Canada’s housing market is in retreat, but in some provinces there’s an emerging niche where demand for home loans is still booming: Halal financing for Muslim homebuyers.
More than a million Canadians identify as Muslim, but they are disproportionately renters and many have felt shut out of the country’s real estate market. That is because practicing Muslims are prohibited by their faith from paying or receiving interest, which prevents them from taking conventional mortgages.
In Edmonton, a new startup, Canadian Halal Financial Corp., is trying to meet some of the demand for home ownership in Alberta’s Muslim community. The company was founded by Thomas Lukaszuk, a former provincial MLA and cabinet minister, and John Stainton, a businessman and lawyer.
The two have worked closely with the Al Rashid Mosque, a local mainstay, to create an alternate type of mortgage that they say meets strict religious standards. The company has approved 600 applications since its launch last December, with more than a dozen new requests coming in each week.
“This is the fastest growing segment of the Canadian population that was excluded from Canada’s real-estate market,” Mr. Lukaszuk said. “It’s extremely, personally, very rewarding. But it took a lot of effort.”
Islamic finance isn’t new, but it exists in a fragmented patchwork across the country and has yet to enter the financial mainstream. Many providers of halal mortgages are concentrated in Ontario, and some have operated in a religious gray zone without much oversight or a consistent set of 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 the authority of two fatwas – a form of religious edict – from respected Muslim authorities. That includes one from 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 and to get approval from scholars at Al Azhar University, one of the world’s oldest sources of Islamic jurisprudence. The fatwa that Al Azhar granted to Canadian Halal Financial is the first for a North American company.
Yet it took years of discussions, and six-figure legal bills, to reach that point, responding to pressure from the mosque’s congregation about the need for a halal way to buy a home in Alberta.
“They approached the Imams, they said … ‘we cannot rent forever, so find us a solution,'” Mr. Omar said in an interview.
At first, leaders at Al Rashid had discussions with credit unions and banks locally. But those institutions concluded that they could not create a compliant product and keep it separate from their core business lending and taking deposits based on interest, Mr. Lukaszuk and Mr. Omar said. As a result, they wouldn’t be considered halal.
The Al Rashid mosque then turned to Mr. Lukaszuk, who had done business building new homes after he left politics, where he met Muslim clients looking for a way to finance new construction. It took two years of meetings with lawyers and scholars to draft contracts that complied with both provincial and Islamic laws. And there were times when Mr. Lukaszuk thought it “would be impossible.”
When the company launched, “it was a big hit and big news,” Mr. Omar said.
“Imagine that when someone is renting for the past 20 years and it’s like, finally, you guys 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 down payment of at least 25 per cent, regular payments until the home is fully paid for and charge a fee over and above the price of the home that is not based on interest rates.
“It is okay from a religious perspective for us to make a profit, but this profit cannot be interest-based,” Mr. Lukaszuk said.
By far the most popular type of contract is musharakah, a form of partnership similar to a lease-to-own structure. The buyer’s name is on the title to the home, the amortization period can be up to 30 years and there is flexibility to make early lump-sum payments. Also available is a more traditional one murabaha contract, which has a shorter term up to 15 years and payments that are locked in.
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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 financing company that didn’t last, and sold it before he moved to Edmonton in 2012. He had been renting ever since, until he found Canadian Halal Financial through the Al Rashid mosque , which has a program to sign up prospective clients.
With financing from the company, Mr. Rahman bought a larger home in Edmonton where he lives with his wife, daughter and son, with room for extended family to visit. After property taxes, it costs about the same as the smaller town home he was previously renting, he said. He likened having a mortgage from a company recognized by his mosque and Al Azhar to having a prescription signed by a doctor.
“I can take this medicine,” he said. “It takes the burden away from us. It gives a very big and strong confidence going with them. … It’s just like a big door opened for a lot of people.”
The structures of Islamic financing sometimes walk a fine line. Canadian Halal Financial’s contracts can only have two parties – the company and the buyer, with no involvement from other financial institutions or insurers. The company cannot mix its funds with interest-bearing products, but it can raise capital or take credit lines to fund its business from financial institutions, including banks, pension funds or private wealth funds.
“We are the buffer and there is no direct contact between our investors,” Mr. Lukaszuk said.
The question each 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 has a doctorate in Islamic finance.
His company follows standards set by the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based non-profit. It sets rules about structuring products and governance that require a company to have an expert supervisory board, internal and external auditors, and regularly updated certifications or fatwas.
“This can be done in the right way,” Dr. Sawwaf said.
Strong and consistent standards will be critical as demand for halal mortgages grows in Canada, and more financing providers start up to meet that need. Canadian Halal Financial is fielding an increasing number of inquiries from outside Alberta, and the company is considering opening offices in Ontario, BC and Quebec in the near term.
At Manzil in Toronto, the waiting list has 12,000 families who want financing to buy homes and the company would need another $6-billion in funding to serve them all.
“We have a mismatch when it comes to supply and demand,” the Manzil CEO said.