Stuart Carruthers (http://www.stikeman.com/cps/rde/xchg/se-en/hs.xsl/11424.htm)
As in many Western nations, the awareness and availability of Islamic
financial services in Canada continue to grow, although still at a
relatively modest rate. While some limited Shari'ah-compliant products
are currently available, there has been limited activity to date, and no
major financial institution yet offers a meaningful suite of Islamic
financial products or services. However, given the burgeoning Islamic
population in Canada, the growing potential for Islamic financial
services in Canada is being carefully followed by Canadian financial
institutions, regulators, government agencies, professional advisors and
media outlets. For additional background on Islamic finance, please see
Stikeman Elliott's
Financial Services Updates of April
2007 and
January 2008.
Much like in the United Kingdom, Canada's Muslim population has
experienced significant recent growth - from an estimated 253,000 in
1991 to between 800,000 and 1,000,000 in 2006. By 2017, Muslim
Canadians are expected to comprise from 3.7% to 4.9% of the Canadian
population. Moreover, the Muslim population, which is younger and more
educated than the overall population, is concentrated in Canada's
largest cities. Consequently, there is expected to be increased demand
for Islamic financial services in Canada in the coming years,
potentially providing a tremendous opportunity for financial firms
prepared to serve this growing community.
The Canadian financial and economic environment
A number of other factors may also support the growth of Islamic
finance in Canada in the longer term. Canada continues to enjoy a
relatively stable economic and political environment and has generally
avoided the level of turmoil currently being experienced in the United
States with respect to subprime lending and restricted credit
availability issues. Further, a world-class regulator, the federal
Office of the Superintendent of Financial Institutions (Canada) (OSFI),
regulates the solvency of most of the larger financial institutions,
including the large banks and life insurance groups, while also
regulating the market conduct of the large banks. Canada also benefits
from a strongly multicultural and tolerant society, a rapidly
appreciating currency, robust regulatory and legal systems, a neutral
and balanced foreign policy and favourable tax treaties with certain
Gulf states.
Activity to date
Despite significant recent media coverage of issues related to
Islamic financial services in Canada, there has been limited meaningful
activity to date. As previously widely reported, an Ontario-based
Islamic mortgage provider, UM Financial, has been indicating for some
time that it expects to launch a suite of products in collaboration with
a major Canadian financial institution. No further announcements in
this regard, however, have recently been made. One of the large banks
offers Shari'ah-linked notes through its private banking division and in
2004 offered a similar retail investment product through its branches.
The Co-operators mutual insurance group, meanwhile, offers certain
limited Islamic insurance products, and Islamic mutual funds have also
been sold across Canada. Many of the products, however, have been
short-lived, including a group of funds, offered through a leading
mutual fund group, which were discontinued in 2006 with only C$6.1
million in assets under management.
Overall, participation in the Islamic financial services sector is
still rather peripheral and limited, and no major financial institution
is currently offering a meaningful package of Islamic financial
services. It is suspected that the current significant credit crunch
and subprime mortgage exposures, although not as significant an issue in
Canada as in the United States, are currently more pressing priorities
for the larger Canadian financial institutions.
A number of applications have recently been made to OSFI, however,
for newly-incorporated Canadian banks offering Islamic financial
services. While some of the applications are understood to be quite far
advanced, they appear to be on hold pending the response of a federal
multi-agency task force established last year to consider issues related
to Islamic finance in the Canadian financial services marketplace.
Interestingly, earlier this year, the Canada Mortgage and Housing
Corporation, a federal Canadian crown corporation, also turned its
attention to the issue of Islamic finance in the Canadian marketplace,
issuing a Request for Proposal for a research report on the subject. As
previously widely reported, the request generated some controversy and
resulting media coverage, with UM Financial and others supporting the
exercise and at least one other Islamic group in Canada criticizing the
exercise.
Prospects for the future
Canada is still a number of steps behind the United Kingdom, where
Islamic finance is in turn still growing slowly. Major developments in
Canada are likely some time away, although, as noted above, the
demographic prospects are excellent. The same structural issues are
present in Canada as were identified in the U.K. by the Financial
Services Authority's November 2007 discussion paper respecting
developments in Islamic finance in that country. While there is
significant interest from a wide variety of stakeholders, the eventual
products will need to be extremely competitive in order to achieve wide
distribution in the Canadian marketplace.
Future activity will
likely include one or more of the major international financial
institutions with Islamic windows offering retail home finance products
in Canada, credit unions and mid-size banks offering home finance
products in Canada, major existing Canadian banks breaking into the
retail market, and, in the longer term, one or more newly-established
Canadian Islamic banks.
