Dozens of Muslim homeowners are complaining that they have been left in limbo by a disintegrating “ sharia-compliant” mortgage arrangement, putting a focus on the emergence of parallel banking systems in Canada.
Some Muslims believe that sharia, or Islamic law, bans interest-bearing bank arrangements because they are considered akin to usury, and a small industry of middlemen has sprouted up to address those concerns.
Toronto’s UM Financial, an Islamic lender backed by a credit union, was put into receivership this month by an Ontario Superior Court order. This has left more than 170 Muslim homeowners with questions such as: Who controls their properties? How much money do they still owe? To whom do they pay the money? How will this accord with religious principles?
“What ... is going on? That’s where we are right now,” local Muslim leader Mohammad Robert Heft said at a meeting of more than 75 homeowners in a Scarborough strip mall on Saturday.
While there was consensus at the meeting that no one risked losing their homes, little else seemed clear. “It’s such a mess. There are 160 of us in the same boat,” said Mr. Heft, as he was elected head of a steering committee. “This has implications for the image of Islam,” he added, advising that he and other UM Financial clients had to conduct themselves “honourably” to avoid more messy public fallout.
UM Financial had effectively served as a buffer between Muslim homeowners and Credit One, a credit union. The deal was that UM Financial would help its Muslim clients buy their homes and be paid in monthly payments – including service premiums – over long periods of time.
The arrangement lasted six years but unravelled as the credit union and UM Financial went to court in a dispute over money. The management of the portfolio has been passed to a receiver, Grant Thorton LLP, which says it is reviewing matters.
Some critics suggest such practices amount to mortgage by another name. Another critique is that they invite abuse of “the poorest sections of homeowners in the Muslim world, who have been told, ‘If you deal with banks that deal with interest, you will go to hell,’” said Tarek Fatah, a liberal Toronto Muslim who points out what he regards as fundamentalist practices.
Other observers say Canada needs to figure out a way to better regulate sharia financing models, given the brisk demand. “It's going to grow,” said Walid Hejazi of the University of Toronto’s Rotman School of Management, which now offers courses in Islamic finance. “In the U.S., it’s doing well, in the U.K. it’s doing well, but in Canada it’s lagging.”
Prof. Hejazi said various levels of Canadian governments, as well as big banks, are studying Islamic finance models – up to $1-trillion of “excess liquidity” in the Gulf states could be translated into some foreign direct investment one day.
There are also discussions, he added, about whether Toronto should seek to become a North American hub of Islamic banking. “If you get more players you get more transparency.”
UM Financial circulated a statement on Oct. 12, which said “it is true that UM Financial Inc. has ceased operations,” but the overarching company, and CEO Omar Kalair, “continue with business as usual.”
The statement added that “the UM Group” continues to run separately incorporated credit card, real-estate investment, and financial-advisory arms, among other business lines.
Mr. Kalair last night said he can’t comment on the specific business issues, but he stressed that the Islamic financing model is still solid. “A majority of people still want to stay with it. There is a market demand for these products.”
The court order on receivership “does not affect the homeowners’ rights or obligations,” said Michael Creber, a partner at Grant Thorton. No one should be at should be at risk of losing their homes as long as they continue making monthly payments, he explained.