Tax Season Canada poised to be hub of Islamic finance

Islamic banking is being touted as the next big thing for Canada's financial services sector, but experts say it's up to the new federal government to demonstrate that it welcomes Shariah-compliant investments.

"It's absolutely fundamental that the Canadian government signal that, in fact, it is open to Islamic finance," says Walid Hejazi, an associate professor at the University of Toronto's Rotman School of Management.

They could do so either by issuing sukuk – Islamic bonds – or by making a public statement, Hejazi says, noting that the previous government was on record as saying it welcomed such investments.

"If there is a risk that a change in government is going to change its view on that kind of investment, that spooks investors," he said. "So the government must be clear to say . . . 'We're open to Islamic finance, we welcome it,"' Islamic finance – which bans interest payments and investments in gambling, pornography, weapons, alcohol, tobacco and pork – is a fast-growing niche in the financial services industry.

A study released earlier this month by the Toronto Financial Services Alliance and Thomson Reuters says Canada has a number of advantages – including a growing Muslim population, a stable banking system and a favourable regulatory environment – that make it well positioned to become a North American hub for Islamic banking.

"Islamic finance is one of the fastest growing kinds of finance in the world," said Janet Ecker, president and CEO of the TFSA.

"There are opportunities here which should be explored. Toronto is an international financial centre. ... This is another way to keep our reputation and our capabilities growing."

Hejazi says the Islamic ban on interest doesn't mean consumers borrow money for free – it just requires loans to be structured more like partnerships between financial institutions and borrowers.

"The whole idea or the concept is to avoid people becoming buried in debt because, back in the days of the Prophet, ... when people weren't able to pay their debt they were enslaved or exploited," he said.

In the case of commercial loans, that means both the bank and the borrower must have a vested interest in the success of the underlying business.

"If the underlying business does well, they share in the profit," Hejazi says. "If it does poorly, they share in the losses. That's the fundamental difference; this idea of shared risks, and nobody can have a guaranteed return."

The report commissioned by TFSA says there are a number of opportunities for Islamic banking to expand in Canada. Some Muslim Canadians desire Shariah-compliant solutions to their personal finance needs, including mortgages, insurance and investment opportunities.

The Canadian government could also issue sukuk, or Islamic bonds, which are structured in such a way that they generate returns without the use of interest payments, to help fund its planned infrastructure spending, according to the report.

"The new federal government has an opportunity to demonstrate Canada's openness to foreign investment from markets in the Middle East and Southeast Asia by encouraging investments either in a conventional or an Islamic-compliant manner," said Jeffrey Graham, partner and the head of the financial services regulatory group at Borden Ladner Gervais LLP.

"Other governments who have been seeking to do the same thing have issued sovereign sukuks, or Islamic bonds, to help promote their financial sectors."

However, a spokesman for the Department of Finance appeared to throw cold water that idea, saying in an email that "there continues to be very strong demand for regular 'plain vanilla' Government of Canada securities."

Meanwhile, one of the obstacles to the growth of Islamic finance in Canada is the lack of what Hejazi calls "human capital."

"We need to have people across the country that understand Islamic finance, which we don't have," said Hejazi, who teaches a course onIslamic finance, now in its fifth year, at Rotman. Last year the course was full, with 40 students on the waiting list.

"I get so many e-mails from people downtown, from the banks, the accounting firms, consulting firms, saying 'Could I sit in on your class?"' says Hejazi. "There's a lot of interest. People really want to learn more."

(CBC.News Business / 23 December 2015)

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Islamic finance’s global surge remains a missed opportunity for banks in US and Canada

Islamic finance is surging across the globe, gobbling up an ever increasing share of the more than $220 trillion in international assets outstanding. It’s a trend that has accelerated since the 2008 crisis shook confidence in conventional banking, prompting most of the world’s financial capitals from London to Dubai to join the battle to dominate the industry.

That is, everywhere except in the US and Canada. How come? We can blame a combination of regulatory hurdles, a lack of proper rules and standards and general Islamophobia. But the result is that banks in the region risk missing out on a fast-growing and lucrative market and the patronage of wealthy foreign investors – not to mention the millions of Muslims living in North America eager for products and services that match their beliefs.

To be fair, most countries are struggling to craft rules and regulations that standardize Islamic finance and enable it to compete with its conventional counterpart. It’s just that North America is falling further and further behind.

To understand why – and see how the region’s banks could still grasp the industry’s reins – we must first explore the world of Islamic finance.

What is Islamic finance?

Islamic finance is much like traditional finance except that the services and products it creates conform to Islamic teachings,also known as sharia. The most well known of these is the prohibition against charging interest, known as riba in Arabic and a term whose explicit meaning is in dispute (more on that below).

Anyone who’s ever used a credit card knows you can’t borrow a dime without paying interest, but in Islamic finance, banks must find other ways to make money off their loans and other products. They usually do this by charging a service fee and/or engaging in profit-and-loss-sharing contracts. The most popular of such methods for home financing, for example, is called murabaha, which is similar to rent-to-own schemes. A bank purchases a house for a customer and then sells it back at an agreed-upon markup.

Islamic assets must also follow other ethical norms. Investments in high-risk ventures, gambling, non-halal foods, alcohol, pornography, and so on are all off limits. In addition, the rules generally require that risks be shared between the lender and borrower, and that all finance be directly backed by real assets – a far cry from some of Wall Street’s exotic creations that bear only a distant relation to an actual asset.

The industry is growing so quickly because its primary demographic comprises one-sixth of the world’s population, most of which is based in the Middle East and increasingly interested in parking its growing wealth outside the region. This is creating a pressing need for financial products and services that conform to Muslim beliefs.

A fast-growing market

The overall market in Islamic assets has grown at an average pace of 20% a year since the financial crisis struck in 2008.

According to the Dubai-based Al Huda Centre of Islamic Banking and Economics, the industry is projected to boast more than $2.5 trillion in assets this year.

Islamic bonds, or sukuk, are perhaps the most prominent segment, with companies and governments expected to sell about $145 billion of the debt in 2015.

Iran, Malaysia, and Saudi Arabia currently dominate the industry, but many Western countries are vying to become European and international hubs for Islamic finance.

The UK in particular has been pushing hard to get in the game. Last year, it became the first Western country to issue an Islamic bond. The former lord mayor of London, Roger Gifford, went so far as to say that Islamic finance should be as British as fish and chips.

Yet in a 2014 ranking of 42 countries with some form of Islamic finance activity, the US placed 15th and Canada last – a puzzling reality given the importance of each country’s banks to the global financial system.

Why did they fall behind?

It’s not that Islamic finance is new to the New World. Mutual funds and mortgages that adhere to Islamic laws have been around since the 1980s. And in 1998, the US comptroller ruled that certain Islamic mortgages were equivalent to mainstream mortgages, as far as banks were concerned, encouraging Freddie Mac and Fannie Mae to purchase millions of dollars worth of sharia-compliant housing loans.

But such activity was short-lived despite rising demand.

One key explanation why can be found in regulations and laws that discourage Islamic finance, even ones ostensibly designed to keep the overall financial system safe. Meanwhile, the overlapping regulatory layers between the states and federal government that make setting standards incredibly complex.

One example involves a Tennessee mosque that lost its property tax exemption after it took out an Islam-compliant mortgage, which makes the bank the owner until the debt is paid off. Since the technical owner of the property was no longer a religious institution, the tax exemption (for the property) was lost.

Another is the requirement that US banks keep their risk ratios fairly low. In order to be compliant while also maximizing profit, banks usually invest in the huge supply of fixed-income securities such as Treasuries and conventional corporate bonds, which are prohibited by Islamic laws.

An entirely different reason also appears to be xenophobic fears of sharia spreading across the country. This even sparked an inquiry by the US senate in 2005 to look into whether Islamic finance supports terrorism. Experts at the hearing testified that there is no evidence suggesting Islamic finance is more prone to facilitate terrorism than its conventional counterpart.

Lack of standards a global problem

More broadly, the lack of standards in Islamic finance and costs and complexities involved in entering the market have made some mainstream financial institutions wary. For example, there continue to be disagreements over what actually makes an asset permissible under Islam and who is qualified to determine this in the first place.

In fact, even the most fundamental tenant of Islamic assets – the prohibition of interest – is under dispute. More orthodox schools of thoughts claim all forms of interest are forbidden, while modernists contend only its most excessive and exploitative forms (namely usury, the ninth-greatest sin) should be prohibited.

There are now increasing fears that this lack of standards will hurt the industry in the long run. But rather than serving to put off banks in North America, this actually presents an opportunity to lead the way in crafting regulations that set standards globally and developing products at the cutting edge of the industry.

A fresh opportunity

Both the US and Canada are a natural fit as homes to the bustling and dynamic Islamic finance industry, despite the above challenges.

The region’s energy and natural resources, as well as its stability, are a strong draw for wealthy investors from the Middle East, while the presence of highly educated and high-income Muslim populations offers a sizable domestic customer base.

This is a segment that has been much neglected despite its desire for sharia-compliant financial products. A new survey of US Muslims by Dinar Standard shows that 65% of respondents want Islamic finance available at their local bank and 57% want to know such products are verified as sharia-compliant.

As they are unable to find avenues within institutional finance to invest in ways that conform to their beliefs many Muslims have fallen victim to ponzi schemes and other scams. High profile cases involving an alleged ponzi scheme in Chicago and insolvency of a mortgage provider in Toronto point to the vulnerability of the nascent industry.

Regulators need to clear the way

Fortunately, banks have been showing increased interest in recent years in adding Islamic finance to their offerings, and mainstream lenders are exploring how to tailor their contracts to meet sharia’s requirements. Goldman Sachs issued its debutsharia- compliant bond last year, becoming the fourth US-based issuer to do so.

And there is also much interest in fusing the similarly fast-growing halal food industry with Islamic finance.

But even if the banks are growing more interested, regulators must get involved to provide sufficient guidance to allow them to move ahead. The fundamentals of Islamic finance need to be strengthened and standardized if it is to emerge as a viable alternative.

At its heart, the purpose of Islamic finance is to promote the social good through financial markets, allowing companies and consumers to raise money while following the moral precepts enshrined in the Koran. But the way it is currently practiced is far away from realizing this goal.

(The Conversation / 06 March 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic banking set to boom in Canada

After emerging largely unscathed from the financial crisis that hammered North American and European financial institutions, Islamic banking has momentum.

Worth $1 trillion in assets, Islamic banking is being lauded by British Prime Minister David Cameron and supported by Canada’s Conservative government, major banks and credit unions, leading business schools and influential Muslims across the country.

Islamic banking — which bans interest payments, pure monetary speculation and investing in such things as alcohol, gambling, pornographic media and pork — is being sold as the next big thing in financing for Canada, which is home to just over a million Muslims.

“Awareness in Canada of Islamic banking has increased dramatically in the last few years,” says Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management, where he teaches on the subject.

“With the federal government’s efforts in this respect, Canada’s attractiveness to Islamic finance will grow,” Hejazi says. He cited how Prime Minister Stephen Harper’s government helped sponsor a World Islamic Banking Conference last year in the oil-rich Persian Gulf.

Many Canadian Muslims are seeking “Shariah-compliant banking solutions to their personal finances,” says Hejazi, a Lebanese-Canadian. They want home mortgages that are not based on conventional Western interest payments, but which operate more like a partnership.

The International Monetary Fund, Hejazi says, recently attributed the expansion of Islamic finance to demand from the increasing number of Muslims living in the West, growing oil wealth in Muslim countries and people seeking “ethical” and lower-risk financial products.

Even though Islamic banking has some harsh critics among Canadian Muslims who consider it unwieldy — with many still suffering from the 2011 bankruptcy of Toronto-based UM Financial, which offered Shariah-compliant mortgages — the movement is gaining energy.

In addition to Canadian banks, such as CIBC, making explicit gestures to offer Islamic banking, Hejazi says the Canada Mortgage and Housing Corporation recently reported there are no regulatory hurdles to stop Shariah-compliant banking expanding in Canada.

To continue to grow, some of the world’s largest Islamic banks — most of which are in the Middle East, Indonesia and Pakistan — are looking at rebranding to appear less religious and more open to Western investors drawn to the kind of no-interest cooperative banking that is also offered in countries such as Sweden.

For instance, the Abu Dhabi Islamic Bank, the largest Shariah-compliant lender in the emirate, is considering removing the word “Islamic” from its name and calling itself Abu Dhabi International to emphasize its service quality. Many financial institutions in Muslim-majority countries already simply call themselves “participation banks.”

“I think many Muslims in Metro Vancouver are excited about the idea of Islamic banking. In general, I think it’s a good idea,” says Luay Kawasme, director of the Vancouver Muslim Community Centre.

“The appeal of it for Muslims is they don’t have to get involved in financing that involves interest. Instead, the risk occurs between the financial institution and the borrower. You basically go into business together as partners.”

The Islamic ban on usury grew out of the seventh-century era of Mohammed. The founder of Islam, Luay says, opposed the way “the wealthy would get outrageous returns on their loans; charging interest rates of 20, 30 and 40 per cent.”

Bans on usury are also embedded in Hebrew and Christian scriptures, Luay recognizes.

(The Vancouver Sun / 26 December 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Muslim banking in Canada: A paradigm shift

It is likely that Islamic finance in Canada will increase in popularity given the number of potential households it could serve. It is also likely that as the regulatory framework for such institutions solidifies, more entrants into the market will help satiate the desire for economies of scale. Many emerging markets around the world with relatively large Muslim populations already have significant Islamic banking institutions. Needless to say, Islamic finance still remains a mystery to many in the Western world.

One of the fundamental tenets of banking is known as interest. There are several historical accounts of interest payments being made as far back as several centuries BC. Interest exists in two general types: a) a fee that is paid by a borrower of money; and b) a fee that is earned from the deposit of money. The difference between b) and a) is often referred to as "the spread." The spread is how most financial institutions make revenue. Take for example a bank that takes a deposit from a customer of $100 and pays that customer interest of 2 per cent or in this case $2 after a year's period. The bank will then take that same $100 and lend it out to a different customer who must pay borrower's interest of 5 per cent or $5. In this case, the bank has made a spread (or profit) of $3.

Islamic banks adhere to religious law — called "sharia" — which affects how they operate. Under sharia law, Muslims do not pay or receive interest. This practice is known as "riba" in Arabic. When gold currency was used for normal transactions, it was acceptable for a loan of 100 gold dinars to be paid back as 110 gold dinars because it was considered tangible value. However, when economies moved toward the use of fiat (or government regulated) money, the practice of riba was inconsistent with Islamic principles and therefore, not permitted. Riba is defined as surplus value without counterpart. This distinction between tangible (gold) and intangible (fiat) transactions is at the root of what makes Islamic banking unique.

If Islamic finance prohibits charging interest (riba), how do they function? Ensuring fair play is at the core of Islamic banking. As such, the principle of "risk-sharing" is a critical component. In essence, the Islamic bank becomes a business partner with the customer. For example, a car lease is appropriate because the bank has a stake in the ownership of the car. There are two principle financing arrangements offered to borrowers: murabaha (instalment sale) and ijara (redeemable lease). In the murabaha example, the bank buys the asset (e.g. large screen television) and then resells it to the customer at a higher price while the customer still uses it. In this case, the customer will have an instalment plan of those repayments. In the ijara example, the customer would use the asset (e.g. large screen television) over a number of years and at the end of the agreement pay cash to own it outright.

When it comes to deposit accounts, Islamic banks have a similar philosophy to credit unions. They will both share in the profits of the organization. The main difference in Islamic finance is that the profits that will be distributed are at a rate agreed to when the account is initially opened. As such, if the Islamic bank does not make any profit, the depositor will not receive any payment. This is an example of the risk-sharing principle outlined earlier.

Islamic finance is an interesting topic of study. There are courses now offered in business schools across the country including ours at DeGroote. A handful of Islamic credit unions are popping up across Canada, although some have struggled to survive. A well-regulated and beneficial Islamic financial infrastructure is indeed possible, and most importantly, necessary for long-term viability in Canada.

Nick Bontis is a professional speaker, management consultant, business adviser, McMaster University professor and author.

(Thespec.Com / 17 May 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Canada: Bank may offer Shariah loans

Islamic Shariah-compliant mortgages could be available in Canada through one of the major conventional banks as early as this summer, says a Toronto-based financial firm operating within the Muslim community.

"We're confident by the summer time we will have a solution in place," said Omar Kalair, chief executive officer of UM Financial Inc.

"We plan to launch with one of the big five banks a whole suite of products under the UM branded name, which will be structured to be Shariah compliant."

Islamic financing, based on the principle that no interest is charged, is in its infancy in Canada, although widely available in the U.K. At least two U.S. banks currently offer Shariah mortgages.

To get around forbidden interest payments on loans, Shariah-compliant mortgages function by having the lender become an equity partner in a home purchase. The homeowner pays the financial institution putting up the rest of the purchase price monthly "rent" or "profit" payments, and principal.

(The Star.Com / 04 Jan 2013)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Canada: Learning Islamic finance

There’s an in-demand MBA course at the University of Toronto’s Rotman School of Management that essentially teaches back-to-basics banking for Canadian businesses. 

Students who enroll learn the merits of being conservative with investments, ways in which their businesses can participate in this sector and will discover the theory that pushes people to save and spend wisely – a concept that has been around for centuries.

Islamic Finance is one of the quickest growing segments of the financial-services industry. Walid Hejazi, professor of International Competitiveness at Rotman, and academic director and developer of the course, says the class introduces new business perspectives to students. “It’s a tremendously misunderstood approach in Canada that has nothing to do with religion,” he says.

“Islamic finance, like conventional finance, is simply an approach to solving the economic problems we currently have. The course appeals to a wide spectrum of students, and my classroom is diverse,” says Hejazi. “The focus of the course is to provide insight into foreign investment and business opportunity in Canada. I’ve taught Christian, Jewish, Muslim students and more.”

The course – aimed at professionals who work in finance, such as controllers, accountants, investors, financial analysts, entrepreneurs and lawyers – doesn’t delve into the beliefs that Muslims hold. Instead, it focuses on attracting foreign investment, conducting business overseas and meeting the growing demand for sharia-compliant investment products in Canada (Islamic law prohibits usury). This is the only MBA course of its kind currently offered in the country, and Hejazi says he believes it offers students a leg up when sharia-compliant finance departments start getting the recognition in Canada that they have in other countries.

That’s one of the reasons Abbas Irtzia signed up for the course last winter. “I felt that getting an understanding of Islamic finance principles would give me an edge if ever I got into business dealings with parties from that region,” says the recent graduate, who is an associate at a boutique private-equity firm in Toronto. “I was very curious. Even though I lived all my life in a country that has a fair number of Islamic financial institutions, I never dug too deep to understand how exactly Islamic finance differed from conventional finance. The course was my chance to learn more about an area that has a certain sense of mystique surrounding it,” he says.

Jesse Rosensweet also took IF last winter and, after earning an A in the class, says he’d like to be involved in the development of sharia-compliant offerings to Canadian consumers and investors, whether working on regulatory issues or from the finance side. The recent MBA grad, who’s articling in corporate law at Toronto’s Aird & Berlis LLP, says Islamic finance has been on his radar for a few years. “This sector is in its infancy in Canada, so the course seemed like a great opportunity to learn about something that will continue developing in the years to come. The GTA represents the biggest potential market in Canada. Hopefully, developments in banking and securities regulation will enable financial institutions to begin offering sharia-compliant products in parallel to the conventional ones,” he says.

Irtzia, who also earned top marks in IF, agrees that it’s only a matter of time before Islamic finance is part of mainstream banking, whether it’s billed as “Islamic” finance or ethical or conservative banking. “With the growing popularity of sharia-complaint products all over the world, I think everyone attending an MBA program in Canada should give this area careful thought, as there could be many opportunities in the Canadian context going forward. I know at least one Canadian bank is already looking toward tapping into this area.”

As for professor Hejazi, he likens the misconceptions about non-Muslims being attracted to the benefits of Islamic finance products, like sharia-compliant mortgages, to enjoying a halal burger. “You don’t have to be Muslim to have one,” he says.

(The Star.Com / 06 Sept 2012)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Canada: Shariah Investment for Canada Muslims

Ontario – Celebrating a growing market of Shari`ah-compliant funds, Canadian Muslims are resorting to products that comply with Islamic principles for their retirement income and investments.

"The way I actually look at Shari`ah-compliant products is mainly as a subset of ethical, or socially responsible investing [such as avoiding the adult entertainment industry or any company that may negatively impact the environment]," Mohammad Khalid, a retired economist living in Oakville, Ontario, told CBC News on Monday, February 27.

Khalid, a devout Muslim, said Muslims must be careful about their investments, such as securities and equities.

Managing his own portfolio, he invests in sectors such as mining, forestry and technology as well as helping his older children save for their retirement.

"The whole market is essentially available, excluding some of the major ones [such as insurance companies and banks]. ...There are so many different companies which will keep giving you dividends year after year," Khalid said.

Shari`ah-compliant funds in Canada are focused on mining, forestry and technology.

"We've assisted in getting the Shari`ah-compliant certification for a couple of the mutual funds that are in Canada right now," said Rehan Huda, a director with Amana Canada Holdings, a niche financial firm that sells Shari`ah-compliant investment funds.

"There’s one fund – a bullion fund – that’s a fairly large fund that has gold, silver, platinum stored here, and it’s a purely Shari`ah-compliant fund.

"Since we're heavily in resource and technology-weighted [funds] ... when those do well, the Shari`ah funds generally do well."

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

The Shari`ah-compliant system is now being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

Flourishing Investments

With the growing Muslim population in Canada, the demand for Shari`ah-compliant investments was increasing.

"An inordinate amount of cash is found among Muslim investors that I know ... and they are waiting for Shari`ah-compliant products," Huda, from the director with Amana Canada Holdings, told CBC News.

"In the future, there’s going to be a lot more products because the population is increasing here."

Muslims make around 2.8 percent of Canada's 32.8 million population, and Islam is the number one non-Christian faith in the Roman Catholic country.

A recent report from the Washington-based Pew Forum on Religion & Public Life said that Muslims are expected to make up 6.6% of Canada’s total population in 2030.

A testament to the growing interest in Shariah-compliant investing is Standard & Poor’s introduction of its Shari`ah stock index (S&P/TSX 60 Shariah Index) into the Canadian market in 2009.

The index recategorizes equities on the S&P/TSX 60 and excludes all equities that do not comply with Islamic law, which is based on the Muslim holy book, the Qur'an.

Though many Canadians think the Shari`ah-compliant funds are not profitable, Khalid says there are many "wonderful companies" that can help investors reap big dividends, including technology companies.

"Absolutely nothing is holding them back," he said.

"If they don’t [invest], obviously they’re losing something big time. You can reduce your taxes big time."

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

(OnIslam, 26 Feb2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Investment Malaysia:
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