Islamic Banking Industry: Concept,

Transactions and Supervision

The Gulf Cooperation Council Countries

Sharia: Islamic Law rules and provisions.

Fatwa: A legal opinion or pronouncement made by a Sharia board, or an Islamic
scholar on any matter pertinent to sharia law.
Gharar: Describes a risky or hazardous sale, where the details of the sale contract
are unknown or uncertain.
Haram: Forbidden Ijarah: Leasing contract
Maysir: Gambling Riba: Usury
Murabaha: Crediting Financing Mudaraba: Profi t and loss-sharing and trust
financing
Musharaka: Joint partnership or equity participation Sukuk: Islamic bonds
Sukuk al-ijrarh: Lease-back Islamic debt instrument Takaful: Islamic insurance
Qardhasan: Interest-free financing
Abbreviations
GCC: Gulf Cooperation Counci PLS: Profit-Loss Sharing
BMA: Bahrain Monetary Agency OIC: The Organization of Islamic Cooperation
IFSB: Islamic Financial Services Board SPV: Special Purpose Vehicle
UAE: United Arab Emirates

I.              Introduction
Recently, Islamic banking has become a very important part of the global financial
services industry.
This paper aims to clarify the concept of Islamic banking, highlight most popular
features of Islamic transactions; how these transactions in practice are similar to
the conventional banks transactions, and the experience of the Gulf Cooperation
Council (GCC) in Islamic banking field.
Many writings argue that the practice of Islamic banking is so far from its theory.
This paper also investigates the question of whether the key issue in Islamic
banking is to meet certain procedures or to achieve the goals of Islamic law.

II.            Definition of Islamic Bank

Islamic banking stems from Sharia Law and all Islamic banking transactions should
comply with Sharia Law provisions.
The Organization of Islamic Cooperation (OIC) defined Islamic Bank as “a financial
institution whose statutes, rules and procedures expressly state its commitment to
the principles of Islamic Sharia and to the banning of the receipt and payment of
interest on any of its operations”
The key feature in Islamic banking is the Profit-Loss Sharing (PLS) which means
that the role of the bank is not lending money to clients but participating in the
business with the clients as a financier in different financial positions.
To understand the concept of Islamic banking it should be noted that the
reference of Islamic banking "sharia law” emphasizes ethical, moral, social and
religious factors to promote equality and fairness for society. Thus, the
philosophy of Islamic banking does not consider money as an earning asset by
itself; but it is used to evaluate commodities.
According to Sharia law provisions paying interest (which is called “riba”) is
prohibited, rather the Law encourages trading and investment on SPL basis.
Therefore, the main purpose of Islamic banking is to achieve welfare for all
society and not to earn money. Of course, this is the theory in Islamic banking; we
will investigate whether the reality of Islamic banking matches the theory.

III.           Beginning and Development of Islamic Banking in GCC

The first private Islamic Bank, the ‘Dubai Islamic Bank’, was set up in 1975 by a
group of Muslim businessmen from several countries. In 1977 the Kuwaiti
Government set up the ‘Kuwait Finance House.
In the 1980s Bahrain implemented Islamic banking within the framework of its
existing system. As of early 1999 Islamic financial institutions were present in
more than 70 States, and their assets exceeded the USD 200 billion mark. Since
the turn of the century, global assets of Islamic financial institutions have
increased significantly. State sukuk emerged around 2001-2002 and quickly
created a large market in several States, particularly in the GCC region.  GCC
markets showed that customers are more attracted to the use financial
instruments offered by Islamic banks.
The GCC has a dual banking system where Islamic and conventional banks are
operating side by side, other countries have different system where Islamic banks
are separated from conventional banks, such as Jordan and Palestine.
The key challenge facing monetary authorities in GCC is how to bring the Islamic
banks and activities under the same supervision imposed on conventional bank.
The development of Islamic finance industry since 1975 encompasses
Islamic Takaful (insurance), sharia-compliant asset management and investment
banking.
GCC legislations and regulations have facilitated the development of Islamic
banking.However, other countries, like Malaysia; have done much to encourage
Islamic banking through legislations, tax exemptions and subsidies. In 1983 the
Islamic Republic of Iran also introduced legislations to make its entire banking
system sharia-compliant, a precedent that none of GCC states have done yet.
However, that does not mean Iranian Islamic banking is system better than its
counterpart in GCC. Islamic banks in GCC have been more innovative than their
Iranian counterparts in terms of product development and providing a much
more attractive range of services, because of the need to compete with
conventional banks in their domestic markets and because the Iranian banks are
state-owned, which makes them more bureaucratic than innovative banks.
GCC Islamic banks have rapidly expanded their branch network in the world. The
Saudi Bank Al Rajhi Bankhas established subsidiaries in Malaysia where it has a
network of nineteen branches. Dubai Islamic Bank has established branches in
Pakistan, and it purchased the Bank of Khartoum in Sudan as well as three real-
estate companies in Egypt. It also has a 27.3 per cent stake in Bosnia International
Bank, 31 per cent of a bank in Northern Cyprus and 18.5 per cent of Saba Islamic
Bank of Yemen. Dubai Islamic Bank has also a 43 per cent investment stake in
real-estate companies in Turkey, Lebanon and the United Kingdom.

IV.           Features of Islamic Banking Transactions

The essential feature of Islamic banking is the interest-free principle. However,
there are other features. The Islamic finance transactions must avoid the
following matters:
 • Interest (riba): the sharia law treats interests as act of exploitation and
injustice by the strong party to the weak party. With interests the rich get
richer and the poor get poorer.
The nature of interest is not complying with sharia law, it is fixed and certain and
the risk of loss is not available and the Islamic banking based on PLS. The PLS
principle assumes that the return is not predetermined but the profit-sharing
ratio is predetermined.  The rule that says “if there is no risk then there is no gain”
was established under PLS principle.
 • Haram activities: transactions involving forbidden goods and activities
(haram), like transactions in dealing with alcohol, gambling, drugs, pork or
anything else that the sharia law considered unlawful.
 • Sales of items not in possession or agreeing to contract without specifying
material terms of the contract (gharar).
 • Speculative transactions or enrichment without labor (maysir), these
transactions are seen in Islamic perspective as kind of gambling.
 • Any transaction should not exploit any party.
In general, any transaction should comply with the justice principles in the sharia
law and some risk must be assumed to justify returns in the transactions;
unconditional returns are not compliant with the sharia law. 
Many people cannot differentiate between Islamic transactions and normal
transactions in conventional banks. The following example clarifies the
difference: 
X wants to buy a car in an amount of 50,000$ and he does not have the amount of
the car. If he resorts to the conventional bank, he will get a loan in an amount
50,000$ plus fixed interest 3% (for example). If X resorts to an Islamic bank, he
will not get the money, instead the Islamic bank will purchase the car in the
amount of 50,000$ and resell it to X by 50,000$ plus fixed return 3% (for
example).What is the difference between two transactions? In the Islamic
transaction the bank possesses the car then resells it to the client which means
that the bank bears a risk of loss. In the conventional bank case it has no risk at
all; the bank lends only money and gains money and does not deal with
commodities.
The question whether the Islamic bank takes a serious risk is a critical question
and the answer is addressed in the next section.

V.            Islamic Banking Instruments

Muslim population, from Muslim communities and Western countries, used to
use Islamic bank services. The Islamic bank deals with various types of
instruments, the following instruments are the most popular in Islamic banking
field:  

1.     Murabaha (Crediting Financing)
In this transaction the bank (financier) purchases a good or asset adding a mark-
up before reselling it to its client on a “cost-plus” basis. In such case the mark-up
is permitted because it is a trade transaction with the risks associated in the sale
of good.
In practice, Islamic banks take actions to reduce the risks
in murabaha transaction; such as:
 • Reduce the time between sale and purchase to the minimum by
appointing the client as a bank agent to buy the goods.
  • Reduce the risk of buying a commodity to the minimum by reselling the
commodity immediately to the client on a mark-up basis.
By using the above mentioned actions the return becomes fixed and
predetermined; however, the transaction is still compliant with sharia law even by
taking such actions.
Regardless to any action taken by the bank to reduce its risk; Mohamed Arrif, an
Islamic researcher, says “What makes the murabaha transaction Islamically
legitimate is that the bank first acquires the asset and in the process it assumes
certain risks between purchase and resale”.
The Islamic scholars did not address the actions that the bank may take to reduce
its risk. However, when the question was addressed to a Sharia Supervision
Board, the reply was that “speed” is required in commercial activities and these
actions make murabaha more effective and fast. 

2.     Mudaraba (Trust Financing)
In this transaction the bank (owner of capital/lender) allows an entrepreneur with
ideas and expertise to use the capital for productive purposes. Both parties will
share the profits, if any, and losses, if any, however, will be borne wholly by the
bank. 
There are two aspects of mudaraba for the Islamic bank; the first one is the
popular side in which the bank plays a role in the investment portfolio side. The
second aspect is not popular, in which the bank usesmudaraba in trade finance
and investment projects.

3.     Musharaka (Equity Participation)
In this transaction the bank and its client use their capital jointly to generate a
surplus. Both parties will share profits or losses according to how they agreed in
the contract depending on the equity ratio.Musharaka  is similar to the idea of
partnership and joint stock ownership.

4.     Ijarah (Lessing Transactions)
Ijarah is a contract under which the financier (bank/lessor) purchases the
required equipment or machine and leases it to its clients (lessee). The parties
may agree upon expiration of the period of the lease contract, the title of the
equipment or machine may be sold to the lessee.
In ijarah transaction the ownership remains with the lessor (bank) and its usufruct
transferred to the lessee for specific rental payments incorporating with profits.
The fixed leasing charge is allowed under sharia law because the financier
assumed risks like a duty of repair and revoke the lease contract by the lessee.
Some writings made analogy between the rent on property and interest on loan.
Indeed, such analogy is rejected by Islamic scholars, because the benefit to the
lessee is certain, while the benefit for the borrower is uncertain.
However, the Islamic banks in lease operations take the following actions to
reduce the risks to a minimum.
 • Appoint the lessee as a maintenance agent,
 • The lease period enables the bank to recover of principal plus rate of
return,
 • In most cases the lessor would conclude a verbal agreement with the
lessee to renew the rent period at a new rent payment. Such agreement
falls under gharar, which is prohibited under the sharia law, but the banks
bypassed it by verbal agreement.
In practice there is a difference between what Islamic rules want to achieve and
what the Islamic banks are doing to get around these rules to reduce their risks.  

5.     Sukuk  (Islamic Bonds)

The name sukuk is similar to certificates and it’s known as Islamic bonds. In 1988
the OIC legitimized the use of sukuk, but the development of sukuk market took
some years.  The Malaysian government issued the first Islamic global bond in
2002. Sukuk  may be issued on behalf of governments and also on behalf of
corporations. Issuing sukuk is not restricted only to Islamic countries, the German
state of Saxony-Anhalt issued a €100 million sukuk in 2004 and the World Bank
issued its first sukuk  for 760 million Malaysian ringgit ($202 million) in 2005.
There are various types of sukuk, but the most popular one is sukukal-
ijrarh because each security (bond) is pro-rata ownership of physical assets and
trading sukukal-ijrarh in secondary market is permitted.
The key idea in sukukal-ijrarh referrers to securitization; although the concept of
securitization is derived from conventional bond application, Islamic securitization
has distinctive features that distinguish it from asset securitization. According to
the sharia law Islamic securitization must be free from riba, gharar andmaysir and
Islamic securitization must involve the funding or the production of real assets.
The uniqueness of Sukuk al-ijarah  is that it’s facilitated by Special Purpose Vehicle
(SPV) which acts on behalf of the investors, Sukuk al-ijrarh set up as follows:
 • Originator holds assets that are the basis of return.
 • Assets are sold to SPV and leased back to originator.
 • SPV sells sukuk certificates to investors.
 • Each certificate is a share in ownership of assets.
 • Periodic distributions funded by rental payments.
 • Returns on sukukal-ijrarhcan are fixed.
It was not expected to have Islamic bonds with fixed returns until Bahrain
Monetary Agency (BMA) issued Islamic leasing securities. The procedures of
issuing sukukal-ijrarh  by BMA is related to the International Bahrain Airport and
was done by the following steps:
 • BMA issued sukuk al-ijrarhin of a total amount of 40 Million Bahraini
Dinar.
 • The subscription in sukuk started on June 20th,2004 and ended on June
20th,2014
 • The rent amount was fixed; each subscriber gained a (5,125%) every six
months.
 • sukuk al-ijrarh represented governmental assets (part of parcel of the
International Bahrain Airport).
  • The sukuk issued for the investors who were represented by Bank of
Bahrain. The Bank purchased the parcel from the government and lease it
back to the government, such lease usually ends with possession as the
government was committed to re-buy the parcel from the bank at the end
of sukuk period at the par value price. 
In practice, sukuk al-ijrarh is similar to conventional bonds except in ownership of
the assets.
Some writings criticize sukukal-ijrarh issued by BMA claiming that such sukuk are
not different from the conventional bonds and the only difference is the naming
and that the issuing process was non-compliant with the sharia law because:
 • The capital of sukuk was guaranteed to repay by the government at par
value price.
 • The returns were also fixed and guaranteed.
 • If the capital and returns are guaranteed then there is no PLS and no risk.
However, the Sharia Committee in Bahrain issued a Fatwa to legalize
the sukuk process and presented arguments to show that the process is totally
compliant with the sharia law.
There is a controversy between Muslim scholars surrounding the question: what
is considered compliant with sharia law and what is non-complaint with sharia
law. The controversy is not only in sukuk, but in every single Islamic transaction.
This returns to the existence of different Islamic jurisprudence schools, different
explanations to the sharia law’s provisions and different sharia opinions.

6. Islamic Credit Cards

The Islamic banking industry is looking to provide all the banking services existing
in conventional banks, and credit cards are of the important services to bank’s
clients. 
According to sharia law the debt cards are permitted since there is no grace
period and no interest (riba), but the problem with this type of credit cards is that
it lends clients an amount of money and the client is committed to repay the
amount with interest. Some Islamic financial organizations developed liberal
rulings to adopt Islamic credit cards for longer periods than the usual one-month
grace period. With these cards purchases are automatically financed over a fixed
period, usually 12 months.
In 2002, Bahrain’s ABC Bank announced that it was to launch the first credit card
conforming to sharia law. In 2002 also, Bank Islam Malaysia Bhd claimed that it
launched the first Islamic credit card.
The OIC issued a fatwa legalizing credit cards if they are compliant with sharia
law's principles. The fatwadraw up the conditions of credit cards from Islamic
perspective and these conditions are:
1. Islamic credit card is not allowed to charge any interest (riba) to payments
even if the user is late on payment. 
2. The bank is permitted to charge fees on the issuance of credit cards.
3. The bank is permitted to charge commission on each transaction done
through the card.
4. The bank is permitted to charge fixed fees on the using the credit ceil in the
card (loan), but such fees must not be linked to the loan amount or period.
However, in practice there are several forms of applying the Islamic rules on
credit cards. For example, some Islamic cards involve a transaction that consists
of two agreements. In the first agreement the customer buys merchandise from
the bank at a stipulated price, the bank buys back the merchandise from the
client at a lower price. The bank’s profit from this transaction is derived from the
difference of the two prices. The profit rate levied by Islamic banks is known in
advance.
There is another form of using Islamic credit cards, in 2003 the Kuwait Finance
House issued credit cards to be used specifically to buy consumer durables from
selected shops, these cards were based on ijarah.
Some writings criticized the manner of using credit cards and claimed that the
only Islamic way to use credit cards is by giving a loan without interests (qard
hasan) and the only permitted fees are the fees of providing the service and any
charge of profit is considered as riba.
 VI.           Regulation and Supervision Structures of Islamic
Banks
There are various system structures of Islamic banking:
(a) Dual system: like Malaysia and Indonesia; in this system the conventional
banks setting up Islamic window operations or even Islamic banking subsidiaries.
(b) Dual system with clear separation between the conventional banks and the
Islamic banks like Bahrain, Palestine and Jordan.
(c) Full Islamization of the financial system: in this system only Islamic banks are
licensed to operate in a country like Iran and Pakistan, there is no license for the
conventional banks.
As a practical matter, Islamic banks are currently governed by the same
regulations that govern conventional banks; such regulations generally follow the
guidelines of the Basle Committee on Banking Supervision. But Basel instructions
do not consider the nature of Islamic banking transactions.
Conventional banks generally follow the Basel Committeerules. The Committee in
2004 issued Basel II which is a set of recommendations on banking laws and
regulations. The purpose of Basel II is the creation of international standards for
banking regulators to be used for the creation of regulations respecting the
amount or ratio of capital that banks should put aside or reserve as a cushion
against the types of financial and operational risks which banks confront. These
international standards act as a measure of protection for the international
financial system against the possibility of a major bank. To achieve this goal, Basel
II sets up rigorous risk and capital management requirements designed to ensure
that the banks hold capital reserves appropriate to the risk exposure of the
particular bank inherent in its lending and investment practices. Accordingly,
under these rules the greater risk to which the bank is exposed, the greater the
amount of capital the bank needs to hold in reserve to safeguard its solvency and
overall economic stability.
After the worldwide financial crisis, Basel III was issued to provide a new global
regulatory standard on bank capital adequacy and liquidity. The Basel Committee
does not take in its account Islamic banking transactions. However, some Islamic
banks have attempted to follow Basel II. But the case is different with Basel III,
which was a reaction to a banking crisis that Islamic banks find themselves not
relevant to react to since they were in the safe side during the crisis.
The Islamic Financial Services Board (IFSB), encourages Islamic financial services
industries and institutions worldwide to follow its recommendations. The IFSB
issued many instructions, standards, and guidelines, such as Core Principles for
Islamic Finance Regulation (Banking Segment) in April 2015, Standard on Risk
Management for Takāful (Islamic Insurance) Undertakings in December 2013, and
Guiding Principles on Stress Testing for Institutions Offering Islamic Financial
Services in March 2012.
One of the most important recommendations of IFSB that Islamic banks must be
subject to the same supervisory rules and requirements same to these rules
govern conventional banks. The IFSB also encourages Islamic banks to integrate
into global markets as it will encourage banks to compete with all other financial
institutions, motivate them to meet the needs of customers, expand their scope
of work, and not to be linked to a specified category of customers.

VII.         Conclusion
The key characteristic of Islamic banking is the interest-free rule which came out
from the holy Quran provisions. The Profit-Loss Sharing (PLS) is a key concept to
understand the Islamic banking instruments. In theory, Islamic banking
transactions are different from the conventional banks transactions. In practice
they are similar, due to the actions taken by Islamic banks to reduce the risks.
While the sharia law aims to promote equality and fairness in the society, the
reality of Islamic banks performance is focusing on gaining money.
IFSB aims to set up standards and guidelines to promote the stability of Islamic
banks over the world.  However, the manner in which Islamic banking services are
currently provided in Muslim countries, GCC in particular is not likely to transform
Islamic banking into a true universal banking system; it is more likely to remain as
a specialized form of banking services.
The experience of GCC and other Islamic countries in Islamic banking industry
appears I that such industry will remain a small segment of the global banking
market, supported primarily by GGC oil money. The Islamic banking industry
remains a niche market, despite its spreading in the Middle East and throughout
the Muslim world and even in parts of the West countries.
To make a real competition between Islamic banks and conventional banks in the
market world, Islamic banking industry needs to adopt the requirements of the
global financial system and reinforce its structures.
The acceptance of Islamic banking worldwide and its spread over the world is
faced by serious obstacles, such as the agreement on what is and what is not
acceptable as sharia compliant throughout the Islamic industry.
_________________________________________________
The Organization of the Islamic Cooperation (OIC) is an inter-governmental
organization grouping fifty-seven States. These 57 States decided to pool their
resources together, combine their efforts and speak with one voice to safeguard
the interest and ensure the progress and well-being of their peoples and those of
other Muslims in the world over; (Sep 24, 2015, 2:00 PM) 
"The prohibition of riba is mentioned in four different revelations in the Quran.
The first revelation emphasizes that interest deprives wealth of Gods blessings.
The second revelation condemns it, placing interest in juxtaposition with wrongful
appropriation of property belonging to others. The third revelation enjoins
Muslims to stay clear of interest for the sake of their own welfare. The fourth
revelation establishes a clear distinction between interest and trade, urging
Muslims to take only the principal sum and to forgo even this sum if the borrower
is unable to repay." Mohamed Ariff, Islamic Banking, Asian-Pacific Economic
Literature, vol. 2, 2-3 (September 1988).
In order to avoid gharar the parties to a contract must make sure that both the
subject and prices of the sale exist, and that parties are able to deliver and parties
must define the quantity, quality and date of future delivery, if any. 
The Basel Committee is the primary global standard-setter for the prudential
regulation of banks and provides a forum for cooperation on banking supervisory
matters. Its mandate is to strengthen the regulation, supervision and practices of
banks worldwide with the purpose of enhancing financial stability”.
The Islamic Financial Services Board (IFSB) is an international standard-setting
organisation that promotes and enhances the soundness and stability of the
Islamic financial services industry by issuing global prudential standards and
guiding principles for the industry, broadly defined to include banking, capital
markets and insurance sectors.
Ibrahim Fares L.L.B in law from Al al-Bayt University, Jordan (2006), his master’s
Degree in Law, Bir Zeit University, Palestine (2009), his L.L.M Degree in Law from
University of Pittsburg, the United States (2013), and his L.L.M Degree in Law from
LAZARSKI University, Poland (2014). He is a member of the Palestinian Bar
Association (2006), and he is an Arbitrator in Commercial and Civil transactions
(2015).
He has over 8 years’ experience in corporate law and finance as senior associate
at one of Palestine's most prominent law firms (Husseini and Husseini Law Firm)
where he specializes in commercial transactions, mergers and acquisitions,
contracts (other areas include intellectual property, banking, labor and
employment, investment and taxation).

Canada: The next hub of Islamic finance?

Middle East Eye
Canada’s stable economy, growing Muslim community and international outlook
could make it the next Islamic financial hub in North America
The sharia-compliant financial sector is not entirely new in Canada (AFP)
TORONTO, Canada - With a growing Muslim population, stable economy and
openness to the world, Canada is poised to become the North American hub for
Islamic finance, local experts have predicted.
But many say Canadians must first better understand the growing financial sector,
and support from the federal and provincial governments would go a long way to
boost its development.
“When you look at global finance, [Islamic finance] is a very, very high growth
area and for Toronto, as an international financial centre, it should be a table-
stake for us,” said Janet Ecker, president and CEO of the Toronto Financial
Services Alliance (TFSA).
Islamic finance is a socially responsible financial system that emerged in the 1970s
and uses Islamic law (sharia) to regulate various sectors, including banking,
investments, and insurance.
Under the system, Islamic investments are often referred to as halal investments,
or sharia-compliant investments.
A recent report by the Toronto Financial Services Alliance (TFSA), a public-private
entity that seeks to build Toronto as a global financial centre, and Thomson
Reuters predicted that Canada could be home to almost $18bn in sharia-
compliant mortgages, while international Islamic bonds (sukuk) could generate
$130bn in national infrastructure investments.
Ecker said Canada’s stable financial market and risk management expertise,
coupled with a large and growing Muslim population and an openness to the
world, makes it an ideal place to develop Islamic financial opportunities.
Just over one million people identified as Muslim on the most recent Canadian
household survey in 2011, and that number is expected to grow to around three
million by 2030. Muslims represented 3.2 percent of the Canadian population in
2011, up from 2 percent a decade earlier.
“Being able to have business partners and a business climate that is more
accepting and open is not an insignificant advantage for us,” Ecker told Middle
East Eye. “I do think Canada and certainly Toronto does provide a more
welcoming environment than they (Muslims) may have in other places.”
How does Islamic finance work?
In Islamic finance, investments in weapons, gambling, alcohol, pork, adult
entertainment and other areas are deemed forbidden and earning interest (riba)
is prohibited. Governments, meanwhile, can issue Islamic bonds (sukuk), which
are structured to be without interest.
“Islamic finance is simply a different way to structure or to create products that
are consistent with the Islamic faith. Full stop,” explained Walid Hejazi, an
associate professor of international business at the University of Toronto’s
Rotman School of Management.
Shared risk and joint profit are also important elements of Islamic finance, and
various cooperative frameworks are employed in housing and other sectors.
“Here’s the essence of it: it’s what’s called shared risk,” Hejazi told MEE.
“The idea being that you [as the bank] and I [as the borrower] together have to
have an interest in the underlying venture, so that you want the underlying
business to do well. If the business does well, you do well. If the business does
poorly, you share in the losses.”
Sharia-compliant insurance (takaful) is also based on the concept of mutual
cooperation and donation, explained Sheila Htay, a professor of banking and
financial services law at Osgoode Professional Development in Toronto.
“When any participant is hit by the misfortune, the claims will be given by the
participant risk fund, which is established based on the concept of donation,” she
told MEE.
Global Islamic financial assets totalled $1.81 trillion in 2014, according to a
recent report published by the Thomson Reuters Foundation, and that figure is
expected to reach $3.25 trillion by 2020.
Islamic commercial banking figures, meanwhile, totalled $1.3 trillion in 2014 and
are set to make up about 9.9 percent of the global market in 2020 at $2.6 trillion,
the same report found. Malaysia had the best-developed economy for Islamic
finance in the world, followed by Bahrain, the United Arab Emirates, Saudi Arabia
and Oman.
Htay said that one of the biggest misconceptions about Islamic finance is that it is
only available to Muslims or in Muslim-majority countries. She said about 50
countries, including non-Muslim states like Singapore, Thailand, Sri Lanka, and the
US and UK, currently offer Islamic banking options.
“The prohibition of interest, uncertainty and gambling is evidenced not only from
the teaching of Islam, but also from other religious teachings such as Christianity,
Judaism and others,” Htay said.
“Although the product has the name ‘Islamic,’ it is intended for all people,
regardless of religions.”
30 years of Islamic financial services
The sharia-compliant financial sector is also not entirely new in Canada.
“Housing cooperatives in Montreal and Toronto, and perhaps other parts of the
country, have been making loans to members of their cooperatives in a sharia-
compliant manner for over 30 years,” explained Jeffrey Graham, partner and the
head of the financial services regulatory group at Borden Ladner Gervais LLP.
The Toronto-based Ansar Housing Cooperative, for instance, uses a concept called
“Diminishing Musharaka” to help home-buyers purchase properties without
paying interest, as is required under a traditional mortgage, Graham said.
This profit- and risk-sharing system allows an individual to buy a home jointly with
a firm, to which he or she then owes rent. The individual then also gradually
purchases the firm’s shares in the property - usually over a set period of time -
until he or she eventually owns the entirety of the home.
“There’s a long history, certainly among private citizens and in the cooperative
movement in Canada, with respect to Islamic finance,” Graham said.
An-Nur Cooperative Company has offered interest-free financing for homebuyers
and advice on sharia-compliant investments for the past 10 years. The company
has offices in Mississauga and Scarborough, large suburbs of Toronto, and
currently co-finances housing for 10 families.
Salim Ansari, an An-Nur board member and chartered accountant, told MEE that
while demand is growing, “the biggest challenge is getting capital”.
Ansari said the involvement of larger Canadian financial institutions in the Islamic
financial sector would ease the current demand and may even help his company
expand.
Going mainstream?
A handful of Sharia-compliant credit unions opened in Canada in recent years, but
many have struggled to stay afloat. The industry was also hit by a case of fraud in
2011 that left some potential clients wary.
More than 170 Muslim homeowners in the Toronto area were left in the
lurch after an Ontario court put an Islamic credit union in receivership. UM
Financial acted as a go-between for a credit union and Muslim families that
sought a sharia-compliant alternative to interest payments. UM Financial declared
bankruptcy that same year.
In 2014, police charged the firm’s co-founder and financier Omar Kalair
with mortgage fraud in the sum of $4.3mn. Kalair allegedly used the mortgage
payments to purchase gold, silver coins and electronics.
“UM Financial set this back dramatically,” Hejazi said.
Jeff Gareau, a financial advisor at No Interest Investments with over two decades
of experience in sharia-compliant investments, agreed that, “past debacles have
really undermined confidence incredibly”.
“Having very expensive schemes where there is a sharia-compliant contract or
having more affordable ‘Islamic mortgages’ where the contracts are not truly
sharia-compliant presents a dilemma for the Muslim consumer,” Gareau told
MEE.
Still, investments in publicly-traded, sharia-compliant mutual funds have more
than tripled in Canada since 2009, Gareau said.
More traditional banks seem to be getting into the sector - the Canadian Imperial
Bank of Canada (CIBC), one of the country’s major financial institutions, now
offers halal investment advice - and the Toronto Stock Exchange even established
a sharia-compliant index in 2009, the S&P/TSX Islamic Index.
Hejazi said he’s had conference calls with three Canadian banks with interest in
Islamic finance over the past six months. But for now, banking institutions in
Canada do not offer sharia-compliant mortgages, he said.
Gareau said that Canada offers unique challenges to the development of Islamic
finance, including a wide geographic area and various provincial regulations
governing finance and investments.
He said it’s important to make sure that any future hub of Islamic finance in
Canada does not lose sight of the values and ethics that underpin the sector.
“If we can guarantee a level of ethics and compliance so that consumers have full
faith in Islamic financial products as well as the advisors practicing in the field,
Canada will definitely become an international hub for Islamic investment and
finance,” he said. 
A step-by-step process
The Department of Finance Canada told MEE in a brief email that Canada’s
banking framework accommodates a range of products and encourages
competition and innovation in the financial sector.
It would not say explicitly whether the government supports Islamic finance.
Lawyer Jeffrey Graham said the Canadian government is not an impediment to
developing a strong Islamic financial sector.
“My sense is that governments and policy makers have been very clear that they
are not in any way opposed to seeing the development of a multitude of financial
structures, but one needs to work with them closely to make sure that they
develop in a manner where the playing field continues to be level,” he said.
But Hejazi said a decision from Canada’s federal or provincial governments to
issue Islamic bonds (sukuk) could serve as a catalyst to help the industry develop.
“What that does is it creates a platform within Canada of what Islamic finance is …
that would provide the platform for this industry to grow,” he said.
Ecker at the TFSA, meanwhile, said that the growth of Islamic finance would be a
“step-by-step process” in Canada that involves learning more about it and
exploring new services.
“Some of the geopolitical tensions do cause people to be cautious,” she said. “But
I think that’s something that hopefully will not stand in the way of being able to
provide additional financial products that happen to be Islamic compliant.”