Monday, May 28, 2012

Islamic Finance in Canada (or Islamic Mortgages)

A lot of Muslims on the Turtle Island are looking for alternative financing options to acquire their dream houses. A lot of COOP are offering this service in Montreal, Toronto and others. COOP are covering some of the demand and they are doing welll so far. However, the COOP model has its own disadvantages also:
  1. High down-payment (25% -30%)
  2. Short amortization period (up to 15 years)
  3. High rent (7.5% fixed for 15 years). This one looks high but it is about 1.5% above the banks rate in most cases 
  4. Low financing capacity. COOP finance small houses up to $250,000 or $300,000 in most cases out of which the tenant will be paying about 30% 
  5. Long waiting queue. This is natural because one ouf ot every 5 customers can buy a house at a time. So this means, for every bought house, there are 4 other people waiting in line. Hence, 80% of all COOP members would be waiting in line for the repayment of the 20% who already bought houses. Without external finances, the COOP model can not survive.
  6. Rigid regulations and low customer service
  7. Low customer satisfaction 
  8. Low growth potential. 
  9. Low attractiveness for investors. Few people are willing to invest for long term at the rate of 5% under the current scheme. A lot of work is needed on the trust and credibility side. 
However, this option is much better than the TRUST Camouflage model. A lot of companies (or mortgage brokers) are playing on this option to offer a halal service (knowing that it is nothing of halal). Under this scheme, the service provider would clients the following:

  1. The client-tenant Establish a trust and grant the broker to be a co-trustee
  2. The broker will get a mortgage deal form a bank for the client
  3. The client sign the mortgage with the bank (And you say it is Sharia compliant !!!)
  4. The client pays rent to the TRUST (himself/herself and the broker)
  5. The TRUST will pay this rent as interest to the bank (Awful scenario indeed)
  6. The TRUST would charge the trustee to pay a fees (someone paying his own trustee)
  7. The TRUST would charge the client for the contract !
One can see directly that this is not really a viable financing opiton and it is not sharia compliant at all. There are serveal companies offering this financial service in Canada: Ijara Canada, Ijara Mortgage Broker, My Ijara Canada ...

In fact, those companies are trying to offer a good service (from their point of view). However, it is not really sharia compliant and it does not offer a good alternative for Islamic mortgage for Canadians. I am afraid that they know the invalidity of this option and still going for it. This would a major mistake towards the Muslim community in Canada as a whole.