Tuesday, January 26, 2010


*** "Islamic financing is based on the principle that charging interest on loans is forbidden". You heard that right: no juice. MS ***


OTTAWA - Most forms of Islamic financing, including Shariah-compliant mortgages, would pose no legal hurdles if widely offered in Canada, concludes a CMHC report expected Wednesday.

The 88-page Canada Mortgage and Housing Corp. study notes that Islamic funding instruments are widely available throughout the world, but even in Muslim countries, often comprise a minority share.

Canada's Muslim community has taken the first tentative steps to privately offering Shariah-compliant mortgage-like products, but the practice is still in its infancy.

Islamic financing is based on the principle that charging interest on loans is forbidden.

The report, by the law firm Gowling, Lafleur Henderson LLP, found no legal impediment to the practice becoming more common.

"Islamic financial products should not present any particular difficulties under Canadian accounting standards," states the study.

It adds that "given the growth of Islamic financing internationally, it can be expected that international harmonization of IF accounting and reporting ... will occur in due course."

The CMHC prefaces the report by stating it has no plans to insure Shariah mortgages, nor does it plan to change current legislation or administrative practices.

Rather, it suggests that private entities would be open to pursue offering the unique financial services to Canada's Muslim community, believed to number about 700,000, if they wish.

The report was commissioned last year at a time when efforts were underway by Muslim financial firms to have one or more of Canada's large banks issue Shariah mortgages.

Instead of interest, Shariah-compliant mortgages function by having the lender become an equity partner in the purchase of the home. The homeowner then pays monthly "rent" or "profit," along with principal payments, to the financial institution putting up the rest of the purchase price.

The co-ownership of the property does create hurdles for lenders, the report notes.

Since lenders remain co-owners, the are equally legally liable in cases of environmental contamination, non-compliance with property standards, and also for property taxes, condominium fees and other responsibilities.

The study leaves open the question of demand in Canada for Shariah mortgages, but adds that "most Canadian firms offering Islamic housing finance state that demand currently exceeds supply."

Toronto-based UM Financial has estimated it has about 5,000 Canadian Muslim clients prepared to transfer their current conventional mortgages to Shariah-compliant ones once a bank begins offering the service.