Canada Islamic finance: All ambition and no action?

Photo: Canada's Prime Minister Justin Trudeau shakes hands after speaking at a mosque to mark the Muslim holiday of Eid al-Adha in Ottawa, Ontario, Canada September 12, 2016. REUTERS/Chris Wattie

There's been a lot of talk in the last couple of years about positioning Canada as the North American Islamic finance hub. Is Canada moving in the right direction? What are its Islamic finance credentials and growth opportunities?

REGULATORY DEVELOPMENTS

Canada’s regulation of the Islamic finance industry is similar to its North American neighbor, the United States: although there is interest in Islamic finance, this has not translated into much in the way of concrete regulatory developments.

Separate laws or regulations do not govern the Islamic finance industry in Canada, which falls under the ambit of conventional finance regulations. However, key stakeholders in Canada’s financial regulatory infrastructure have been exploring how Shariah-compliant financial institutions can operate in the country.

In particular, stakeholders such as the Department of Finance, Bank of Canada, and the Canada Deposit Insurance Corporation (CDIC) have been examining the adaptations needed for existing Canadian laws to accommodate Islamic banks, financial institutions, and Islamic windows.

MAJOR CONSUMER NEEDS 

With over 1 million Muslims in Canada, there is latent demand for Islamic financial services in the country. Chief among their needs is Shariah-compliant mortgages: the size of the Shariah-compliant mortgage finance market in Canada is estimated to be over $2 billion in 2015 and that figure is projected to increase to around $18 billion by 2020, according to the Canada Islamic Finance Outlook 2016 report (pdf) by Thomson Reuters and the Toronto Financial Services Alliance.

Other core areas that Muslim Canadians need Shariah-compliant financing solutions are in home financing, insurance, and banking and investment services.

Walid Hejazi, Associate Professor at the University of Toronto’s Rotman School of Management, pointed out to Salaam Gateway that other active players in the Canadian Islamic finance market include Islamic brokerage services (e.g. CIBC Wood Gundy), numerous ijarah loan and housing co-operatives, and Islamic mutual funds such as the Global Iman Fund.

Apart from consumers, there is also strong potential for Islamic finance in Canada to take off from the institutional perspective.

Two of the areas of institutional demand include sukuk and Islamic funds.

Regarding sukuk, Canada will require major infrastructure improvements in the next few years, and tapping the sukuk markets could be a way to fund around $130 billion of infrastructure development, according to the Thomson Reuters and Toronto Financial Services Alliance report.

With the increased discussion around the similarities between responsible finance and Islamic finance, there is a latent market opportunity for Canadian fund managers to offer Islamic funds to both non-Muslim and Muslim Canadians alike. The potential market size for Islamic funds is around $2 billion.

CHALLENGES AND OPPORTUNITIES

However, Islamic finance remains a nascent industry in Canada that faces several challenges to its further development.

Hejazi notes that the Muslim population in Canada remains relatively small.

Additionally, he says, “There are political sensitivities around the introduction of “Sharia” into the Canadian context.” 

Hejazi also points out that scandals such as the 2011 insolvency of Islamic mortgage financier UM Financial have brought negative publicity to Islamic finance, and set back the development of the industry in Canada.

Moreover, on an institutional level, unlike in the United Kingdom, Hejazi observes that “there is no extensive or broad support for the issuance of a sovereign sukuk in Canada”.

In the absence of such initiatives, it is difficult to see how Canada is creating a level playing field for Islamic finance that will help promote its further development.

Jeff (Jaafer) Gareau, a Financial Advisor specializing in Islamic investments and finance since the 1990s with the company No Interest Investments, highlighted two main challenges of sourcing financing funds and trust. On financing, Gareau told Salaam Gateway, “The source of funds is tight … The Bank Act does not permit banks to share ownership and risks when lending money so they cannot do true Islamic financing, i.e. they do not go on joint-title of the deed in the percentage of ownership.”

On trust, Gareau noted,“There have recently been some examples of "Islamic" organizations which have not inspired trust in the Muslim community.”

Nonetheless, promising opportunities for the development of Islamic finance do exist.

Hejazi notes at least four opportunities for Islamic finance in Canada. These include:

1. Excess demand for Islamic solutions on the retail side, particularly Shariah-compliant mortgages
2. The Canadian government’s creation of an infrastructure bank, which aligns well with Islamic finance given the asset-backed (and asset-based) nature of Islamic finance that are ideally suited for such investments
3. The current Canadian Liberal Government that came into office late 2015 under Prime Minister Justin Trudeau, is much more open to embracing Islamic finance than the previous Conservative Government
4. There are many Canadian corporates looking to tap into Shariah-compliant pools of capital globally, which may translate into corporate sukuk issuances and other Shariah-compliant structures in Canada.

In Gareau’s view, one of the key opportunities for Islamic finance in Canada would be “a bona fide Islamic contract that is professionally run with ethics, professionalism, and competence by experienced professionals.” This, he believes, could tap into the latent demand for Shariah-compliant finance.

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