Canada: Islamic finance potential lies in Toronto
There is a sense that Islamic finance in Canada lags in development as compared to other western nations, particularly the US, the UK and Australia. This is not lost on the Canadian government, particularly with the latest moves by the Cameron government to make the UK a global hub for Islamic finance. The question that immediately comes to mind: why can’t Canada be a North American hub for Islamic finance? As discussed below, awareness in Canada of Islamic finance has increased dramatically in the past few years, and there is optimism within the financial industry and government that Toronto can become a North American hub for Islamic finance. However, there remain several obstacles to the further development of Islamic finance in Canada.
2013: A review
Increased awareness in Canada
There have been several attempts over the past few years to increase awareness within Canada of Islamic finance, and to better understand how Shariah compliant financial structures can fit within the broader Canadian economy. A 2010 Canadian Mortgage and Housing Authority report entitled ‘Islamic Housing Finance in Canada’ found there are no legal hurdles to Islamic financing in Canada, and “Islamic financial products should not present any particular difficulties under Canadian accounting standards”.
The Toronto Financial Services Alliance (TFSA)’s Islamic finance working group wrote a report entitled ‘Making Toronto the North American Center for Islamic Finance: Challenges and Opportunities’. The report provides a summary of Islamic finance activity in Toronto and identifies tax, regulatory and legal issues that need to be addressed to ensure the growth of Islamic finance in Toronto and Canada. As the title of the report states, the report addresses Toronto’s potential of being the North American hub for Islamic finance.
The Canadian initiative to attract Shariah compliant capital increased significantly in 2013 with the Canadian government’s sponsorship of the 20th Anniversary World Islamic Banking Conference (WIBC) in Bahrain. In attendance from Canada were Janet Ecker, the president and CEO of the TFSA; Canada’s ambassador to Saudi Arabia and Bahrain, Thomas MacDonald; Claudio Ramirez, the counselor for economic and finance; Cindie-Eve Bourassa, the trade commissioner; Jeff Graham, TFSA board member, and myself. There was an overflow crowd for the Canada country presentation, reflecting tremendous interest in Islamic finance in Canada.
The question is, why? Why should Canada be a hub for Islamic finance?
First, Canada has a population of over one million Muslims, many of whom are highly educated. By 2030, Canada’s population of Muslims is expected to grow to 2.7 million and account for about 3% of Canada’s population. The largest concentration of the Muslim population is in the greater Toronto area. Many are seeking Shariah compliant solutions to their personal finances. There remains a significant void in Canada when it comes to these offerings – part is a lack of supply, but also a lack of understanding on the part of Muslim consumers. While products are available, the uptake is slow. There are a number of smaller and less well known institutions in Canada offering Shariah compliant mortgages (and other products), which are offered at a premium over conventional mortgages.
There is at least one of Canadian major bank major banks offering Shariah compliant solutions. For example, Khaled Sultan is an investment advisor at CIBC Wood Gundy, and offers his clients Shariah compliant solutions. As the mainstream financial institutions continue to grow their offerings, so too will the confidence Muslims have and with that the uptake of Shariah compliant solutions. Furthermore, there are several indications that there is excess demand, as reflected in the waiting lists for Shariah compliant mortgages at several cooperatives. Nevertheless, the collapse of one Shariah compliant financial institution offering Islamic mortgages has sent shivers throughout the community, hence driving the need for larger and more credible players to enter this market.
Second, during the financial crisis, Shariah compliant financial institutions performed better than conventional institutions. This has raised questions intellectually as to why? What is it about Shariah compliant structures that make them more resilient in the face of financial difficulty? Related directly to this is Canada’s financial system. While not Shariah compliant, the World Economic Forum has ranked Canadian banks and financial system as the most sound in the world for the sixth consecutive year. The conservative nature of Shariah compliant banking is more akin to Canada’s banking system than it is to the banking systems in many other countries. That is, Shariah compliant financial structures fundamentally are more similar to the Canadian banking and financial market structures than in many other countries.
Third, Canada is very well-endowed in natural resources. The latest estimates indicate that Canada has 12% of the world’s proven oil reserves, third only to Saudi Arabia and Venezuela. The Canadian government has put the figure at CA$650 billion (US$585.44 billion) in capital investments in the next decade alone to develop the energy reserves in Canada. Canada is in need of foreign investment and an important source of foreign capital is the GCC whose investors prefer to invest in a Shariah compliant way, therefore Canada must accommodate and become more amenable to such structures.
2014: A preview
As the theory of international business predicts, much of the world’s foreign investment is intra-industry. Canadian companies invest extensively abroad in natural resources and energy, and at the same time, Canada attracts much investment in these same industries. By opening more to Islamic finance, Canada will be able to attract significant amounts of Shariah capital into its energy and natural resources sectors – on a win-win basis.
Part of the eco-system for Islamic finance is education. The Rotman School of Management at the University of Toronto has an MBA course in Islamic finance. Demand for this course and other Islamic finance offerings is extensive. There are also several graduate students doing research in Islamic finance. Topics include standardization of Sukuk structures, liquidity management within Islamic financial systems, and regulatory changes to further enhance Islamic finance in Canada.
As we enter 2014, awareness of Islamic finance in Canada will continue to grow, and with the federal government’s efforts in this respect, Canada’s attractiveness to Islamic finance will grow. Current regulatory reviews at the federal and provincial levels — together with an apparent political will — is making Toronto more likely than ever before to become North America’s hub for Islamic finance.
Walid Hejazi is the associate professor at Rotman School of Management. He can be contacted at Hejazi@Rotman.Utoronto.Ca .
- April 13, 2014
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