Introduction
Are you a Muslim in Canada, who wants to get himself financed through Islamic ways and invest in Halal financial products? If yes, this article will let you know everything you want to know about Islamic Finance and Banking practices in Canada.
Islamic Finance & Halal Financing and Banking are the ways of investments and financing through Sharia-compliant or Islamic laws. Its basic tenets are to bypass interest, gharar (ambiguity), and risk transferring.
Due to prohibitions of wrongful activities such as speculation, ambiguity, interest, gambling, and risk-transferring, the advent of Islamic finance and banking has compelled Muslims across the world to adopt the Sharia-compliant financial system.
Around the globe, the Muslim population is pervasive, so is Canada. There are almost 1.5 million or 4% Muslims, the second-largest religious group in Canada. Even though immigrant Muslims are higher in number, Canadian-born Muslims are also increasing in number.
Most Canadian Muslims with a middle-class and well-educated background in financial literacy are in greater Toronto and Montreal. Since Muslim Community is quite fledgling in Canada, there will be desperate needs for financial services which align with their creed.
Does Canada have modes of Islamic Financing and Investment?
Of course, in Canada, you will find the Islamic ways of investments and Halal Financing since there is a large Muslim community. However, you don’t need to be a Muslim for obtaining Islamic financial & halal financing and banking services. A Canadian can get Sharia-compliant financial services in Canada.
What are the Modes of Sharia Financing in Canada?
Islamic/Halal Mortgage Loans in Canada-Here is how it works.
Islamic or Halal Mortgage loans are the house financing facility available for Canadian Muslims without interest or Haram elements. Unlike conventional mortgages where a homeowner pays the regular stream of cash flows, including principal plus interest, to banks, the Sharia-compliant mortgages work based upon Diminishing Musharaka (Co-ownership) and Ijarah (Islamic Leasing).
In Canada, you will get three types of Islamic mortgages: Murahaba, Musharaka, and Ijara. Murahaba is a typical deferred sale contract between bank and borrower; however, the bank must reveal the profit and cost of a property before transferring to a borrower. You and the bank agree to set the profit, and you promise to pay the payment in instalments.
In Diminishing Musharaka, there will be a partnership between you and the bank with joint homeownership because both of you will own the house. Here the upfront payment is necessary, which will transfer most shares to you. As you keep on paying, your share will be increasing. Once you buy the full shares, the bank will transfer the home to you.
And in Ijara, the bank purchases and then give the property on rent to you until you fully pay it. After you pay the full price of a house, the bank will transfer the rented property as a gift. Remember that it is you who choose home before approaching any Islamic Bank or Financial institution (IFI).
Pros and Cons
- No upfront payment in case of Ijara mortgage
- Non-interest-bearing mortgages.
- Based upon a partnership, leaser and lessee, and buyer and seller relationship rather than borrower and lender.
- No change in the margin.
- Benchmark margin/profit is the central bank policy rate.
- Higher contractual costs
Islamic Car Loans/Ijarah in Canada-Here is how it works.
Islamic Car Loans facilitate the Muslims who want to own the car by following the Sharia-compliant principles. Unlike conventional car loans, Islamic car loans remove the interest-bearing elements through the contract of Ijara and Murahaba.
In Canada, you will get car financing either in Ijara- or Murahaba-based. In these contracts, you have to look for a better car of any brand by yourself and then approach the Islamic Bank for car financing. You and Islamic Bank will agree on a certain profit level on the purchase price, which you will pay in instalments in deferred sale contract (Murahaba) and rental payments in Ijara (Islamic Financial leasing). At the end of payments or instalments, you will become the owner of the car.
Pros and Cons
- N0n-interest car financing.
- Environmental-friendly Halal cars
- Having Takaful or Auto Insurance
- Manufactured based upon halal material and labor.
Islamic Personal loans without Interest in Canada-Here is how it works.
Do you want to get personal loans based upon Halal Financing transactions? You can avail yourself of the opportunity of getting personal loans in Canada. Remember that Islam does not allow increments in the monetary value of the loan, which is interest. And thus, it treats money only as a medium of exchange, not as a commodity.
Unlike the conventional personal loans where you get loans and then pay them back through the payment which contains principal plus interest, Islamic Finance loans have certain contracts like Tawarruq which involves the sale of a product on a deferred basis by the bank to the customer. In return, you as a customer will sell a commodity on a cash basis in the market or to the third party arranged by the bank to obtain the cash you required. Since the deferred price must be higher than the spot or cash price, the bank will earn the profit through deferred sales. You must pay the loan along with the profit in payments.
On the other hand, if you want to get a loan in the form of a commodity, you can opt for the Murahaba contract which is a deferred sale contract.
Pros and Cons
- Fixed profit margin
- Non-interest transaction
- Real commodity transaction
- Extra Wakala fee (agency cost)
Islamic Business Loans in Canada-Here is how it works.
In Canada, small and medium enterprises (SMEs) can get Islamic business loans if they are struggling with unsold inventory and working capital management issues. In addition to that, the entrepreneurs can acquire loans to finance their venture in Canada.
As a businessperson, you can invest to expand the business through an Islamic Business loan facility. For working capital finance, you can opt for various options.
If you want to get a commodity on spot and cannot make payments, you can go for a Murahaba sale contract with the bank. Tijarah is the best option for you when you sell a lot of inventory on credit. Thus, you do not have sufficient cash to meet current operations. Specifically, in Tijarah, the bank will take your inventory and then sell it in the market with a minimal commission.
The other types of working capital finances are istisna, Bai Salam, and Musawamah. For fixed assets and long-term business financing needs, you can use the Diminishing Musharaka, Musharaka, and Ijara contracts.
Pros and Cons
- Loans do not inflate.
- Profit-loss sharing
- Solving working capital issues through the involvement of Islamic banks.
Islamic Credit Cards-Here is how it works.
Manzil, the Canadian Islamic Financial Institution (IFI), accompanied by KOHO has given the chance to Muslims in Canada to get the prepaid visa and credit cards. It is an utterly interest-free credit card service in Canada.
Like conventional credit cards, you will open a checking account with Manzil and then get great perks such as cashback, rewards, and other benefits while using the Islamic credit cards of KOHO and Manzil. The bank will not charge any interest on transactions; however, you must pay the fees while you conduct the transactions such as purchasing goods and services.
This card facility involves a cashback facility when you do a specified number of transactions. You may wonder that this cashback may be interest. You do not have to worry about it, for you will find it aligned with the Islamic principles when you will approach the bank.
Pros and Cons
- Interest-free prepaid cards
- Does not involve a subscription fee.
- Certain cashbacks
- Enhancement in credit score with the credit build facility
Islamic Finance/Halal Investment Modes in Canada
Registered Retirement Savings Plan (RRSP) -Here is how it works.
Registered retirement savings plan (RRSP) is a Canada-based retirement account introduced by the Canadian government in 1957. The major advantage of this investment account that it is not tax-deductible until retirement.
This account exists in conventional ways of investments for Canadian people. However, Islamic Banks and Financial Institutions have tailored it according to Sharia-compliant laws.
Manzil’s SRSP account is tax-deductible so that you should not carry the tax burden at the end. When you contribute to your account, the IFIs invest these contributions in the halal portfolio which consists of halal stocks, Sukuk, and real estate investment. In Canada, most IFIs contact Wahed’s HLAL EFT, registered on the NASDAQ, for halal stocks and bonds.
Pros and Cons
- The Diversified portfolios are based upon your choice or risk-aversion.
- Halal portfolio of equity and income funds
- Tax-deductible at the start, but not at the end.
- CI Direct Investing for tracking and monitoring
- Profit-loss sharing
Tax-Free Savings Account (TFSA) -Here is how it works.
For tax-free gains, TFSA is the best savings account or investment option. The money you will contribute will have a certain limit in a year. You can get gains and withdraw money without paying taxes.
Since the nature of the account does not matter, what matters is how you see your investments through the account. Like SRSP, IFIs or Manzil invests your amount in the halal portfolio of stocks, bonds, and real estate through Wahed’s HLAL EFT.
Pros and Cons
- No tax on gain and withdrawal
- Different types of risks and returns for you.
- Management of investments through CI Direct Investing
- Limitation of the amount invested.
Registered Education Savings Plan (RESP)-Here is how it works.
RESPs are the investment or saving accounts provided to Canadians to acquire higher education. You can use the proceeds from the account for any expense. When you use it for education expenses, you will not be liable to pay taxes on investment gains from the account.
Through the Canadian Education Savings Grant, you will get contributions from the Canadian government up to 20% of your annual contribution until you get $7200 per child. Conventional RESPs pay the stream of interests and get invested in Haram financial instruments or products.
Islamic RESPS are completely halal since you will not find your money invested in a prohibited portfolio of stocks, bonds, and real estate. Through an Islamic portfolio of stocks, sukuks, and real estate investment, Wahed’s HLAL EFT gets significant proceeds.
Pros and Cons
- Non-interest-bearing investments.
- CI Direct Investing
- Government contribution
- Not tax-deductible if used for education purposes only.
Registered Retirement Income Fund-Here is how it works.
After considering RRSP, you may wonder how will you receive your money during retirement? RRIF provides you with a regular stream of income accumulated in RRSP. Canadian Tax law defers tax income on RRIF.
Canadians can invest in this account to get regular income. Unlike conventional RRIF, Islamic/Halal RRIF will provide you with sharia-compliant proceeds received from the halal portfolio of stocks, bonds, and real estate investment.
Pros and Cons
- The flexibility of choosing a regular stream of cashflows.
- Avoidance of huge taxes
- Management through CI Direct Investing
- Halal Income provision during your retirement
Locked-in Retirement Account (LIRA)-Here is how it works.
For surviving spouses/partners, former registered pension plan members, and former spouses, it is preferable to go for LIRA or locked-in retirement savings plan (LRSP) to hold locked-in pension funds. Or you entitle to receive a pension from your employer but have not got retired yet, you can still go for this account.
Remember that the investment account name is like general accounts. The only difference which separates it from the conventional account is the type of investment. Islamic Financial Institutions and Banks ensure that you get halal income through a halal portfolio of stocks and bonds.
Pros and Cons
- Can get a pension even if you change your job.
- Managed through CI Direct Investing.
- Non-interest investment.
Business Investment-Here is how it works.
Like a personal saving account of different types, you as a business person can get the business account for savings. This account will help you get halal returns from halal portfolios of stocks and bonds.
Have you got cash earning no returns at all? You can make your idle cash profitable by ensuring that you maximize your returns through Sharia-compliant investments. IFIs will provide you with the opportunity to earn.
When you approach IFIs, you will have to enter the different sharia-compliant contracts such as Modaraba which enables you to join hands with the IFI to share profit and losses. Through Modaraba, you will earn either profit or loss. IFI will not bear any loss unless it makes a blunder while investing your amount in other businesses.
Pros and cons
- Accumulation of funds for future needs.
- Various Islamic investment contracts
- Sharia-compliant investment and proceeds
- The facility of CI Direct Investing
Real Estate Investment Trust (REITs)-Here is how it works.
REITs are types of investment companies that have commercial or residential income-producing real estate property. The property encompasses REIT, includes apartment buildings, shopping centers, warehouses, commercial offices, hospitals, data storage facilities, manufacturing facilities, timberland, forests, hotels, and so on.
Publicly traded REIT typically works as a public company, for it sells its stocks in markets. Shareholders receive the dividends from the rent the Real Estate Investment Trust collects.
In Canada, you will find the Islamic Real Estate Investment Trust which offers you halal investment in real estate. For the screening of sharia compliance, you can see the policies of REIT being lessor. In other words, look out whether they lease their property to halal or prohibited activities. Through IFI, you can invest in the Islamic REIT. In Canada, you can look out for SP Funds S&P Global REIT Sharia Exchange Traded Funds which provide you with an overview of the sharia-compliant publicly traded REIT market.
Pros and cons
- High liquidity
- Diversification of REIT income from property
- Passive investment because of lack of participation in renting collecting.
- A regular stream of cash flows from rent
- Volatility in stock prices for publicly traded REIT
- Less effective control of REIT over tenants
Sukuk-Here is how it works.
Sukuks are types of Islamic bonds that are asset-backed fixed-income securities. Unlike conventional bonds that are debt securities, you will come to know that Sukuk works like leasing an asset because investors contribute to purchase an asset and then provide an asset to the company on the lease (Ijara) and receive rental payments. At the end of the period, the company pays off the principal and owns the leased asset.
For Canadian Muslims or investors, there are SP Funds Dow Jones Global Exchange Traded Funds to invest in the global Sukuk market. The SPSK ETF has a basket of sukuks from around the globe. You can choose the countries to invest in their Sukuk. Remember that Islamic bonds have dominated more than any other Islamic financial product. Thus, you have a greater opportunity to reap the benefits in the Islamic fixed income market.
Pros and Cons
- Claim on assets of the company.
- Depend on rental income or lease payments received.
- Global investment opportunities
- Standardized indices for Sukuk
- Well-developed primary and secondary market
Halal Portfolio of Stocks-Here is how it works.
As a Canadian Muslim/investor, you can look for the SP Funds S&P Sharia Industry Exclusions Exchange Traded Funds to invest in permissible stocks of top companies through a brokerage account in the New Stock Exchange.
SPUS ETF monitors sharia-compliant stocks for 200 companies of S&P 500. Sharia law prohibits interest and other prohibited activities. Thus, SPUS ETF compresses.
An investor, you can invest in sharia-compliant stocks through a brokerage account or a third party such as Halal Financial Institutions that will do a risk assessment before investment.
Pros and Cons
- Accessibility to the global stock market
- Standardized indices such as SPUS ETF for halal investments
- Specialized financial advisors or IFIs such ShariaPortfolio Canada’s express
Aya Islamic Financial Term Deposit-Here is how it works.
Aya Financial has introduced the Modaraba-based term deposits certificate for Canadian Muslims. Term deposits are types of Sukuks because they generate fixed returns.
This certificate is based upon Modaraba which involves two parties: one is you and another the bank. You provide the bank with capital or finance; the bank invests in permissible businesses on behalf of you. If any profit occurs, the bank will charge management fees from you. However, you must bear the loss if there is not any blunder made by the bank.
Pros and Cons
- Profit-loss sharing contract.
- Sharia-compliant instrument
- Changing proceeds from an investment
What are Islamic Banks and Financial Institutions in Canada for Islamic Financing and Investments?
In Canada, you will find many halal Financial and Banking services that you can get from the following companies.
- Ijara Community Development Corporation
- United Muslim Financial
- Manzil Bank
- Assiniboine Credit Union
- Al-Ittihad Investment
- Islamic Cooperative Housing Corporation
- Ansar Cooperative Housing Corporation
- Habib Canadian Bank
- Amana Auto Finance Canada
- Qurtuba Housing Cooperative
- Wealthsimple Halal
- An-Nur Housing Cooperative
- Shariah Portfolio Canada
- IANA Financial
- Global Iman Fund
- Al Yusr
Who can avail of the Islamic Financial Products and Services in Canada?
Both Muslims and Non-Muslims can avail themselves of the Islamic Financial and Banking services in Canada. Remember that Islamic Finance does not only cater the services to Muslims but also non-Muslims across Canada. In other words, you do not have to be Muslim to entitle such services.
Takeaways
Islamic Finance and Banking practices are emerging financial services. Its global share is increasing at a faster pace.
Canada with the growing Muslim population has seen tremendous growth in Islamic Finance Industry; however, you will observe that most of the Islamic financial instruments are not there. Since the Muslim community tend to double within a decade in Canada, the potential growth of halal products will be greater.
According to sources, the sharia-compliant mortgages are $18 billion in Canada. And international sukuks can create more than $130 billion investment opportunities for domestic infrastructure. Both financing and investment opportunities are very high in the future because Canada is going to be the western hub of Islamic Finance and Banking.