Islamic Finance in a State of Flux
As Eid, the biggest Muslim holiday of the year, is being celebrated today, it is worth taking a look at developments in Islamic finance in Canada. Islamic finance refers to the system of finance that is compliant with the principles of Islamic law, one of which is the importance of balancing material with social objectives. (Read Islamic Finance 101: A Primer.) Islamic finance shares several characteristics with social finance, and has been in Canada for several years, owing to the large Muslim population in the country.
Islamic law prohibits usurious transactions that exploit those in need of capital. Transactions that are prone to undue risk or uncertainty are also prohibited. On the other hand Islam’s economic ethos strongly promotes investment in useful and beneficial businesses and encourages investors to take an active part in both the profit and loss of an enterprise. These core principles of Islamic financial law helped shelter many Shari’a-compliant financial instruments and institutions from the devastating losses of the international economic collapse of 2008.
Ancient Roots, Modern Hopes
Islamic finance is referred to as a recent phenomenon, even though its roots can be traced to the profit-and-loss sharing contracts of ancient caravan traders, including the Prophet Muhammad. In its modern manifestation, however, Islamic finance started in the small Egyptian village of Mit Ghamr with profit-and-loss sharing arrangements and then moved from pure equity investing to replicating conventional instruments. The global Islamic finance industry is valued at $1.14 trillion with annual growth rates of 10 percent.
However, Islamic finance is currently in a state of flux. From BMB Islamic disbanding after several years of successful Shari’a advisory work under the umbrella of the Brunei-based BMB Group to Daud Vicary Abdullah resigning as head of Islamic finance at Deloitte and decamping to the greener academic setting of the
International Centre for Education in Islamic Finance (INCEIF), Islamic finance is going through a phase of global reconfiguration and change. In the current state of flux, we may see a return to core investing values and Canada, currently touted as the safest economy in the world, may be a leader in the re-emergence of a more traditionally centred Islamic finance model.
A Flurry of Activity in Canada
After pioneering work by community-based Islamic home financing and equity investment companies, the Canadian Islamic finance space is going through interesting times. New contenders have emerged in the space within the last few months. These contenders may have something to contribute to the social finance conversation in Canada, once they are up and running. This summer a company called Al Huda launched, offering real estate development and property management services. On the ethical advisory side, Al Huda launched an Islamic finance consultancy, following on the footsteps of the Islamic Finance Advisory Board. Another launch was by Hakim Wealth Management, which has developed proprietary software to screen Shari’a-compliant stocks using strict economic metrics. There has also been background activity in Islamic mortgages, whose distinguishing feature from their conventional counterparts tends to be an “ounce of mercy” for borrowers in times of financial distress. While banks will sometimes give distressed borrowers some time to cure defaulted mortgage payments (especially while they retain counsel), this is never a stated policy.
One of the drivers of Islamic finance in Canada may well be immigration flows. As Muslims continue to migrate to Canada, devout members of the community will continue to seek financing that is in line with their spiritual values. Indeed, one of the principals of Al Huda previously worked in a senior role at Dubai Islamic Bank. If the new start-ups can fulfil these needs by providing products that meet both Shari’a and economic metrics, Canada could be well on its way to becoming an important centre of Islamic finance in North America.
Note: By Shahzad Siddiqui, with the assistance of Jawad Jafry.
Photo credit: http://www.flickr.com/photos/jeanchristophe/3527688851/