Sharia-bank bids trigger concerns
OTTAWA and TORONTO -- Ottawa has received its first applications to start up Canadian banks operating within the strictures of Islamic religious law - financial institutions that, if approved, would be among the first in the West.
Canada's bank regulator, the Office of the Superintendent of Financial Institutions, is studying two proposals for banks that offer services in keeping with Islamic laws that forbid speculation and interest but are in favour of transactions where profit and loss is shared.
The applications came to light in government documents obtained by The Globe and Mail under access to information laws, files that show Ottawa believes there are four other possible applicants keen to start banks operating under Islamic religious law, or sharia.
While some banks in the West offer sharia-compliant products, few aside from the Islamic Bank of Britain are standalone institutions set up expressly for this purpose.
The applications are taking Canadian regulators into largely uncharted territory as they puzzle over what sort of regulatory treatment would apply.
Regulators say the challenge is trying to discern exactly what types of financial transactions are being proposed and whether they could conceivably fit what's allowed under the Bank Act.
"For most Canadian banks so far the products are somewhat straightforward and a deposit is a deposit," said Normand Bergevin, managing director at OSFI's approvals and precedents division. "When you have an applicant that comes to you with nothing but new products, that makes the process a little bit more difficult."
Products the banks propose to offer, from term deposits to mortgages, are structured to avoid the explicit payment or collection of interest.
OSFI won't divulge the identities of the two applicants, citing confidentiality rules.
But decision-makers throughout the federal government are quietly mulling the broader question of how to handle a banking trend that's worth hundreds of millions of dollars annually in the Islamic world and may be attractive to Canadian Muslims, a group one June government memo calls "the fastest growing immigrant population."
The federal Finance department established an Islamic financial services working group in June to study the issue. The 20-person group, including staff from OSFI, Canada Deposit Insurance Corp. and the Bank of Canada, hopes to deliver recommendations within months.
"There's been quite a bit of growth in Islamic finance worldwide and it's definitely a developing trend. And we need to be aware of those trends," a Finance official said.
Ultimately it would be up to federal Finance Minister Jim Flaherty to approve Islamic banks if OSFI recommends it.
Walied Soliman, a lawyer at Ogilvy Renault LLP, says he's confident that Islamic financial products and banks can be structured in such a way that they find a home in Canada's regulatory framework.
He said there's no one set of rules for how Islamic financial transactions should be set up and believes they can be designed to pass muster with Canadian regulators, just as products such as "ethical" funds that avoid certain industries gained approval.
He said an Islamic bank can be set up that wins approval from both regulators and religious experts. "The scholars that practise in this area are very practical people ... and [believe] the most expedient and practical way to get there is to offer products that are as Islamic-compliant as possible" while also complying with government standards, he says.
Today, however, demand for sharia-compliant products in Canada remains unclear and several Islamic finance companies have folded.
Demographics are favourable for growth, though, said Stuart Carruthers, a partner at Stikeman Elliott LLP who has been studying the issue. Income levels are rising in Canada's rapidly expanding Muslim population, a group that is relatively young - meaning opportunities for long-term customers. "I think there will be more demand if the product is there," he said.
He's seen continued interest in the area, both from regulated financial institutions such as banks and insurance companies, as well as from unregulated players such as mortgage or consumer lending firms.
In the shorter term, funding may be a challenge, given the credit crunch hitting some financial services. "I suspect over the past month or so, the big financial institutions may have become more focused on the other shorter-term issues around credit availability."A primer
Under sharia law, making money from money, such as charging interest, is usury and therefore not permitted.
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.
Sharia-compliant products must meet three criteria: no explicit interest is paid; transactions cannot be in areas such as gambling, alcohol, pork or pornography; and a transaction can't be deemed as a gambling contract, or one that assumes a high level of risk.