for arbitration according to the principles of Shariah on the issue(s) raised within a given period.

Proposal: An appropriate Islamic Supervisory Committee (ISC) will supervise on an ongoing basis all financial transactions to ensure this commitment as well as to arbitrate disputes between the organization and member(s). Majority rulings by the (ISC) are final and binding on the organization and member(s).

1.2. Assessment and Decision on Applications

With the primary objective of the organization being to provide Islamic alternative finance for approved applications, it is essential for the processing of the applications, and subsequent decision, to be thorough, relevant, fair and impartial. This may be achieved, among other things, by the following:

1.2.1. Members Database(s)

Applications must come from members. Necessary and relevant information on members must be initially collected at the time of application for membership and later updated and made readily available as and when necessary. This information may include related accounting information.

Proposal: Appropriate and professionally designed membership database(s) should be structured, maintained and linked to user friendly and readily accessible accounting system database(s).

1.2.2. Classification of Applications

Applications may be classified into appropriate categories based on clear and well-documented guidelines. Broadly speaking, categories may include the object of finance, purpose of use, number of previous approved applications . . .etc. This would distinguish between, for example, a house for an applicant to live in and a house for investment.

Proposal: Given several applications, priorities for consideration and assessment procedures may be based on the particular category for a given application.

1.2.3. Processing and Assessment Procedures

Professional and user-friendly designed database(s) may be structured and maintained for all known and future categories.

Proposal: Detailed and well-documented procedures for processing, assessment and decision may be linked to their corresponding categories.

1.2.4. Informative Brochures

Spreading awareness of the various types of Islamic alternatives to finance is in itself a way of Da'wa. Educating the Muslim and non-Muslim community in this area would go a long way towards enhancing the general image of Islam itself.

Being open, truthful and cooperative with members/applicants is a successful marketing technique, let alone a desirable Islamic attitude. There is no reason why current and potential applicants should not be able to conduct self-assessment to get a feel for the chances of success of their applications by having access to the organization's assessment and decision criteria. Applicants would then take necessary steps to increase the chances of approval for their respective applications.

Proposal: Clear, concise and informative literature may be prepared, compiled and made available through various media outlets, including the Internet. Efficient and prompt response to applicants would be facilitated through potentially successful applications being submitted.



There are probably many models and as many methods of implementation of Islamic finance throughout the world. It goes without saying that what may be suitable and appropriate for a given environment may not necessarily be as suitable and appropriate for other environments. The model and implementation alternatives offered here in no way claim supremacy over others. However, they are based on a fair depth of insight into the Muslim community in an Australian environment. Our purpose in this paper is to explore ways and means for developing a better model and implementation through discussion and mutual brain storming.

2.1. Point System Assessment

A point system is an objective and quantifiable way of assessment of a finance application. Although different types of applications may require different versions of a point system, there will still be room for common points used across the counter. Additional points may be added/amended to suit the specific relevant categories.

2.1.1. Point related weights

Basic and specific versions of point systems should be developed for assessment of various categories. Within any given point system, not every point would necessarily have the same weight in assessment.

Proposal: Appropriate weights may be assigned to relevant points of a system depending on the particular point relevance and relative importance.

2.1.2. Credit Worthiness

Certain institutions are now available for offering a measure of credit worthiness. However, that measure should be carefully and fairly assessed to avoid unnecessarily prejudicing an applicant because of situations of which he/she had no control.

Proposal: Steps may be taken to get a fair measure of credit worthiness of an applicant for inclusion in the relevant point system assessment/approval procedures.

2.1.3. Availability of Point systems

Once a point system has been satisfactorily approved, it may be easily and openly made available to applicants/potential applicants without reservation or embarrassment.

Proposal: A set of approved and user-friendly point systems for various finance applications may be compiled and made available on request.

2.2. Communication with members

Friendly communication between the organization and members/ potential members should be encouraged at all times. Queries and/or requests for information should be promptly answered without unnecessary delays. Feedback, suggestions, proposals, and complaints from members should be called for and addressed. The image of the organization may well depend on the efficiency, or lack of it, in communicating with members/potential members. Appropriate computer networks should be established between the main office and the branches. Contingency plans and risk analyses may be developed in case of accidental breakdown. Every effort should be made to maintain a state-of-the-art readiness of the information technology hardware and software.

2.2.1. Information Technology

Keeping abreast of technology may be demanding and sometimes costly. Nevertheless, an Islamic finance organization cannot afford to be left behind in a highly competitive market. Delays in responding to members' queries due to lack of utilisation of up to date Information Technology would be unacceptable for this environment.

Proposal: Necessary hardware and software upgrades and related staff training should be the order of the day.

2.2.2. Keeping in Touch

Reaching out for members/potential members would create and encourage a feeling of belonging and a bond of loyalty. Easy access to the decision-making levels would help build up mutual trust and give members a feeling of having a say in the running of the organization. Arrangements may be made for regular meetings with members/potential members in the branch. Moreover, the main office may circulate a periodical newsletter to all members at the national level.

Proposal: Regular and reasonably frequent meetings and newsletter/Web page would keep members and potential members in good communication with the organization.

2.2.3 Islamic Education for Staff and Members/Potential Members

A fact of life the organization has to accept is that many or most Muslims in Australia are not well informed on Islamic finance. Reaching out to offer informal education on this issue is yet another form of Daawah as well as a prudent marketing strategy. Staff training on relevant Islamic issues should be part of their ongoing development.

Proposal: Regular meetings may well be partly-used for a fairly in-depth Islamic finance education to members/potential members. However, appropriate training programs should be developed for staff education and on-going training in Islamic Banking & Finance.

2.3. Keeping Abreast of Market Changes

Keeping track of changes and developments in the highly competitive finance market is an essential element for the survival of the organization. Losing touch with the market may isolate the organization and eventually eliminate it as a viable competitor.

2.3.1. Market Information Resources

There are established sources for information in every industry, banking and finance included. Arrangements should be made to have access to timely and relevant information, eg. information on values of real estate properties and rent market for various suburbs may be obtained from the Real Estate industry's officially recognized sources. Similarly, relevant information on other industries may be collected.

Proposal: Appropriate databases and related decision-support systems may be structured and maintained by the Expert Advisory Panel to keep track of relevant information and compile trends in those industries to help well-informed decisions being taken.

2.3.2. Proactive market leadership

Being proactive rather than reactive would add to the competitive advantage of the organization. Taking a lead in such areas as determination of rates of return on investment in relevant markets would keep the organization one step ahead of competitors.

Proposal: Every effort should be taken to be a market leader in relevant areas of finance based on improved information and analysis resources.

2.3.3. Wide-Base Market Strategy

Given the availability of finance resources, the organization would be better off having a wider base of membership with relatively lower profit margins than the other way around. A wider base of membership would help a larger number of Muslims being protected from the Riba alternative. The Daawah implication is obvious.

Proposal: Spreading finance to a larger population with relatively lower returns may be a preferred strategic marketing policy.

2.3.4. Finance Repayments by Members

Close and active monitoring on repayments is vital not only for securing return on investment but also to inculcate in the members a responsible and prompt commitment to finance agreements.

Proposal: Appropriate procedures for follow-up and updating of repayment information may be developed with adequate system of reminders and subsequent action as necessary.

2.4. Zakat and Qard Hassan Funds

Special funds for Zakat (Alms) and Qard Hassan (Interest free loans) may be established as an integral part of the organization. Presenting an integrated Islamic range of activities creates a desirable impression to members/potential members of the community.

2.4.1. Zakat

Many members would sincerely welcome an option for the organization to carry out the task of calculating and deducting the due amounts of Zakat on their capital and/or profits in their accounts.

Proposal: An option to authorize the organization to automatically calculate and deduct appropriate amounts of Zakat may be included in the membership application form, and implemented.

2.4.2. Qard Hassan

Similarly, many members would like to donate regular amounts from their capital and/or profits for the Qard Hassan fund.

Proposal: Allowance may be made for willing members to authorize the organization to regularly transfer required donations from their relevant accounts to the Qard Hassan fund. Actual transfer should then be implemented.

2.4.3. Access to Zakat/Qard Hassan

Arrangements may be set up for needy members/non-members of the community to apply for Zakat donations and/or Qard Hassan from the appropriate funds.

Proposal: Procedures for getting money from those funds should ensure confidentiality and dignity of the applicants.



3.1. House Finance

Without going into depth, an example of an application for financing a house will be presented. Initial data required in the application would include:

3.1.1. Member name and ID number

This would be used to extract from relevant database(s) all necessary personal information, including age, employment, size of family, membership period, history of previous applications, if any, investment pattern . . . etc.

3.1.2. Location and Value of house

This would help verify the applicant's details with information from Expert Advisory Panel sources. In addition, the application should give the member's intended contributory share of this value, which would help define the organization's share of finance and appropriate timing of fund release

3.1.3. Member's Employment Status

This would show current employment status together with evidence of monthly income and commitments. It will help assessment of the member's ability to repay.

3.1.4. Member's Intended Monthly Payments

This would be assesed in comparison with income and commitments. It would also help determine the intended period of repayment.

3.2. Assessment

With the above-mentioned input information, the application is assessed. This is a straight forward case. However, the relevant expert on the Expert Advisory Panel may be consulted on the price and monthly rent of a similar property in the required location as well as the trends for the intended period of repayment. The supplied information is used to check on the corresponding application's details, and discrepancies settled.

Proposal: Provided there are no unreasonable remaining discrepancies, the appropriate point system is then implemented for assessment.

3.2.1. Unsuccessful Application

If unsuccessful, the member should be advised as to the areas of assessment where the application may be improved. If the member accepts the advice, the application is again assessed with the new set of information.

Proposal: This process may be repeated until the application is successful or the member withdraws the application.

3.2.2. Successful Application

When successful, the member may be offered alternative ways of repayment schedules in the form of either Ijarah or Murabaha. Ijarah is where the member rents the organization's share of the property and, over the nominated period, buys back the organization's share (sometimes-called Shared Equity and Rent SER). Murabaha is where a member pays a Cost plus profit amount. In Ijarah cases, the member alone and not the organization would benefit from possible appreciation in the value of the property throughout the repayment period. However, should the member default on payment or gets the organization's agreement to sell the property before final repayment, both the member and the organization would benefit from potential appreciation of the property value at the time of selling. Each would get a share of the selling price proportionate to their respective equities at the time.

3.2.3. Repayment

Several options for repayment may be made available to the member. This aims at giving a member a choice that best suits his/her situation and attitude. Fixed Rent

Using a rent value of the property that is higher by reasonable margin, say 10%, over the market rent. In return for the increased rent value, the rent itself would be fixed for the whole repayment period. This offer would be attractive to conservative members who prefer peace of mind in an otherwise rather volatile market. Such members may not want to take the risk of potential rent increases throughout the repayment period.

Point System for Application Assessment

  Point System Item Input Data Score Weight Weighted Score
 1 Employment Type (1)   28    15    420 
 2 Employment Period (Years)  4.6 
 3 Gross Income / Month ($)  1650  16  15 240 
 4 Commitment / Month ($)  1000  16  10 160 
 5 Payment / Month ($)  360  32  160 
 6 Balance in Account ($)  2480    28    10    280 
 7 Investment Period (Years) 
 8 Finance Item Value ($)  184000  16  10  160 
 9 Member Contribution ($)  35000  10  80 
 10 Membership Period (Years)  40  200 
 11 Age (Years)  20  40  200 
 12 Credit Worthiness (2)  32  15  480 


265  100  2380 

  Assessment Result 


(1) Unemployed [1], Casual [2], Part time [3], Self employed [4], Full time [5]
(2) Evaluated on a scale of [1] ­ [5], the lowest being [1] and the highest being [5]


1. Monthly payment to gross monthly income Score

Less than 20% 5
20% - 25% 4
25% - 30% 3 437/3124 = 30% 3
30% - 35% 2
Above 35% 1

2. Amount requested from MCCA to total value of house

Less than 35% 5
35% - 45% 4
45% - 55% 3
55% - 65% 2 80/106 = 76% 1
65% - 80% 1
More than 80% 0

3. Number of years needed to purchase total equity from MCCA

8 - 5 4
10 - 8 3
12 - 10 2 12 years 2
15 - 12 1
More than 15 years 0

4. Length of membership

Above 4 years 5
3 - 4 4
2 - 3 3 1 - 2 years 2
1 - 2 2
6 months ­ 1 year 1
Less than 6 months 0

5. Percentage of equity in house invested with MCCA (+)

Above 60% 5
50% - 60% 4
40% - 50% 3 24% 1
30% - 40% 2
20% - 30% 1
Less than 20% 0

6. Age

45 - 55 5
35 - 45 4
25 - 35 3 34 years 3
Above 55 2
21 - 25 1
15 - 21 0

7. Family size

6 or more 5
5 4
4 3 4 persons 3
3 2
1 - 2 1

8. Nature of investment with MCCA

Lump sum investment in addition to regular investment 5
Regular investment 3 5
Lump sum before the SER application 1

Bonus points

Credit rating with MCCA

Prompt payment 3
Average 2
Late payment 0


(+) Not applicable for mortgage discharge application Reviewed Market Rent

Repayments are calculated using the market rent of the property, the rent being regularly reviewed at agreeable intervals, say annually. This offer would suit members willing to accept reasonable risks in change of rent value. Murabaha

Repayment, using a Murabaha (Cost plus profit) basis. This offer would suit members who want a clean buy without getting the organization as partners in the property. This would enable them to sell the property whenever they can get a satisfactory price or, alternatively, benefit from potential appreciation of the property value on the market.



4.1. Organisational Structure

The following suggestions are proposed:

4.1.1. Securing a reliable source of capital based on setting high standards for staff recruitment.

4.1.2. Prompt and efficient service to members based on appropriate staff training, including alternative duties.

4.1.3. Appropriate supervisory and Executive Structures based on separate Board of Directors and Executive Management roles and functions.

4.1.4. Empowerment of Branch Offices through delegation for responsibility of achieving well defined and mutually agreeable results within an Islamic vision, together with appropriate resources for implementation made available to the Branch.

4.1.5. Readily available expert advice and consultation through establishing an Expert Advisory Panel.

4.1.6. Ensuring all financial transactions are within lawful guidelines set out by Shari'a as well as arbitrating disputes with members through establishing an Islamic Supervisory Committee.

4.2. Application Assessment and Decision.

4.2.1. Develop membership database(s) linked to relevant financial/accounting database(s).

4.2.2. Classification of application categories based on object of finance, purpose of use, number of previous approved applications, etc.

4.2.3. Processing and assessment procedures based on relevant appropriate assessment point systems.

4.2.4. Provide informative literature, as well as other media including Internet, giving assessment point systems criteria on request to help improve acceptability of finance applications by better-informed members.

4.3. Model and implementation.

4.3.1. Develop variants of relevant point systems for assessment of different categories of applications with due consideration to credit worthiness of members.

4.3.2. Improve communication with membership through up-to-date Information Technology and appropriate staff training in prompt delivery of services and Islamic finance education. This to be achieved through periodic meetings, newsletter and the Internet.

4.3.3. Keep abreast of market changes and take proactive initiatives to maintain wide-based market strategy, and market leadership ahead of competition through better information and analysis resources and prompt collection of repayments.

4.3.4. Organize Zakat and Qard Hassan services to members and non-members with appropriate dignity and confidentiality for users of these services.



(1) James Martin, The Great Transition, AMACOM, American Management Association, New York, NY, 1995

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