Canadian citizens have long voiced their need for non-interest-bearing financial products and solutions. Islamic finance known as Shariah compliant banking which is recognized in Canada as one of the alternative financing means is the solution. At present there is a significantly large un-met demand in this industry; such financing is not just for the Muslim consumers, it will be accessible to all. HESHAM YOUSSEF discusses the challenges faced by the Islamic finance industry in Canada.
Shariah compliant financing is the new buzzword in international financial markets. This type of financing, which is distinguished by its ‘interest-free’ transactions, is a rapidly growing market and has forced many international players to take notice. In addition to the emergence and growth of independent Islamic financial institutions, many international financial institutions have reacted by opening a Shariah compliant window within their conventional set-up. Some conventional financial institutions have gone further and established fully-fledged Islamic finance subsidiaries based on Shariah principles. A snapshot of the global industry size and composition is given below:
Global industry size
As of 2011 there were over 500 financial institutions worth US$1.3 trillion and the Shariah compliant financial sector is expected to grow even further. In a study conducted by PwC in 2009, they identified that the Shariah compliant money management sector is growing at a rate of 15-20% annually.
Composition
Today, the US which is Canada’s neighbor is home to at least 19 providers of Islamic banking products and services, including retail banks, investment banks, mortgage companies, investment advisors and community-based finance providers.
With the estimated number of Muslims living in Canada ranging from one and a half to two million (based on various governmental and private surveys) (excluding non-Muslims interested in the same banking and finance concept and approach) it now appears that real market demand and viability for offering Islamic banking products and services in Canada either already exist or are being developed and penetrated by these early-to-market providers. This is further demonstrated by the number of applications submitted to The Office of the Superintendent of Financial Institutions (OSFI) which is an independent agency of the government of Canada, established in 1987 to contribute to the safety and soundness of the Canadian financial system. OSFI supervises and regulates federally registered banks and insurers, trust and loan companies, as well as private pension plans subject to federal oversight. At one point in time, there were about five applications. Recently they were reduced to two out of which one was published in the Canadian Gazette. OSFI now has a fully-fledged department to assess the Shariah compliant instruments and banking in general. The issue is that Canada by definition is not a risk taker and tend to support oligopoly, hence the regulatory resistance to open the market. Unfortunately, currently there does not seem to be any competition literally in any sector of the economy.
Not only that but given the positive financial position that many Islamic financial institutions are reportedly having in the current global financial crisis (compared to conventional counterparts around the world), the timing could not be more perfect for them to take the industry to the next level in Canada.
While initial analyst reports were mixed concerning how Islamic financial institutions will weather the current financial crisis, it is now clear that they, while not immune from the crisis, are being less impacted than conventional institutions. This is because Islamic financial institutions, by their nature, have not invested in toxic assets or derivative structured instruments that many conventional institutions invested in. More importantly, most of the Shariah compliant transactions are asset-based and not merely fictitious or structured products to just make money.
On the demand side of the equation, the picture looks very disappointing. There has not been any official attempt by the Canadian government to capitalize on the uniquely healthy position of Gulf-based Islamic institutions to Canada’s advantage. This is unlike the US Treasury department that hosted a seminar in Washington DC, called ‘Islamic Finance 101’. Also, the US Treasury department deputy secretary, Robert Kimmit, traveled to the Middle East and publicly expressed the US’s positive and accommodating attitude towards the development and growth of the industry in the country. Gordon Brown (the UK’s prime minister) and Kitty Ussher (formerly a Treasury minister and now parliamentary undersecretary at the Department of Work and Pensions) in recent years announced that London has been declared to be ‘the next global hub for Islamic banking’.
The Gulf-based Islamic institutions are suffering from a multitude of barriers when it comes to entering the Canadian market. Needless to say, many investors did penetrate the Canadian market but yet the regulatory bodies dampened their enthusiasm. A bank charter was in the pipeline for more than seven years and yet it did not take off. A real estate company worth US$300 million has also not seen the light of day yet. The examples are countless.
One significant point is the perception that Canadian regulators are not interested in the growth of the banking sector in general, not only of Islamic banking. Many believe that the country’s officials are resistant towards the growth of the industry because they are not as vocal or direct about expressing their interest. But on the contrary, they oppose the merger of the big, top banks. They are pro-oligopoly where five banks control 90% of the banking sector and the economy and conditions to enter the sector and economy are stringent.
It is obvious that many Canadians in the country currently do not bank at a conventional bank because doing so violates their faith in which they believe there should be restrictions on the receipt and payment of interest.
Currently, there are no banks in Canada that offer Shariah compliant financial products. On the other hand, there are several cooperatives and one mortgage financing company that offer Shariah compliant products in the home financing segment. Some of these players also offer Shariah compliant leasing and commercial financing. However, due to funding issues, and their reliance on the savings of those participating in the cooperative, they have routine waiting periods of 12-24 months for clients who wish to utilize their services.
The Islamic cooperatives are typically small with a limited capital base. Their capital base is funded by the local Muslim community, specifically those saving up with the cooperative to eventually be able to finance the purchase of their own house. For a long time they were the only alternative available to the local community. Despite the high rates, long waiting times, and large amounts of downpayments, a substantial number of Muslims have signed up and waited years and years in order to take advantage of a Shariah compliant product.
Currently, the Winnipeg-based Credit Union has launched the country’s first ‘Islamic mortgage’, a product designed to address Islamic law. Your Credit Union (based in Ottawa) offers a Shariah compliant home financing product. Their product is not accessible to the public directly but is offered indirectly via a mortgage financing company. However, this financing is limited to the geographical area of its operations i.e. Ontario. Apart from that, McMaster Credit Union in Hamilton is the only other credit union offering Shariah compliant customer accounts, but they do not offer any Shariah compliant home financing products. Moreover, their products are also restricted geographically to Hamilton and its suburban areas. As a whole, credit unions do not offer any Shariah compliant commercial or trade financing services.
Fortunately, there is an increasing realization that the perceptions about the regulatory bodies regarding Islamic banking were simply incorrect. This, of course, is attributable to the fact that the country’s Islamic finance market is now more populated with higher demand and offerings than it used to be. More and more investors are also recognizing the opportunities that will exist for them in the Canadian market.
Hesham M Youssef is the vice president of Islamic banking services at Oasis Financial Holdings. He can be contacted at [email protected] .