Canada has been a pioneer in Islamic finance in the West over the past 20 years. Beginning in the early 1980s, several Muslim housing cooperatives were established in Canada that pooled investment capital for the purpose of buying homes for interested Muslims. Later, some of theses cooperatives offered automobile leasing and investment products. Recently, Canadian mainstream financial institutions have begun to show interest in Islamic finance.
Economic Powerhouse
A land of vast distances and rich natural resources, Canada became a self-governing dominion in 1867 while retaining ties to the British crown. The country is a constitutional monarchy that is also a parliamentary democracy and a federation. The population is estimated to be 33 million and the official languages are English and French.
As an affluent, high-tech industrial society, Canada resembles its southern neighbour, the United States, in its market-oriented economic system, pattern of production and affluent living standards. Since World War II, the rapid growth of the manufacturing, mining and service sectors has transformed the nation from a largely rural economy into one that is primarily industrial and urban.
Given its great natural resources, skilled labor force and modern infrastructure, Canada enjoys solid economic prospects. The Canadian government's astute fiscal management has produced consecutive balanced budgets since 1997 and the country has been a top performer among the G-8 nations over the past decade. Key public policy issues include how to manage the rising cost of the publicly funded healthcare system as well as sustainable development.
Growing Community
Over the past decades, Muslims from all parts of the world have moved to Canada to pursue a better quality of life. These include a large number of professionals such as doctors, engineers and computer scientists who came to meet Canada's labour requirements. There have also been a number of refugees, such as in the 1980s, when Canada became an important place of refuge for those fleeing the civil war in Lebanon. In the 1990s, the civil war in Somalia brought tens of thousands of refugees to Canada. The Canadian Muslim population is diverse, including people born in the Muslim world, Canadian-born Muslims and Western converts.
According to the national statistics agency, Statistics Canada, there were approximately 100,000 Muslims in 1981, 250,000 in 1991 and 600,000 in 2001. Currently, the population is between 850,000 and 900,000 and Islam is the fastest-growing religion in Canada. The high growth rate in the Muslim population in Canada is likely due to a combination of high birth rates and immigration. Estimates indicate that Canadian Muslims already make up the largest non-Christian community in 10 out of the 25 important metropolitan cities in the country. Muslims have settled from the Atlantic to the Pacific coast, in all the 10 provinces and the three territories. However, 86 percent of Muslims live in only six metropolitan areas, and metropolitan Toronto has about half of the Muslim population in Canada.
The ethnic breakdown of the Muslim population is as follows:
37 percent are of South Asian descent
21 percent are of Arab descent
14 percent are of West Indian descent
28 percent are of a number of other ethnicities, e.g., African, Malaysian, Turkish, etc.
Muslims represent the youngest generation in Canada, with a median age of 28 years, as compared to the national median of 37 years. They are among the most educated groups in the country, with 1.5 percent of the population holding PhDs, second only to the Jewish community at 2 percent.
On the Move
Beginning the 1980s, several Islamic financial co-operatives have operated in Canada and they offer a number of Shariah-compliant financial products. These include home financing, car leasing, commercial financing and investment opportunities. The home finance products are offered under a Musharaka contract in which home purchasers and the cooperative own shares of the property in relation to the capital they invest in the home. The homeowner pays rent for the shares owned by the cooperative and also buys shares from the cooperative to reduce the monthly rent. The cooperative also shares in the increase in the value of the home at the end of the contract when the homeowner finally purchases the home.
Car leasing is generally done through an Ijara structure which is similar to conventional lease-to-own financing. The cooperatives have done a small amount of equipment and business financing, but their main focus has been residential or commercial real estate financing.
In terms of investment opportunities, the cooperatives offer the opportunity for Muslims in Canada to invest their retirement savings as well as their regular savings in a Shariah-compliant way. Some of these investments have included a Muslim-owned slaughterhouse, medical and professional buildings, convenience stores, etc. Recently, cooperatives have embarked upon larger-scale land development projects, including in the resource-rich province of Alberta, where the recent boom in oil prices has caused significant economic growth and opportunities for investors.
Over the past couple of years, Canadian financial institutions have also begun to experiment with Islamic finance products. A couple of credit unions in the province of Ontario, where the majority of Muslims in Canada reside, offer Murabaha home financing. These contracts are essentially installment sales contracts in which home purchasers would have the property assigned to the financial institution, which would then sell the property to the purchaser with a mark-up.
In terms of Shariah-compliant investments, the country's largest bank, the Royal Bank of Canada, introduced for a brief period of time an equity index-linked note using the Dow Jones Islamic Index. A new set of Shariah-compliant mutual funds have been set up over the past year and there are more investment products that are in the process of being developed by a variety of groups and institutions.
Challenges and Opportunities
In analyzing the potential for Islamic finance in the Canadian market, there are two key elements that support the development of this industry:
The rapid growth of the Muslim population in the country and the corresponding increased demand for Shariah-compliant financial services.
The availability of Islamic products in Canada is limited when compared with the size of the population and the potential wealth that this population possesses.
Existing Islamic finance companies and institutions in Canada do face a number of challenges. Foremost is the lack of capital available to the current cooperatives and Muslim firms to meet the market demand of the domestic home finance market. In the United States, for example, such cooperatives and firms have been replaced over the past several years by innovative home finance firms that utilize partners such as Freddie Mac and Fannie Mae that provide large pools of capital that can be used to fund home financing. The securitisation of these Islamic home finance portfolios ensures the constant supply of funds to meet the market demand. In addition, Islamic home financing in the US is relatively competitive to the market, as opposed to Canada, where Muslim consumers often pay significant premiums in order to secure Shariah-compliant financing.
In terms of investment opportunities, there are a few new investment vehicles that are now available for high net worth investors, but there are not enough to meet the demands of the majority of retail customers. The success of some of the US-based and international Shariah-compliant funds may lead to the introduction of more such funds in Canada, thus giving Muslim retail investors more options on where to invest their savings.
In order to meet many of the challenges described above, a number of groups, including international financial institutions, are in the process of applying to Canadian regulators for the establishment of Islamic banks in Canada. A successful business model for such a bank will have to consider the challenges of attracting Muslim clients away from their current conventional banking providers. In order to achieve the desired level of market penetration, such institutions must offer a clear and attractive Islamic finance proposition that would serve the needs of the community. Providing a large array of product options will be critical in order to make Islamic financial services competitive and convenient to use. The reach of Islamic financial products and services as well as sophistication and professionalism in service delivery will also be important elements of a successful Islamic financial services proposition.
Time of Transition
As in a number of other Western nations, Canada is experiencing rapid growth in its Muslim population. This has translated into a significant demand for Shariah-compliant financial services. The Islamic finance industry in Canada is undergoing a transition as new entrants are beginning to offer Shariah-compliant financial products that were once only offered by Islamic cooperatives. Recent developments in the United States, namely the success of home finance programs and the growth of Islamic mutual funds, may influence the way Islamic finance develops in Canada over the next several years. The end result will be positive for Canadian Muslims as the majority of them, as elsewhere across the world, are seeking Shariah-compliant alternatives for their financial affairs.
Rehan Huda is co-founder and vice president, Business Development, of Amana Canada Holdings Inc., a Canadian firm in the process of applying for a bank license. He can be reached at rehan.huda@amanacanada.com
By Rehan Huda
© Business Islamica 2007
