Islamic finance is one of the fastest-growing areas of financial services in the world. Global banks are scrambling to start offering products that conform to sharia law, just as billions of dollars from oil-rich countries in the Middle East look for places to invest.
Canada's not immune to the trend. Most of the big banks are contemplating offering sharia-compliant products to expand their reach among Canada's fastest-growing immigrant population. Products range from mortgages to mutual funds, car financings and bonds.
Sharia-compliant services are similar to any other type of so-called socially responsible investing. In this case, they tend to meet three criteria: no explicit interest; transactions can't be in such areas such as gambling, pork or pornography; and can't be deemed too high risk.
Several articles written in the Globe and Mail have sparked a lively online debate over the growth in such services and the line between faith and finance.
Walied Soliman, a lawyer at Ogilvy Renault, joined us to take your questions. He acts for clients in a wide range of industries, including mining, energy and pharma and has also helped develop numerous Islamic-finance structured products. He's been seconded to the legal group of CIBC and to the Ontario Securities Commission's enforcement branch.
He was online Thursday to discuss the demand and potential for sharia-compliant financial services in Canada and its rise around the world.
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Tavia Grant, globeandmail.com: Hello Walied, thank you for taking time out of your busy day to join us. Hundreds of comments have been posted online in response to the Globe articles on this, and I've been struck by several points. One is that this issue is certainly of great interest to people, partly because it touches on diversity and Canadian identity. The other is how scared -- and angry -- some people are by the idea of Sharia law and what they think it represents. Sticking strictly with how it applies to financial products, could you address some of those concerns? Can it be associated with oppressing women? Is it as intolerant and inflexible as some people seem to think?
Walied Soliman replies: I am glad you have asked these questions. The two most common questions we get at Ogilvy Renault from our clients are what is the size of the market and what is all this stuff about "shariah."
I am sure we will get a chance to address the size of the market later on in this discussion. As to the concept of "sharia", it is important to understand that "shariah" simply means "law" in the Arabic language. These products are no different than any other products that meet the personal needs of individuals or companies. Sometimes investor needs are driven by ethical considerations (i.e. ethical funds etc.) or personal tax planning (i.e. flow-through products). Islamic finance products are driven by the personal beliefs of individual and commercial investors and borrowers. This is why Canadian financial institutions, investments dealers and others are considering this space- there is a market, products that can be relatively easily designed, and money to be made. Getting into specifics, as lawyers, we advise our clients on the regulatory aspects of implementing these products in Canada. Quite simply, financial institutions and lenders in Canada are not allowed to discriminate in their lending practises. In our practise I have never come across any tenet of the requirements under Islamic finance law that did not adhere to the principals of Canada's liberal democracy.
Ferdous Islam from Canada writes: What Islamic finance products are available in Canada now? Which outlets/chain can I go to go? What control mechanisms are in place to ensure the compliance?
Walied Soliman replies: These are early days in the retail roll-out of Islamic finance in Canada. There are many mid-market providers in the market which are relatively easy to find on the internet. No provider in Canada, at this stage, has rolled out a product that is equivalent from a pricing perspective to conventional products. I think that this will change over the next 18-24 months. As to control mechanisms, customers need to be comfortable with the Islamic scholars advising lenders and dealers before they proceed with a transaction.
R. Carriere from Maritimes Canada writes: Good afternoon, thank you for taking my question and allowing me a better understanding of this concept. In a G&M article of May 7 written by Tavia Grant, the following was posted under 'Islamic finance quick facts: Under Sharia law, making money from money, such as charging interest, is usury and therefore NOT permitted.' In a follow-up article by the same writer on May 25, the following is stated: 'UM Financial Inc. has provided sharia-compliant mortgages to almost 500 homeowners in Ontario - even though it charges a deposit and costs about 0.60 percentage points more than a regular mortgage. Its homeowner mortgages tend to be structured like a rent-to-own system to avoid interest.'
On one hand, Sharia Law states no interest is allowed, on the other, it appears loopholes are sought to bypass the law. Therefore, if following the traditions of Sharia Law is key and fundamental, why try to change a banking system and find loopholes or financial window dressing, when the end result is basically the same -- that being that interest is charged and against the Law. Or is it?
Walied Soliman replies: That's a really good question and one that Canadian trained lawyers and accountants really struggle with. Generally, we are a substance jurisdiction- which means that courts will generally interpret an arrangement based on the substance rather than the form of a transaction. In an Islamic Finance transaction, the form is at least as equal in importance as the substance of the transaction. Let's be clear, the substance of an Islamic Finance transaction is critical but the form is given significant credit. Tax lawyers and accountants have an understanding of this concept, as Canada is generally a "form" jurisdiction for tax purposes.
Claude Veilleux from Montreal Canada writes: I was wondering how financial services would make money by offering product that confirm to sharia law. For instance, if my client needs to borrow money to buy a car or renovate a house, if there is no notion of interest, where and how is the bank going to make its money?
Walied Soliman replies: Islamic finance law encourages business transactions! You might acquire the automobile for your client and resell it to them at a markup or enter into a "rent to own" arrangement with your client. The funniest emails we get are the very excited people who read Tavia's articles and want to know where they can get an interest free mortgage- structured finance lawyers and accountants have figured out a lot of things but not that one yet!
Asma Teebi from Canada writes: Is a non-interest-based Islamic finance regime truly possible in Canada? It would seem that the current system--and the history of our economic model for the past 200 years--skews itself heavily in favour (and in defense of) the status quo. What factors make present conditions ripe for Islamic finance in Canada?
Walied Soliman replies: There is nothing that breeds innovation like demand and it is becoming very clear to us that the retail demand is strong in Canada and that institutional interest is growing very quickly. If you ever want to have some fun with your lawyer, ask them if they can come up with an issues list for the implementation of a Malaysian or Qatari Islamic finance product in Canada- trust me, it is a fruitless exercise. At Ogilvy Renault we have spent lots of time on the drawing board designing these products and I can tell you that that there is only one way to make these products work in Canada and that is developing made in Canada solutions.
Marc Puddy from Toronto Canada writes: Mr. Soliman, I am aware of sharia-compliant product offerings for mortgages, mutual funds, bonds and other financing, presumably, there are insurance companies creating Takaful insurance products in North America?
Walied Soliman replies: Takaful insurance products are one of the new frontiers in Islamic Finance that hasn't really matured in any part of the world yet, let alone North America. As with any product, demand will ultimately determine whether a provider in Canada takes the lead in offering this service.
Lisa Azzuolo from Canada writes: Hi, I have 2 questions: 1. We hear that banks in Europe have been equipped to deal with these shariah compliant finance deals for some time - why is it that Canada has only recently recognized the need for accommodating this community with innovative financing alternatives? 2. Are there advantages to doing Shariah compliant finance deals that non-Islamic individuals may want to try and benefit from and if so, are there limitations to who can choose to undertake in this type of transaction? Can this open the doors to complaints of discrimination or preferential treatment? Thank you! Lisa
Walied Soliman replies: Islamic Finance is approaching maturity in many parts of the world, including south-east Asia, the Middle East and, most recently Europe. The UK in particular is working on making London an international hub for Islamic Finance, including by floating the idea of offering UK government bonds that are Islamic-finance compliant. Many international financial institutions such as Citibank, Lloyds, HSBC and others have been offering these products for many years. The Dow Jones Group has an excellent website with information on these products and has developed several Islamic-finance compliant Dow Jones indices. Again, in Canada, I believe it has simply been a function of demand. The retail community ranges in size from 700,000 to over 1,000,000 (depending on who you read), which is a sizable market. Recent successes by mid-market providers have made it clear that this is a multi billion dollar retail market in Canada. On the institutional side, it is not difficult to determine the type of liquidity available in oil-rich countries. Lots of that money is looking to Canada and is looking to products that are Islamic finance compliant. Finally, these products are not exclusively available to people of the Muslim faith - I am sure your local bank would be happy to take on your home-financing regardless of who you are!
Aun Jaffery from Mississauga Canada writes: Good afternoon, I realize that the Sharia inspired banking intends to be socially responsible in nature. Is such banking against the financing of wars or military equipment .. or is there a criteria already established by Sharia Law that helps determine what needs to be done.
Walied Soliman replies: As lawyers, we take direction from our clients and their scholars on permissible structures and underlying assets. My understanding is that weapons and similar manufacturers are absolutely prohibited.
Celia Gibb from Windsor Canada writes: I have been researching the topic of Islamic finance quite a bit recently; however, I am having a bit of trouble finding information about Islamic finance in Canada, as it is in the early stages. My first question is: Is there enough market interest for Shariah-compliant financial products in Canada to make it worthwhile for companies to pursue? More specifically, what percentage of the Muslim population in Canada adheres to Shariah law? I read that it is about 40% in the UK. Would it be safe to assume it is about the same in Canada?
I also read somewhere that there is more emphasis placed on the relationship between the lender and borrower with Islamic finance. Would this be a deciding component in all transactions in Canada as well? How could this be addressed in a market where emphasis is placed on credit score, not a person's character?
Walied Soliman replies: Great questions! You are right, these are early days in Canada for these products and as such there is little information available on the internet. If you want to learn about the sector I would suggest reviewing Harvard's Islamic Finance Project website, HSBC Amana's website and the website of the Dow Jones Islamic Indices. As to market interest, to build upon what I have said earlier, I think that the proof is clearly in the pudding- the mid-market providers in Canada, with several handicaps (including the all-important pricing) have shown that there is a significant, under serviced sector of the retail market that is waiting for a competitive product. Whether that amounts to 40% or 60% of the Muslim population, I am not sure. As to credit scores- sorry, yes they remain important and are reviewed!
Tavia Grant of globeandmail.com: Walied has kindly agreed to stay an extra 15 minutes with us to answer some more questions in the queue. We'll refrain from making any jokes about extra billable hours here -- and we're happy he's extending the time.
Cameron Reid from Toronto Canada writes: I have to say that I do not like at all the idea of any kind of separate law or financial structure based on religion. Canada's laws are secular and should remain so. When people emigrate here, they must be aware that our laws are not islamic, or jewish, or christian for that matter. IF it was THAT important to them to be able to conduct financial transactions under islamic law, then perhaps they should not have come here.
Walied Soliman replies: This is simply about market demand and interest. Evidence suggests that this is a multibillion dollar retail industry and an even larger institutional industry.
Deena Thakib from Toronto Canada writes: When can we expect to walk into banks and have access to these products?
Walied Soliman replies: Bankers have always been able to figure out a trend in its early days and I think this will be no different! Standby!
Tavia Grant of globeandmail.com: Walied, I'd like to thank you for taking the time today on what's clearly a hot topic. Any last thoughts?
Walied Soliman replies: This is an exciting new industry in Canada that is gaining attention due to the clear retail and growing institutional demand for product. As I've written earlier, demand breads innovation and it has been very exciting working on structuring these products with our team at Ogilvy Renault . We have found that the most important principal in designing these products is coming up with made in Canada solutions. Clients are excited- they all want to be first to market. Much like the securitization and income trust industries it will be interesting to watch the growth of the Islamic finance industry in Canada and the important role it will play in the lives of many Canadians.
Thank you very much for your interest today!