Articles

This list will be continually updated.

1. Faith-based mortgages court Muslims
2. A hot new banking trend: Sharia-compliant finance
   
3. Muslim law dictates new investment practices
4. IIBFI in the Business Islamica Magazine [Download PDF]
5. Islamic financial services: Overview and prospects for the Canadian marketplace [Stikeman Elliott publication]
6. We’re leading the Sharia pack — for now
   
7. Islamic finance basics
8. Non-Muslims snap up Islamic accounts

Faith-based mortgages court Muslims
Carrie Tait, Financial Post

A growing number of North Americans Muslims are willing to pay more for their mortgages, so long as the deal complies with their religious beliefs.

It is estimated that at least one third of Muslims will refuse conventional mortgages because they violate shariah law, Islam's guiding body of rules, by charging interest. But it's also believed that these potential home owners will pay more to make their mortgages religiously sound.

"They are very loyal to the faith-based products," said Akram Sheikh, senior vice-president of Anchor Finance Group LLC, in an interview at the Islamic Finance World North America conference in Toronto yesterday. "Their own inner conviction will lead them," Mr. Shiekh said.

Read the rest of the article

A hot new banking trend: Sharia-compliant finance
Tavia Grant
From Monday's Globe and Mail- May 7, 2007 at 3:23 AM EDT

It's an unlikely image: staffers at the Office of the Superintendent of Financial Institutions - surely one of Ottawa's driest regimes - are busy brushing up on the fine points of sharia law these days to cope with the anticipated expansion of Islamic financial services in Canada.

"Lately we have had more expressions of interest," said Normand Bergevin, managing director at OSFI's approvals and precedents division.

Several people on his staff are learning about business plans, legal structures, accounting methods, types of governance and other issues related to Islamic finance.

"It's fairly new to us," he said. "There's not a whole lot of experience here in terms of supervising or even understanding the different types of products. They all have little twists on them that make them very unlike anything we've ever seen before."

They're likely to see a lot more. Islamic finance is becoming one of the hottest areas in banking and insurance in the world as the Muslim population grows and wealth increases.

Sharia-compliant products must meet three criteria: no explicit interest is paid; the transactions can't be in such areas such as gambling, alcohol, pork or pornography; and the transaction can't be deemed as a gambling contract, or one that assumes a high level of risk. Products tend to be for both Muslims and non-Muslims alike.

Assets in the sector have hit more than $250-billion (U.S.) worldwide while the number of Islamic financial institutions has jumped to more than 300 from just one in 1975, the British Treasury estimates.

It's prompted global financial companies such as Citibank NA, HSBC Holdings PLC, Barclays PLC and American International Group Inc. to start offering Islamic financing products. Governments are getting interested too: Britain said last month it's looking into issuing sharia-compliant bonds as London aims to become the world centre for Islamic finance.
Canada is part of the wave. Several Canadian financial institutions are preparing sharia-compliant mortgages, insurance, taxi licensing and investment funds to help serve the country's fastest-growing part of the population. Foreign institutional investors are also keen on entering the Canadian market.
"I expect it to grow exponentially in Canada in the next couple of years," said Walied Soliman, a lawyer at Ogilvy Renault LLP, who says it's become a priority practice area for his firm. "It's quite unbelievable how it is growing."

Most big Canadian institutions are treading carefully and not all are jumping on board - Royal Bank of Canada quietly tested a sharia finance product a few years ago but didn't find enough market interest. The bank has no plans to implement a sharia product at the moment. Yet plenty is percolating below the surface as businesses reach out to a growing immigrant population.

"A number of the major banks in Canada are looking at it," said Mr. Soliman, who predicts a large Canadian bank will announce a sharia product within the next 18 months.

His firm's been working with a major Canadian institution to establish a suitable private equity fund, and is helping create a registered education savings plan that's sharia-compliant.

As worldwide demand for Islamic banking and insurance products explodes - it now exists in 75 countries - big Canadian law firms are jockeying for position in the area.
Stikeman Elliott LLP lawyer Stuart Carruthers sent a newsletter to clients last month, telling them demand for this type of product "no doubt" will grow.
"We see this coming down the pipeline," he said.

Co-operators Group Ltd. has gotten the ball rolling. Canada's third-largest home insurer has developed a form of insurance - called takaful - which it will begin offering in a Muslim housing co-operative by this summer.
Pervez Nasim, chairman of the Islamic Co-operative Housing Corporation Ltd., says he's seen demand for sharia-compliant mortgages "surge" in the last three years.
Credit unions, such as the McMaster Savings and Credit Union in Hamilton, are starting to offer sharia-compliant mortgages, which tend to be structured like a rent-to-own system to avoid interest.

Islamic finance quick facts
What is Sharia law?
Under Sharia law, making money from money, such as charging interest, is usury and therefore not permitted.
Wealth should be generated only through legitimate trade and investment in assets.
Investment in companies involved with alcohol, gambling, tobacco and pornography is strictly off limits.

How does Islamic finance work?
The overarching principle of Islamic finance is that all forms of interest are forbidden. The Islamic financial model works on the basis of risk sharing.
The customer and the bank share the risk of any investment on agreed terms, and divide any profits between them.

Why is interest forbidden in Islam?
During the time of the Prophet Mohammed, many people made gains by lending money at extortionate rates. As a result, the payment of interest was forbidden because it was unjust. Islam teaches that money must be used in a useful way. You can't make money from money. You can generate wealth through legitimate trade in goods and items, but you must share the risks and rewards.

Canadian Muslim population
1991: 253,300
2001: 579,600
2007 (estimated): 750,000
to one million
Source: Statistics Canada, Ogilvy Renault LLP, Lloyds TSB, International Islamic banking, finance & insurance conference

Muslim law dictates new investment practices
- James Daw, Toronto Star

April 19, 2007- Members of Canada's growing Muslim community are working with secular financial institutions to develop new insurance products.
They intend to rally community support and the endorsement of local religious leaders to ensure success after a major bank stumbled with an Islamic or Shariah-compliant investment product in 2004.
Strict adherents of Islam oppose interest charges, centuries after most Jews and Christians began to interpret similar strictures in their scriptures to refer only to excessive interest charges.

Read the rest of the article.

Islamic financial services: Overview and prospects for the Canadian marketplace
by Nevinne Hassan and Stuart Carruthers

In the last thirty years, the Islamic financial services industry has undergone significant expansion in many parts of the world. A 2005 publication of the International Monetary Fund (IMF) estimated that there are over three hundred Islamic financial institutions worldwide, with an estimated $250 billion in total assets and an annual growth rate of 15%.

The Islamic, or Takaful, insurance sector in particular has experienced a significant expansion since the first such insurer was established in 1979, with an estimated 250 Takaful insurers currently operating throughout the world. From September 2005 to October 2006, eleven insurance companies announced their intention to enter the worldwide Takaful insurance market. In 2005, total Takaful premiums exceeded US$2 billion and are expected to more than triple by 2015, to US$7.4 billion.

Read the rest of the Stikeman Elliott publication.

We’re leading the Sharia pack — for now
Andrew White on Sunday, 08 April 2007

While the English may have invented cricket, rugby and football, sporting commentators will tell you that coming up with the discipline in the first place, does not guarantee pre-eminence in that particular field. The same wisdom, it would appear, also applies to the financial world - only this time, the English are the ones hastily adopting another's national sport.

From the corridors of power to high-street banks, Sharia finance is on the lips of UK policymakers, businesses and private customers. Islamic debt is an instrument to tap the Middle East's petrodollars, and non-interest-paying accounts are a way through which banks' financial services can be reconciled with the requirements of a particular client's faith.

Read the rest of the article.

Islamic Finance Basics
 This article is intended as an introduction to some of the key types of Islamic contracts and how they are applied to provide alternative Islamic financing options.

Murabaha, Ijara, and musharakah/mudarabah contract types form the basis of a variety of Shariah compliant substitutes to conventional corporate and trade financing solutions today. The basic premise of Islamic finance lies in the need to eliminate both interest (Riba) and uncertainty (Gharar) from financial transactions.
The following sections gives the most basic outline of the key types of Islamic contracts applied today.

Murabaha
Murabahah is often referred to as 'cost-plus financing' and frequently appears as a form of trade finance based upon letters of credit. In its simplest form, this contract involves the sale of an item on a deferred basis. The item is delivered immediately and the price to be paid for the item includes a mutually agreed margin of profit payable to the seller. In this contract, the market cost price (true cost) of the item is shared with the buyer at the time of concluding the sale.
According to Tarek al-Diwany (Islamic-finance.com), Murabahah is a form of 'trust sale' since the buyer must trust that the seller is disclosing his true costs. After discussing the true costs, a profit margin may be agreed either on a percentage of cost basis or as a fixed amount. It is very important to remember that the amount of profit earned in this transaction is not a reward for the use of the financier's money. In other words, a financier cannot take money if he/she does not perform any service other than the use of his/her money for the transaction. Such an occurrence would cause this type of deal to resemble the charging of interest. Today, Murabahah is used most to assist short-term trade transactions.

Ijara
The use of leasing is represented by the Ijara contract in Islamic law. The contract represents a transaction in which a known benefit (usufruct) associated with a specified asset is sold for a payment. In the course of this sale of usufruct, ownership of the asset is not transferred - the bank maintains ownership of the asset. The Ijara contract can be designed to return the fixed assets to the lessor at the end of the lease period, in which case the lease takes on the features of an operating lease in which the bank takes title of the asset at the end of the lease term. The other mechanism would be to allow the lessee to agree, at the outset, to buy the assets in question at the end of the lease period. The lease here takes on the nature of a hire purchase known as ijara wa iqtina (literally, lease and ownership). In simple terms, this means that the asset can be sold to the lessor at the end of the lease.

Mudarabah and Musharakah
Since the inception of Islamic economic theory and its outgrowth into Islamic finance, scholars have lauded Mudarabah and Musharakah as the ideal forms of permissible contract in Islamic thought. The basic reasoning is that these contracts pool resources and expertise as well as spread the inherent risk in a project among the various parties involved. Here we present some salient features of both contract types.

In the Mudarabah model, a mudarib or entrepreneur usually provides management expertise which is treated as a form of capital. The investor is known as the rabb al-mal. The share of expected future profits between the mudarib(s) and the investor(s) is agreed at the outset in any ratio mutually agreed to by the parties involved. The rabb al-mal bears all losses of invested assets (be they cash or other forms of capital). In the case there is more than one investor losses are to be shared according to the investment share of each investor. The entrepreneur must not bear any of the loss(es) attributable to invested capital. The entrepreneur is not allowed to take any form of remuneration other than profit-share. Technically, the entrepreneur has no recompense for his efforts unless the project is profitable; unless there is a guaranteed wage.

The Musharakah model is essentially a sharing model. Parties involved in a partnership arrangement contribute funds to and have the right to exercise executive powers in that project in accordance with an agreed formula. All partners are obligated to contribute capital to the venture. These contributions can be subject to profit sharing in a ratio mutually agreeable to all the investing parties. Just as with mudarabah, a fixed amount of payment can not be agreed at the outset. As with most joint ventures partners must receive regular accounting information as well as other information on business activities.

Emma Dellaway, 25, from south London, likes to know that the money sitting in her current account is not doing harm. "I don't have much money, as I am just starting out on my career, but what I do have should not be used unethically," she says. "I hate to think of arms going to some African country funded, however indirectly, from my account." Ms Dellaway took an unusual step to follow through her ethical beliefs. She opened an Islamic current account.

Read the rest of the article