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Devoid of Interest
Enterprise Magazine, July 2005
Photo: Molly Crealock
Muhammad D. Khalid had saved up money for a down payment and he had his eye on a cute three-bedroom brick house in Etobicoke, Ontario. However, the idea of taking on a mortgage weighed heavily on Khalid's mind - as a devout Muslim, it's against his beliefs to pay or receive interest.
Instead, Khalid, joined together with a handful of Muslims in the Toronto area to start an ambitious project - a Muslim home finance coop. Today, twenty-four years after the Islamic Cooperative Housing Corporation (ICHC) was created, it has sold $30 million in shares and purchased housing units for 495 Muslim families. The coop is one of a growing number of financial organizations in Canada offering products that conform to the Shariah, or Muslim law.
"The concept of Islamic finance is simple," explains Khalid, a 60-year-old Pakistan-born Muslim who worked as an economic advisor at Ontario Hydro before he retired. He sits in the boardroom of the Islamic Centre of Canada in Mississauga, a complex that is also home to a mosque, a Muslim high school and a bookstore. "In Islam, interest is forbidden. People doing business together must share in the profit and losses. We become partners. We float together or we sink together."
The Shariah is not a legal system in the Western sense of the word; rather, it's a broad ethical code covering religious rituals and activities of every day life. Muslim law differs from country to country: it's based on the text of the holy book the Koran and the Sunna, the words and deeds and the Prophet Mohammed, but it also incorporates local traditions. In Ontario last year, Muslim law hit the headlines in a debate about using Shariah-based arbitration to settle Muslim family disputes, such as divorce, custody and inheritance. Women's groups and legal organizations objected, saying the Shariah discriminates against women. However, Muslim financial law is much less controversial, and the biggest difference from the Western banking system is the prohibition against interest. Islamic financial institutions vary, but most operate using some sort of fixed fee as opposed to a fluctuating interest rate.
In the time of Mohammed (570-632 CE), money lending was common. If the debtor couldn't pay the money back, they would be forgiven for a year, but the amount owing would double. Mohammed's teachings banned riba, translated as "interest" or "usury": in the Koran, it says "Those that live on usury shall rise up before God like men whom Satan has demented by his touch; for they claim that trading is no different from usury. But God has permitted trading and made usury unlawful." Some Muslims believe the ban applies only to excessive interest rates, but many think paying or receiving any form of interest is forbidden.
The Islamic Cooperative Housing Corporation was one of the first Muslim financial institutions in Canada: it began in 1981 by pooling money from members of the local Muslim community. This is how ICHC's system works: if a Muslim wants to buy a house, they have to put at least 25% down and the coop buys the property. Instead of mortgage payments, the resident pays the coop a fixed sum of money each month, including a 20% administration fee. Eventually, the resident pays off their debt entirely and the property is transferred into their name. ICHC also receives funds from Muslim investors who want to put money into an organization that doesn't operate using interest. The cooperative has been so successful that it reached the government limit of $30 million several years ago and opened up a second pool, called Ansar Cooperative Housing Corporation.
MD Khalid drives his car over to a quiet street in the neighbouring suburb of Oakville to show me one of the cooperative's projects he's particularly proud of - his own home. It's the second property he's purchased through the coop. Inside the brick house, the walls are covered with giant framed photographs of Muslim pilgrims gathered in Mecca. In the kitchen, Khalid's wife Habiba is preparing cookies, cakes and samosas for 10th day of Zul-Hijjah, a holiday when families feast and give food to friends, relatives and the poor.
According to Khalid, there are financial benefits to the buying through the coop: you're not subject to fluctuations in interest rates and you can pay your debt off early without penalties. However, Khalid isn't motivated by the financial gains - he's involved with the coop because of ethical concerns. "I believe that interest is bad," he says. "People are taken advantage of and rich people get richer on the backs of the poor."
In Muslim countries, people traditionally paid cash for property in order to avoid interest, while those who needed to borrow often had little choice but to take out conventional interest-based mortgages. However, in the past several decades, Islamic financial institutions have been popping up all over the Islamic world and in Western countries with Muslim populations. Britain has been a leader: HSBC offers Shariah-compliant mortgages and last year the U.K. government gave approval for the creation of a complete Muslim financial institution - the Islamic Bank of Britain. New York's Dow Jones now has Islamic market indexes of Shariah compliant stocks, which exclude companies that deal in alcohol, pork, and interest-based investments.
According to Anver Emon, a specialist in Islamic law at the University of Toronto's Faculty of Law, getting an Islamic mortgage helps Muslims avoid interest, but it may not put more money in their pockets.
"It may not result in a better financial deal," he says. "Some Islamic banks charge more for a loan than conventional banks and some charge less."
Some scholars argue that because Islamic mortgages replace interest with a fixed fee, Muslim consumers are still paying interest, but under another name.
"In the end, it may not be much different from a conventional mortgage," says Emon, "but for a devout Muslim, they think they're sticking to letter of law, and that may be important to them."
In Canada, both Muslim and mainstream financial institutions are trying to gain the trust of the growing Muslim population: according to the 2001 census, there are around 580,000 Muslims in Canada, more than double the number living here in 1991. Statistics Canada says Islam will continue to be one of Canada's fastest growing religions, and predicts the Muslim population will reach 1.4 million by 2017.
Last year, the Royal Bank of Canada offered a Shariah-compliant equity-linked fund, but they're no longer selling it and bank officials won't comment on the success of the project. According to Khalid, his community didn't accept the RBC fund because it didn't truly conform to Muslim law. "They promised the capital investment would be safe, but in Islam, business partners must share the risk together, so the Royal Bank product just fell by the wayside."
RBC insists their product was Shariah-compliant, saying they had approval from three well-known Muslim scholars. Masud Choudhury, a professor of economics at the University College of Cape Breton Sydney who has studied Islamic finance extensively, says it can be very difficult for mainstream financial institutions to gain the trust of the Muslim community.
"There needs to be a shared risk and the investment cannot involve interest," he says. "When a bank like RBC says they have a product that is Shariah compliant, there are a lot of other things required to make it acceptable. Many Muslims feel that in order to serve the moral law, the money should be put into a project that will benefit society and the economy. Personally, I'm skeptical the RBC product. I wouldn't put all my eggs in that basket."
A new generation of Canadian-born Muslims is trying to create new products to fill the gap left by the banks. These second generation entrepreneurs were educated in Canada and can easily navigate through the business world; they also have strong connections in the Muslim communities where they were raised.
Twenty-nine year old Omar Kalair was raised in Mississauga, and he's been involved in various projects in the community, including producing a Muslim radio show and newspaper. Kalair did most of his assignments for his business economics degree at Wilfred Laurier University on Muslim finance. When Kalair formed his company UM Financial, he didn't look to a cooperative model to get funds from the community - instead he decided to develop partnerships with mainstream organizations.
"With a cooperative, the amount of money you can raise is limited and the features you can offer are also limited," he says. "Our goal is to create a product for the Muslim masses."
Kalair's first project was the creation of a Shariah-compliant bank account with Toronto's Metro Credit Union last year. The savings account money wasn't lent out to parties who were charged interest: instead it was used for cash at Metro's branches. However in March, Metro Credit Union was in midst of a merger with CS COOP and they scrapped the Shariah-complaint account. Metro representative Robyn Hall wouldn't comment, only saying that the pilot was "unsuccessful."
However, Kalair isn't deterred, and says he'll look for other credit unions and banks to work with. He's already created a home finance program, which is being funded by the Credit Union Central of Ontario (CUCO). Kalair says it's the first Shariah-compliant home financing in Ontario that offers similar features and rates to a conventional mortgage.
Jens Lohmueller, a product developer at CUCO who worked on the project, says developing the Shariah-complaint home financing program was "long and painful" process that dragged out over a year and a half. CUCO had to change it's own lending policies and get permission from the Canada Revenue Agency to have the transfer of ownership to UM Financial and the resident considered as one transaction. Lohmueller says some regulators wanted to help the Muslim community, while others were less receptive. "Some just leaned back and said the laws are such and you cannot do that," he says.
With the recent controversies in Ontario, some credit union staff may wonder if pairing up with Muslim financial institutions could affect the treatment of women in their own branches. The University of Toronto's Anver Emon doesn't think women face obstacles at Muslim banks and coops: he says Islam has a long tradition of accepting women who are active business participants, going back to Mohammed's first wife, who hired him to work for her caravan business. However, Emon says if credit unions have concerns, they should bring them up with their potential business partners.
"If you're thinking of creating a partnership with a Muslim financial institution, invest some time interviewing them and learning who they are," he advises. "If you have concerns, find out if they have a non-discrimination policy and make that a requirement."
The end goal of the Islamic Cooperative Housing Corporation, UM Financial and other Muslim financial institutions in Canada is to create a full-service Muslim bank or credit union in Canada. Jens Lohmueller says the law needs to change before that can happen: federal rules force financial institutions to offer interest-bearing savings accounts and they must keep deposits with the Bank of Canada, where they earn interest. And perhaps the biggest obstacle, according to Lohmeuller, is to unite the Muslim community behind the project.
"Right now the community is not one coherent group," he says. "To build a credit union, they need to have one single voice."
In the meantime, Lohmeuller feels existing credit unions have a duty to work together with the Muslim community. "The banks have dropped the lead on this," he says. "RBC tried to offer Islamic products, but they didn't get the volume they wanted. For a big bank to act, they want volume. Credit unions have a different approach. We are community driven financial institutions. There is a community here that wants to access the credit union system, and we should work with them to make it happen."