Islamic Banking

After emerging largely unscathed from the financial crisis that hammered North American and European financial institutions, Islamic banking has momentum.

Worth $1 trillion in assets, Islamic banking is being lauded by British Prime Minister David Cameron and supported by Canada’s Conservative government, major banks and credit unions, leading business schools and influential Muslims across the country.

Islamic banking — which bans interest payments, pure monetary speculation and investing in such things as alcohol, gambling, pornographic media and pork — is being sold as the next big thing in financing for Canada, which is home to just over a million Muslims.

“Awareness in Canada of Islamic banking has increased dramatically in the last few years,” says Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management, where he teaches on the subject.

“With the federal government’s efforts in this respect, Canada’s attractiveness to Islamic finance will grow,” Hejazi says. He cited how Prime Minister Stephen Harper’s government helped sponsor a World Islamic Banking Conference last year in the oil-rich Persian Gulf.

Many Canadian Muslims are seeking “Shariah-compliant banking solutions to their personal finances,” says Hejazi, a Lebanese-Canadian. They want home mortgages that are not based on conventional Western interest payments, but which operate more like a partnership.

The International Monetary Fund, Hejazi says, recently attributed the expansion of Islamic finance to demand from the increasing number of Muslims living in the West, growing oil wealth in Muslim countries and people seeking “ethical” and lower-risk financial products.

Even though Islamic banking has some harsh critics among Canadian Muslims who consider it unwieldy — with many still suffering from the 2011 bankruptcy of Toronto-based UM Financial, which offered Shariah-compliant mortgages — the movement is gaining energy.

In addition to Canadian banks, such as CIBC, making explicit gestures to offer Islamic banking, Hejazi says the Canada Mortgage and Housing Corporation recently reported there are no regulatory hurdles to stop Shariah-compliant banking expanding in Canada.

To continue to grow, some of the world’s largest Islamic banks — most of which are in the Middle East, Indonesia and Pakistan — are looking at rebranding to appear less religious and more open to Western investors drawn to the kind of no-interest cooperative banking that is also offered in countries such as Sweden.

For instance, the Abu Dhabi Islamic Bank, the largest Shariah-compliant lender in the emirate, is considering removing the word “Islamic” from its name and calling itself Abu Dhabi International to emphasize its service quality. Many financial institutions in Muslim-majority countries already simply call themselves “participation banks.”

“I think many Muslims in Metro Vancouver are excited about the idea of Islamic banking. In general, I think it’s a good idea,” says Luay Kawasme, director of the Vancouver Muslim Community Centre.

“The appeal of it for Muslims is they don’t have to get involved in financing that involves interest. Instead, the risk occurs between the financial institution and the borrower. You basically go into business together as partners.”

The Islamic ban on usury grew out of the seventh-century era of Mohammed. The founder of Islam, Luay says, opposed the way “the wealthy would get outrageous returns on their loans; charging interest rates of 20, 30 and 40 per cent.”

Bans on usury are also embedded in Hebrew and Christian scriptures, Luay recognizes.

The early Christian theologians St. Anselm and St. Thomas Aquinas condemned the charging of interest, with Augustine saying it amounted to “double-charging” for a loan.

In her book, The Public Bank Solution, economist Ellen Brown says Catholic monks in the medieval period found interest rates were “particularly devastating to the poor.” So Franciscan monks offered loans on which they made no profit.

However, as modern banking has developed, most Christian leaders have stopped protesting the charging of interest, unless the rates are egregious.

SFU Islamic studies professor Derryl Maclean says the definition of the Arabic word for usury, riba, is in flux, with some believing it applies to the charge of any interest and others thinking it’s only opposes exorbitant rates.

Maclean says it’s not only Muslims who want alternative and ethical investing options. Many secular institutions, for instance, offer “ethical” mutual funds, which refuse to invest in tobacco or weapons.

Maclean notes that Islamic newspapers in Canada and Metro Vancouver, such as All-Ameen, continue to run opinion pieces that champion Shariah-compliant banking.

How does a no-interest loan can work? Hejazi says it’s not borrowing for free.

For instance, one Shariah-compliant method for a family seeking to buy a $300,000 home would be to have the bank buy it for them. Hejazi says the bank could then sell the home to the customer for $523,443, which is roughly equivalent to a five per cent rate of interest over 25 years.

The homeowner would pay off the amount over time. One differences to a conventional mortgage is there are no changes in the payment and that late penalties are not allowed if the homeowner, for example, is laid off. In that way, the arrangement is more like a shared-risk partnership.

Still, some Muslims caution against emphasizing that a faithful Muslim is obligated to take part in Shariah-compliant banking. And a significant portion of citizens in Muslim-majority countries continue to opt for Western-style banking.

Even Tirad Mahmoud, chief executive of the Abu Dhabi Islamic Bank, said in a report that “some Islamic banks are unfairly using their Islamic label in Muslim communities. It is an emotional label that is very powerful in these communities, but are we leveraging on emotions?”

Tarek Fatah, founder of the liberal-minded Canadian Muslim Congress and author of Chasing a Mirage: The Tragic Illusion of an Islamic State, definitely believes the name of Islam is being abused to sell a flawed financial banking system, which he says is often more expensive than Western-style banking.

The Islamic-banking label, Fatah says, can be used to take advantage of vulnerable Muslims around the world and in Canada, some of who feel compelled to use such services in hopes “of avoiding eternal hellfire.”

Given such downsides, Fatah worries that giant financial institutions such as HSBC, Barclays, Citibank, TD Bank and others have either started offering Shariah-compliant banking or are seriously considering it.

A kind of secular variation on Islamic banking has already made inroads in Sweden. The JAK Members Bank, which has more than 30,000 clients, is a reciprocal cooperative in which members receive no interest on their savings and offer each other no-interest loans.

Canadian economist Mark Anielski, author of The Economics of Happiness: Discovering Genuine Wealth, wrote a report in 2004 on the JAK Members Bank in response to the personal interest of then-Vancity Capital Corporation president Bob Williams. However, Vancity, the country’s largest credit union, has not specifically acted on it.

Despite the many hurdles facing Shariah-compliant banking and secular no-interest public banking, Hejazi recently wrote a column in The Islamic Finance News expressing his enthusiasm for Islamic banking becoming a major force in Canada.

Shariah-compliant banking should be strengthened in Canada in part to encourage foreign investment from the oil-rich Gulf States, Hejazi says.

“By opening more to Islamic finance,” he says, “Canada will be able to attract significant amounts of Shariah capital into its energy and natural resources sectors — on a win-win basis.”

Hejazi notes the pressure for Islamic banking is also simply arising out of the country’s demographic religious shift. Muslims already account for seven per cent of the population of Metro Toronto and five per cent of those in Metro Vancouver.

The Muslim population of Canada, he says, is projected by 2030 to mushroom to more than 2.7 million