Shari’a compliant lending – the next frontier of financing? Spring 2008

One is reading and hearing the words “Shari’a compliant” increasingly in 2008 as increased attention is being paid in the Canadian and international financial industry to the growing market of Muslim financing. A 2007 British report placed the international value of such financing at greater than $500 billion per year. It should be noted that Muslims are now the fifth-largest religious group in Canada.

Shari’a (or Islamic) law is derived from the Holy Qur’an, the Islamic holy book. The Holy Qur’an’s economic prescriptions emphasize effort and the due reward for work, and prohibit business transactions that involve interest or speculative investments. The paying and receiving of interest is prohibited as a form of usury.

A number of Shari’a compliant banking products have been developed that are relatively similar to traditional Canadian products and offer comparable risks. For instance, a “Murabaha” transaction will take the place of a traditional purchase financing mortgage. In this type of transaction, the “capital provider” [viz. Lender] agrees to purchase the property and then immediately re-sell same to the purchaser at a pre-determined mark-up calculated to cover the capital provider’s costs and profits (which take the place of traditional interest). In this type of transaction, the re-sale price is often paid by fixed installments. The capital provider will also take a security interest in the property to secure the payments.

This transaction may have the same end result as a traditional mortgage transaction, but is acceptable under Shari’a law as the capital provider is not earning interest on its investment – rather it earns a share of the profits.

Canadian regulators appear not to have taken an official position on Shari’a type transactions. That being said, many investors are anxious to take advantage of what is perceived as an un-tapped market.