Canada is looking to position itself as the regional hub for Islamic finance in North America, industry leaders revealed at the World Islamic Banking Conference, which took place in Bahrain last week.
While the US is a much larger market overall, Canada has a proportionately larger Muslim population, coupled with an arguably more favourable federal regulatory regime and an outward looking orientation that is also potentially more favourable and conducive to the growth of Islamic finance.
Speaking at the event in Bahrain, Canada's Special Envoy to the Organisation of Islamic Cooperation (OIC) and current Ambassador of Canada to the United Arab Emirates, H.E. Arif Z Lalani, said "Canada's commercial ties with the countries of the OIC are growing fast. Canada is keen to explore ways to forge new partnerships and to create new opportunities for long-term, collective prosperity both in Canada and in the Muslim world."
A domestic Islamic banking system has strong potential, with a growing domestic Muslim population estimated to be more than 1.3 million (3% of the population) in Canada and expected to rise to three million (6.6% of the population) by 2030.
According to the Canada Islamic Finance Outlook 2016 report, released by Thomson Reuters at the event, there is a potential of over US$2bn in Shariah-compliant mortgages in Canada, a figure that is expected to increase to US$18bn by 2020.
International Sukuk is another area where Canada can potentially attract more foreign capital to support infrastructure need, amounting in total to US$130bn, or 9% of Canada’s GDP. Given Canada’s strong economy and AAA credit rating, coupled with the need for Islamic financial institutions across the globe to increase their high quality liquid assets in order to meet new Basel III requirements, sovereign Sukuk issuances would likely find significant demand.
Takaful operations are also poised to expand, both domestically and internationally, which reflects the recent experience of Canadian financial companies operating in Southeast Asia as well as the long history of Canadian mutual insurance.
"Canada and Toronto have all the ingredients to become a North American hub for Islamic finance- a sound economy and stable political environment; a wealth of assets that are conducive to Islamic finance; traditionally strong risk management skills; a large and growing Muslim population; an openness to doing business with the world; and an effective regime of regulation and supervision," said Janet Ecker, president and CEO, Toronto Financial Services Alliance.
James Bagshawe, a member of the executive committee of the recently established Islamic Insurance Association of London (IIAL) and COO of UK-based Cobalt Underwriting, recently told Insurance Business that the US and Canada are expected to follow London's lead with the development of Islamic insurance products. Not just because of the burgeoning market for Shariah-compliant financial products worldwide but also because of increasing demand for old-fashioned transparency.
Insurance and reinsurance is one of the last financial services sectors to establish Shariah-compliant operations and products, largely due to the fact that it is based on a risk transfer model, which must be circumvented to make it halal, or 'clean'.
“Of course there are large Muslim interests in America and Canada, and there is clearly risk that Muslim companies will want to write in a Shariah-compliant way in these regions,” said Bagshawe. “But there's also the consideration that conventional operators just like the idea of doing things in a more ethical way,” he said.
“The principals of Shariah-compliant products make them open to all mankind wherever they are from. If I'm offered two products, both the same premium and the same cover, but one is conventional and the other gives a small participation in the surplus, making it Shariah-compliant, then why wouldn't I take it? Transparency and its ethical nature is attractive not just to regulators but also customers.”
The principals of a Shariah-compliant product are threefold:
The contract is transparent – this is something that clearly appeals to regulators
Purity – the money has to be kept separate from conventional, in the that investments themselves are Shariah-compliant
Participation – Islamic financial products are a bit like mutuals, in that there is a small interest in outcome or a participation in the surplus
Insurance products also can't underwrite risks that are haram, or forbidden, such as pork products, alcohol or armaments, for example.
“It's really just an old fashioned and ethical way of doing things,” said Bagshawe, “it abides by the principle that 'my word is my bond', which makes it appealing to all parties. It puts the interests of the customer first and is open to all-comers, not just Muslims,” he said, likening the concept to proposed legislation such as Canada's CRM2 for financial services, which is designed to promote transparency.