THE OPPORTUNITIES AND CHALLENGES OF ISLAMIC MORTGAGE FINANCE IN CANADA -

The opportunities and challenges of islamic mortgage finance in canada

Khurram Abdullah, CEO Tjara LLC
Dr Omar Fisher, Member Advisory Board Tjara LLC

The article succinctly presents a case study of the main issues related to Islamic finance and halal mortgages in non-Muslim majority countries – with highlights on the political, socioreligious, fiscal and knowledge perspectives in Canada.

Mortgage Finance Context

Residential mortgage financing across Canada in 2023 rose to CA$2.14 trillion, up 3.4 per cent from 2022 yet the pace of growth slowed from the six per cent growth of the prior year. Higher costs of homeownership and elevated interest rates are expected to reduce demand for mortgages in 2024. According to CMHC, the average home mortgage is CA$338,500, and the homeownership rate is 66.5 per cent, down from a peak of 69 per cent a decade earlier. There is no definitive data on immigrants, minorities, and diverse groups’ homeownership rates, yet estimates suggest their participation rates are well below other higher-income demographic groups.

What is Tjara and the Offerings of Halal Mortgage Finance in Canada

The introduction of halal mortgages in Canada is not entirely new as the first Shari’a-compliant instrument was introduced over 40 years ago by the Toronto Housing Cooperative as a mechanism to recycle excess savings of Muslim community members into funds for affordable home purchases using a rent-to-own model (ijara). Similar Islamic finance models have been implemented in the USA, UK and parts of Europe during the prior three decades.

Key players in Canada include:

Tjara: As a new leader in halal mortgages provides home financing, commercial financing for profit and non-profit entities like mosques and Islamic schools, business financing and halal franchise financing. They use partnership (musharaka) model to cater interest-free mortgages.
Zero Mortgage: Another player in the halal mortgage market, Zero Mortgage, provides interest-free home financing options tailored to meet the needs of the Muslim community. They focus on offering transparent and ethical financial services aligned with Islamic principles (The Halal Times).
Toronto Housing Cooperative: This cooperative offers housing solutions compliant with Islamic finance principles, although their primary focus is on providing affordable housing rather than strictly financial services like Manzil and Zero Mortgage (Global News).
Ansar Financial and Development Corporation: This organisation also offers Shari’a-compliant financial products, including real estate investment and development projects, which may include interest free mortgage options (Global News).
UM Financial: Previously known for offering halal mortgage products, UM Financial has been involved in providing Islamic financing options, although its presence and activity in the market have varied over the years (The Halal Times).

As the above finance suppliers are privately owned, there is no verifiable data on mortgage volumes or profitability. One report on the THC shows a gross operating budget of CA$658 million for the year 2022.
As of the 2021 census, the Muslim population in Canada is approximately 1.8 million, or 4.9 per cent of the total population. Canada’s demographics are changing due to immigration and births, which have increased the population by two per cent since 2001.

Toronto Housing Cooperative started 40 years ago in Canada as a mechanism to recycle excess savings of Muslim community members into funds for affordable home purchases using a rent-to-own model (ijara)

Tjara’s Halal Mortgage Product (Diminishing Partnership Model):

The Islamic home finance products are based on simple concepts of purchase-sale (murabaha) or shared purchase (musharaka). For the Canadian market the best and safest product is the diminishing partnership model which is offered by Tjara Financing Canada (www.tjara.ca). One example is the “Diminishing Partnership” model: to purchase a house the individual puts 20 per cent down of the market purchase price and Tjara’s pooled funds (from investors) own the remaining 80 per cent. Ahmed is charged a rental fee for the use of this house, CA$1,000 monthly, which is shared pro-rata with the shared owners. In case Ahmed is also the home purchaser, then he pays the 20 per cent rental as a modest Acquisition Fee towards an increasing ownership stake as well as the CA$800 monthly as a Usage Fee.

It is noteworthy that financial institutions do not carry assets like homes on their balance sheets in the Canadian market. In addition, mortgage financing arrangements must be re-set (re-negotiated) every five years. Legal documentation of such finance models can be structured as halal mortgages without compromising halal principles and current compliance rules, mortgage practices and financial legislation.

Commonly, halal meat is more expensive than regular meat because there is an extra step and expense involved for slaughtering that is Shari’a compliant. However, Tjara can offer its halal mortgages with
competitive pricing to conventional banks and mortgage brokers because of operational efficiencies and lean staffing. This assures that Tjara, along with our partner financial institutions, are offering a highly attractive alternative mortgage finance proposition. We also assure clients that no discrimination occurs, financing is carbon-neutral, and our fatwa evidences full Shari’a compliance.

Islamic home finance products are based on simple concepts of purchase-sale (murabaha) or shared purchase (musharaka). For the Canadian market the best and safest product is the diminishing partnership model which is offered by Tjara Financing Canada

How does Tjara Make Money without Charging Interest?

Many interested parties often ask “How does Tjara make money as a business (although non-profit) without charging the interest embedded in conventional mortgage financing?” Using the shared ownership partnership model, Shari’a rules allow different ways to set monthly rent or a Usage Fee. Tjara surveys several homes in the neighbourhood of the target home to be financed to ascertain market rental rates. Either a negotiated home rental is agreed upon or, if the homeowner is seeking re-finance, then he can elect to rent his home for any reasonable amount, or Tjara will benchmark it to a broad regional index.

Benchmarking - too often misunderstood relates to the Canadian Prime Rate, then the underlying transaction is still permissible

Benchmarking is an important issue that is too often misunderstood. When a benchmark relates to the Canadian Prime Rate, then the underlying transaction is still permissible. Benchmarking to a conventional interest (or rental) rate does not affect the financing structure itself, nor render the transaction haram (inadmissible). Take for example, the sale of Zam Zam water (Holy water from Mecca from the well of Prophet Ishmael son of Prophet Abraham (may peace be upon them)) in Canada that uses a 20 per cent profit margin which is identical to local wine selling at a 20 per cent margin, then that Zam Zam water would not be labelled as prohibited (haram) simply because it could be associated with the same benchmark.

In brief, Tjara generates profits to sustain its business model without resorting to interest (riba) through Usage and Acquisition fees. There are no extra fees and Tjara is offering upto 95 per cent financing on only 5 per cent down payment.

Monetary Issues and the Islamic Finance Opportunity

Now looking into the issues on the financial side, in the distant past we have witnessed capitalism falling and rising once or twice every decade, compelling governments to use monetary stimuli and fiscal steroids to make the economy stand up again. It seems that capitalism is becoming immune to these steroids and stimulus plans. So what will happen next? What is the likely backup plan– shall we adopt communism for economic answers, or start working on an alternative system, a system which is not based on debt but rather based on assets, and a real economy? One proven alternative is Islamic finance.

In contrast to debt-based conventional financing, Islamic finance, rooted in asset-based transactions and risk-sharing, provides a more stable, ethical, and resilient financial model for both home and business financing. With the ills of the interest-based system and its supportive structure of the fractional reserve banking system, it is entirely possible that one day when we visit our local bank to start claiming the money deposits, for each CA$100 there may be only CA$1 available and the CA$99 is missing or unavailable!

Islamic finance is simple and generally requires three basic traits. Firstly, no taking or paying off interest (riba), avoid money on money transactions rather prefer to trade, and instead of interest-based lending, Islamic finance promotes profit-sharing, joint ventures, and trade-based transactions, thereby aligning economic activities with real value and productivity. As we can see, debt and interest-based transactions lead to wealth concentration and exploitation by capitalists, disproportionately adversely affecting the poor, vulnerable, and small businesses.

By eliminating interest, Islamic finance encourages risk-sharing and equitable wealth distribution, which fosters social justice and economic stability. Secondly, transactions involving excessive ambiguity (gharar) are prohibited to protect parties from unjust outcomes, promoting transparency and trust in financial dealings. For instance, all terms in an Islamic contract must be clearly defined, reducing the risk of disputes
and misunderstandings. And thirdly, speculation (maisir) involves high risk, often leading to harm and financial loss. Islamic finance discourages purely speculative activities and emphasises real economic transactions backed by tangible assets and shared risks.

In contrast to debtbased conventional financing, Islamic finance, rooted in asset-based transactions and risk-sharing, provides a more stable, ethical, and resilient financial model for both home and business financing

This focus on asset-backed financing contributes to genuine economic growth and development, avoiding speculative bubbles. Investments in harmful industries such as alcohol, gambling, pornography, weapons of mass destruction, and tobacco are prohibited. Instead, Islamic finance promotes investments in sectors contributing positively to society, such as healthcare, education, and renewable energy.

Additionally, adopting standards set by organisations like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has enhanced credibility and helped to attract global investors. Compliance with these internationally recognised standards assures clients of the integrity and transparency of Islamic financial products.

According to the recent census, the nearly two million Muslims residing in Canada enjoy a concentration of professionals with above-average annual income and a strong demand for home ownership. There was an article written in 2015 forecasting a rapid start of halal mortgages, which also projected placement of some CA$18 billion by 2020, but it is never too late to plant a tree.

The case for halal mortgages in Canada can be attractive to capitalrich Gulf countries as a secondary market, looking for safe heavens and G7 sovereign paper as investments for their insurance (takaful) and
re-insurance (re-takaful) companies, pension and social security funds, etc. Similarly, Islamic bonds (sukuk) – in the form of securitisation of residential mortgages – can be attractive and can bring much-needed
liquidity to the Canadian market for economic growth. Moreover, the promotion of homeownership among diverse and ethnic groups through halal mortgage financing can bring in segments of society with limited
financing options and hence, grow the tax base for Canada.

Islamic finance promotes investments in sectors contributing positively to society, such as healthcare, education, and renewable energy

Possible Economic Benefits:

Increased Investment: Offering alternative investment and financing options like Islamic bonds (sukuk) and halal mortgages can attract substantial investments from capital-rich Islamic countries and countries with large Muslim populations. These investments provide a stable source of funding, particularly from Gulf countries seeking Shari’a-compliant opportunities. The infusion of such funds can enhance financial stability and growth.
Economic Growth: By offering Shari’a-compliant financial products, Canada can tap into a new market segment. This not only fosters economic growth but also promotes diversification in the financial sector. As demand for ethical financial products increases, it opens avenues for innovation and development within the financial industry.
Tax Base Expansion: Incorporating halal mortgages can bring more individuals into the formal financial system, thereby expanding the tax base as more people participate in the formal economy through Shari’a-compliant products.

Nearly two million Muslims residing in Canada enjoy a concentration of professionals with above-average annual income and a strong demand for home ownership

Integrating finance into Western societies involves addressing many political, social, fiscal, and educational dimensions. It requires fostering inclusivity, understanding, and social harmony while accommodating the financial needs of diverse communities.

In today’s interconnected and rapidly changing world, the landscape of finance is becoming increasingly diverse, with various systems vying for acceptance and integration. Among these, Islamic finance and specifically halal mortgages have emerged as significant yet often misunderstood sectors. Despite its long history (introduction in 7th CE) and ethical foundations, Islamic finance frequently faces scepticism and prejudice, particularly in non-Islamic countries. This scepticism is exacerbated by the rising tide of Islamophobia, which permeates many aspects of global society. Islamophobia can influence the acceptance and implementation of Islamic finance in Canada. In an environment where Islamophobic sentiments are present, policies related to Islamic finance may be unfairly criticised or dismissed without proper examination.

To broaden the scope of financial products in Canada including halal mortgages, the government is thinking of establishing a regulatory sandbox and changing the tax treatment of these assets

Canadian Government Support for Alternative Finance & Other Political Issues

In the 2024 federal budget, the Trudeau government in Canada declared its support for the exploration of halal mortgages to meet the financial needs of Muslims and other immigrant groups. The plan involves
consultations with financial service providers and community groups to investigate tax incentives and regulatory frameworks to facilitate such products. The budget presentation outlined the government’s plan to
perhaps broaden the scope of financial products offered in Canada. This includes halal mortgages, which are made in accordance with Islamic law, which forbids paying interest since it is seen as usurious. To encourage innovation in financial services while guaranteeing consumer protection, the government is thinking of establishing a regulatory sandbox and changing the tax treatment of these goods. This most certainly bodes well for future private-public partnerships in halal mortgages.

Different political parties in Canada espouse varied stances on Islamic finance, influenced by their broader policies and the demographics they represent. Some parties choose to embrace Islamic finance as part of
their diversity and inclusion agenda, while others are opposed due to ideological reasons, or negative pressure from their constituencies. If the implementation of halal mortgages by Canadian banks is not done before the election next year, there is a possibility that the new government may choose to discontinue such efforts that were started by the current administration unless it is developed and implemented and widely spread before the next election.

Much-needed liquidity for halal mortgage in Canada can be channelised-in from capital-rich Gulf countries and from G7 sovereign paper as investments for their insurance (takaful) and re-insurance (re-takaful) companies, pension and social security funds, etc

However, the complex and time-consuming legislation system will require first identifying the key regulatory issues, whereby local Muslim groups and financial institutions must play a leading role in having dialogue with elected officials. In instances where prejudice against Islamic finance seems to dominate, several adverse outcomes are possible; namely

Addressing political issues related to Islamic finance in Canada requires overcoming cultural biases, enhancing understanding, and developing a supportive regulatory environment. By fostering education, creating fair policies, and learning from international examples of dual finance systems (e.g. Malaysia, Pakistan, Saudi Arabia, UK), Canada can better integrate Islamic finance into its financial system and harness its potential benefits for both economic and social development.

Policy Bias: Unfair scrutiny of Islamic finance products due to negative stereotypes.

Public Misunderstanding: Misconceptions about Islamic finance being used to further political agendas or religious exclusion.
Political Resistance: Policymakers may face pressure from constituents who hold Islamophobic views, leading to reluctance to support or endorse Islamic finance initiatives.
Prejudiced Opposition: Policies may face opposition based on religious biases rather than practical assessment.
Polarised Debate: Political and public debates might focus more on ideological differences than on evaluating the economic and financial merits of Islamic finance.
Misinformation: Spread of inaccurate or misleading information about the nature and benefits of Islamic finance

Social Issues Relating to Shari’a Compliance

The global rise in Islamophobia has added another layer of complexity to the easy acceptance of Islamic finance socially across Canada. This type of prejudice not only affects Muslims but also hinders the broader adoption of alternative financial practices that could benefit racial and ethnic diverse communities. In many Western countries, the term “Shari’a” has been unfairly associated with extremism, overshadowing its true meaning and application in areas such as finance, where its sole purpose is to promote fairness, justice, and transparency.

Non-Religious Sentiment: Some people view Islamic finance as inherently religious or exclusive, rather than understanding it as a set of financial principles that can benefit a diverse range of individuals irrespective of religious beliefs.
Stereotyping and Bias: Negative stereotypes about Islam can extend to Islamic finance, causing scepticism or outright opposition. For example, some might incorrectly associate Islamic finance with extremism or terrorist financing, despite its actual adherence to ethical investing and abhorrence of unwarranted violence.

It is beneficial to understand that in the Abrahamic religions, Christians follow the Shari’a of Jesus (Prophet Essa) MPUH, and likewise Judaism is based on the Shari’a of Moses (Prophet Musa) MPUH. Similarly, Muslims follow the Shari’a of Prophet Mohammad SAW. The Ten Commandments are part of the Shari’a of Prophet Moses, MPUH. The word Shari’a means the very principles and regulations governing the life of the believers of that religion. Without Shari’a, the world could devolve into rules of the jungle and lawlessness. Almost all the constitutions in the world are based on the golden principles of Shari’a which are central to the Abrahamic religions.

Social issues relating to Islamic finance in Canada encompass cultural misunderstandings, access challenges, integration difficulties, community acceptance, ethical perceptions, and economic impacts. Addressing
these issues involves educational efforts, regulatory adjustments, community engagement, and promoting the broader benefits of Islamic finance. By fostering understanding and inclusivity, Canada can better integrate Islamic finance into its financial system and benefit from its proven ethical and diverse financial offerings.

By recognising and accommodating Muslims’ financial practices, the Canadian government can foster better relations with their Muslim populations and set an example of tolerance and respect. Promoting Islamic finance can also enhance cultural understanding and reduce prejudices, contributing to a more inclusive society. Additionally, our government can play a leading role by creating a supportive regulatory framework for Islamic finance, which can attract foreign direct investments (FDI) and position our country as a hub for non-interest financing, including Islamic finance.

Tjara adheres to AAOIFI directives and provides halal musharaka contracts under a Non-Profit Corporation in Canada.

Issues Concerning Sourcing of Capital

Another big issue, even among the learned Muslim community, is the sourcing of fresh capital to underwrite financing. As CEO of Tjara, when I try to source funds from the Middle East, the first thing they ask us
is what is the return and when we reply saying 5 per cent, then the express their scepticism of halal investments in Canada saying that we make more than this sitting on our local deposits. Furthermore, the
Canadian currency (CA$) represents a currency risk because the GCC currency is benchmarked to the US$ whereas the CA$ fluctuates against the US$. Hence, fresh capital for halal mortgages in Canada must be
found within our communities first and then attract foreign direct investment to boost halal mortgages.

For the time being, Tjara’s approach is to source funds from within Canada to fund halal mortgages. As my learned ustaz, teacher, and mentor Dr Hussain Hamid Hassan (may Allah bless him and have mercy on him), used to say: “All the money in the world is halal, it’s the way you earn it makes it halal or haram”. Therefore, if we are developing a partnership agreement with the client on one side and negotiating a halal-compliant relationship with a lender on the other side, then it is permissible to get funds from that conventional lender. Prophet Mohammad SAW, and his companions may Allah be pleased with them, did business with Christians and Jews of the city of Madina, but this was based on principles of Shari’a, whereas the funds from Christians and Jews may have had elements of interest in their income.

Governance Issues Relating to Islamic Finance in Canada

Modern Islamic finance has significantly developed in the last halfcentury. It requires specific knowledge of conventional products and relevant laws, as well as awareness of religious doctrines concerning Islamic finance. There are two layers of governance in any Islamic finance institution: i. one is the regular Board of Directors (BoD) and ii. another one is the Shari’a Supervisory Board (SSB), consisting of highly qualified Islamic finance scholars. One shall always look at the Shari’a Supervisory Board (SSB) and the scholars representing the SSB and make sure they have diverse Islamic finance experience.

Before an individual investigates the legal documentation of a financial product, it is wise to first examine if the company and the product follow AAOIFI standards or not. Tjara adheres to AAOIFI directives and provides halal musharaka contracts under a Non-Profit Corporation in Canada, which has three directors; Dr Omar Fisher (USA), Dr Noor Inayah (Malaysia), and Obaid Siddiqui (Canada). Tjara also has an Ethical Shariah Advisory Board, with Dr Aznan Hasan (Malaysia), Dr Akram Laldin (Malaysia), Mufti Muaz Ashraf Usmani (Pakistan) and Shaikh Abo Abdus Salaam (Canada) as its members.

Governance Issues Relating to Islamic Finance in Canada

Tjara is supportive of the Government of Canada’s initiatives and openness to explore halal mortgages. It is wise for leaders in Canada to consult with Tjara on halal financing along with international consultants like Ebdaa, and Dar Al Shari’a to establish a truly expert base of proven practitioners in Islamic finance. Collaboration with these companies can have a significant impact in regulatory reviews and help to draft legislation friendly regulations to accommodate Islamic finance.

From our past experiences, workable documentation and legal structures can be agreed upon with minimal changes to current mortgage regulations that could open the gateway for the conduct of halal mortgages
in Canada.

Assuming that some 35 per cent of the Muslim population prefers halal mortgages to conventional interest-based financing, then an estimated CA$138.6 billion can be added to the current annual mortgage volume and thus boost the percentage rate of homeownership across Canada.

Above is a discussion of some of the main obstacles and key issues relating to Islamic finance and halal mortgages in non-majority Islamic countries, such as Canada. Educational initiatives, including workshops, seminars, and media campaigns, can effectively inform both Muslim and non-Muslim communities about
the advantages of Islamic finance.

By highlighting the ethical and financial benefits of Shari’a-compliant products, these initiatives can drive halal mortgage demand and acceptance, paving the way for greater integration of Islamic finance into mainstream financial systems. By fostering education, policy support, and community engagement, the benefits of Islamic finance can be more widely accepted and used to leverage the building of a more equitable, prosperous, and harmonious Canada.