Canada’s housing market is in decline, but in some provinces there is an emerging niche where home loan demand is still booming: halal financing for Muslim homebuyers.
More than a million Canadians identify as Muslim, but they are disproportionately renters and many feel left out of the country’s real estate market. This is because practicing Muslims are forbidden by their faith from paying or receiving interest, which prevents them from taking out traditional mortgages.
In Edmonton, a new startup, Canadian Halal Financial Corp., is trying to fill some of the homeownership demand of Alberta’s Muslim community. The company was founded by Thomas Lukaszuk, a former MLA and provincial cabinet minister, and John Stainton, a businessman and attorney.
The two have worked closely with Al-Rashid Mosque, a local mainstay, to create an alternative type of mortgage that they say meets strict religious standards. The company has approved 600 applications since its inception last December, with more than a dozen new applications coming in each week.
“This is the fastest growing segment of Canada’s population to be excluded from Canada’s real estate market,” said Mr. Lukaszuk. “It is personally very enriching. But it took a lot of effort.”
Islamic finance is not new, but it exists in a fragmented patchwork quilt nationwide and has yet to enter the financial mainstream. Many halal mortgage providers are Ontario-focused, and some have operated in a religious gray area without much oversight or consistent standards, unlike the halal food industry, which is tightly regulated.
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Canadian Halal Financial positions itself as a credible provider of mortgages that comply with Islamic principles on two levels of authority fatwas – a kind of religious edict – by respected Muslim authorities. These include one by a committee at Al Rashid, Canada’s oldest mosque and a prominent hub in Edmonton.
One of the mosque’s leaders, Imam Mahmoud Omar, traveled to Egypt to seek approval from scholars at Al-Azhar University, one of the world’s oldest sources of Islamic jurisprudence. The fatwa Al Azhar granted to Canada’s Halal Financial is the first for a North American company.
But it took years of debate and six-figure court costs to get to this point, responding to pressure from the mosque’s community that a halal method was required for buying a home in Alberta.
“They approached the imams, they said… ‘We can’t rent forever, so find us a solution,'” Mr Omar said in an interview.
First, Al Rashid executives held talks with local credit unions and banks. But these institutions concluded they could not create a compliant product and separate it from their core business of lending and taking deposits on an interest basis, Mr Lukaszuk and Mr Omar said. As a result, they would not be considered halal.
Al-Rashid Mosque then approached Mr Lukaszuk, who had been in business building new houses after retiring from politics, where he met Muslim clients looking for a way to finance the new construction. It took two years of meetings with lawyers and scholars to draft contracts that conformed to both provincial and Islamic law. And there were times when Mr Lukaszuk thought it was “impossible”.
When the company started, “it was a big success and big news,” said Mr. Omar.
“Imagine someone has been renting for the last 20 years and it’s like you finally made it possible for me to own my house. It was an emotional time.”
The company offers two types of halal financing. Both require a minimum 25 percent down payment, periodic payments until the home is fully paid off, and a noninterest-bearing fee over the home price.
“From a religious perspective, it’s okay for us to make a profit, but that profit cannot be interest-based,” Mr Lukaszuk said.
By far the most popular type of contract is Musharaka, a form of partnership similar to a lease-to-own structure. The buyer’s name will be on the title deed, the payback period can be up to 30 years and there is an option for early capital payments. Also available is a more traditional one murabaha Contract that has a shorter term of up to 15 years and fixed payments.
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One buyer, Nadeem Rahman, came to Canada in 1998 and lived in and around the Greater Toronto Area for the next 14 years. In 2006, he bought a home through a now-defunct Halal finance company that did not last and sold it before moving to Edmonton in 2012. He had been renting since then until he found Canada’s Halal Financial, which has a prospect sign-up program, via the Al Rashid Mosque.
With Company funding, Mr. Rahman purchased a larger home in Edmonton where he lives with his wife, daughter and son and has room for extended family visits. After property taxes, it costs about the same as the smaller townhouse he previously rented, he said. He compared a mortgage from a company recognized by his mosque and Al Azhar to a prescription signed by a doctor.
“I can take this drug,” he said. “That takes the load off us. There is a very big and strong confidence to walk with them. … It’s like a big door that opens for many people.”
Islamic finance structures sometimes walk a fine line. Canadian Halal Financial contracts can have only two parties – the company and the buyer, with no involvement of other financial institutions or insurers. The company cannot mix its funds with interest-bearing products, but it can raise capital or borrow lines to fund its business from financial institutions, including banks, pension funds, or private equity funds.
“We are the buffer and there is no direct contact between our investors,” said Mr. Lukaszuk.
The question every time a new Islamic finance provider launches in Canada is, “Are they halal or not?” said Dr. Mohamad Sawwaf, Founder and Chief Executive Officer of Toronto-based Islamic Financial Institution Manzil, who holds a PhD in Islamic Finance.
His company follows the standards of the Accounting and Auditing Organization for Islamic Financial Institutions, a non-profit organization based in Bahrain. It establishes product structuring and governance rules that require a company to have an expert board of directors, internal and external auditors, and regularly updated certifications or fatwas.
“This can be done the right way,” said Dr. Sawwaf.
Strong and consistent standards will be critical as demand for Halal mortgages in Canada grows and more financing providers begin to meet that need. Canadian Halal Financial is taking an increasing number of inquiries from outside of Alberta and the company is considering opening offices in Ontario, BC and Quebec in the near future.
Manzil in Toronto has 12,000 families on the waiting list for financing to buy homes, and the company would need an additional $6 billion in funding to service them all.
“We have a mismatch between supply and demand,” the Manzil CEO said.