Sharia Mortgages In The News

Sharia A CMHC report came out last week about Islamic financing in Canada. It suggested there are no serious legal or accounting hurdles to prevent Canadian lenders from offering Sharia-compliant mortgages.

Yet, few lenders seem willing (or able) to do so.

One big impediment is uncertainty about risk and return. Another, seems to be a lack of capital.  True Islamic financing cannot be sourced from the money markets, where interest is paid to borrow money from investors.  The Islamic faith holds that receiving or charging interest on loans is forbidden. 

To get around the interest problem on individual mortgages, Shariah lenders become co-owners of a property and charge a marked-up “rent” instead.  (Critics, not surprisingly, see this as simply masking the word “interest.”)

The more intriguing thing to us is how little Sharia-friendly money there is in Canada.  RBS, one of the biggest banks in the world, offers Sharia financing in the UK, but there’s nothing similar in scale in Canada.

We spoke to UM Financial last year. While small, they're one of the better-known Sharia lenders in Canada.  They told us they have a waiting list of 5,000 customers but cannot meet the demand. (Over 700,000 Muslims are estimated to live in Canada.)

It’s surprising that so few institutions and/or investors have entered the market thus far.  700,000 people is a decent-sized niche market.  You’d think, with all the money in the Middle East, for example, that companies like UM Financial could find more capital. 

For now, it looks like Muslim Canadians are resigned to waiting for someone to fill the void. 


Sidebar:  CMHC reportedly says it has no plans to insure Sharia mortgages.

  1. Sharia Mortgages is very high demand among muslims of Middle East,Pakistan, India, Bangladesh and other Islamic countries. Top priority for the immigrants form these countries is to buy house first and then start life. There is no availability of Sharia Mortgages in Canada. In UK Sharia based banking is expanding and becoming more popular.If any finacial institute come up with Sharia Mortgages will be a success.

  2. Most lenders have looked at this market over the years and all have backed away for the same reason. As the article alluded to, there is a huge upfront investment cost that may or may not produce a payback. By the time you’ve designed an application, revised all your standard charge terms and revamped your servicing platform, that niche market doesn’t look as tempting. (As just one example of how unique and complex this product would be, imagine trying to calculate the penalty on an interest free mortgage!)
    When you add in the fact that many in the Muslim community feel that this form of lending is essentially “interest by another name” there is no guarantee that the product would sell at anything close to the blue sky numbers that are floated by brokers (who would only benefit by having an additional product to add to their quiver). Throw in the fact that a Sharia-compliant mortgage would be offered at higher interest rates (how else to recover all those extra development and infrastructure costs?) and it’s a non-starter.

  3. Saeed, the fact that sharia mortgage is successful and booming in the UK leads me to believe that it is doable and doesn’t have as much negativity associated to it as you have drawn the picture to be. Of course whichever lender getting into it would have to study the market well and cover all the basis, but ultimately, if done properly, it could be a huge success (as it is in the UK and other countries).
    As for the so-called “penalty”: what does your landlord do today if you missed to pay the rent for the month? Similarly, the lender would keep accumilating the rent; this has nothing to do with the principal. Of course there would be other more complicated rules associated, but I am just giving you an example.
    Finally, you say “Sharia-compliant mortgage would be offered at higher interest rates”: higher than what???? There are no other options for Muslims that want to get an Islamic allowable mortgage, so realistically this is an advantage for the lender and not a disadvantage! The lender can ask any “rent” rates (within reason) and the Muslim borrower would be “happy” to pay it!

  4. Could banks not simply make Sharia mortgages open and charge a higher rate? Muslim borrowers would probably not switch lenders anyhow.

  5. I have read that oil producing nations have a pact to reinvest oil revenues into US treasury bonds. This was true for Saudi Arabia and likely true for other nations as well. It’s conceivable then that although there is a lot of money in the middle east, it is tied up in the US.

  6. Guest,
    Not sure what the upfront capital cost was in the UK vs. the potential market size but just because it is viable in one market does not mean it is viable in every market (maybe the systems in use were more easily adapted, maybe the size of the potential market was far greater etc.)
    In the penalty example, when lenders charge either the interest rate differential or the present value of lost interest, it seems like quite a challenge to create a penalty policy that never mentions the term “interest” (read $$$.)
    Lastly, to your question about charging higher interest rates (I think your question mark key is sticking by the way) you yourself say that the lender can charge what they want “within reason”. What is reasonable? If your selling a commodity (money) and the borrower is a prime credit risk how much of a premium over prevailing rates is reasonable? I doubt the lender and the borrower would agree over time and if you’re a big 5 bank, do you want to be explaining why you’re charging a premium to devout Muslims beyond what their credit profile justifies? Seems like potential PR headache.
    The bottom line is the opportunity to offer Sharia mortgages has been around for a long time and Canadian lenders, who are always looking for ways to make more money, haven’t found a workable solution that justifies the investment risk.

  7. Again, I say that not only in the UK and other countries, but even here in Canada, UM Financial is successful with a large waiting list implies that there is a market and that the business is a possible (if not probable) success. I restate that whatever lender gets into the picture has to study all the issues related (like any other business).
    You keep thinking of penalty as an extra “interest” payment when the Sharia mortgage is rotated around “rent”. Everybody has to pay rent every month, and if you don’t pay for consecutive months, you run the risk of evacuation where in this case the bank can and will sell the house as a joint partner and will cover all their associated fees (read “rent” as well).
    “Reasonable” is something higher (slightly) than a regular conventional mortgage rate since the lender is taking a bit more risk in this scenario. Keep in mind that if Muslims don’t like the rate, they certainly do not have to accept it, and they can (if they wish) still take a normal conventional mortgage. My point is, due to the fact that there are no other options for Muslims, they will be happy to take the sharia mortgage with all associated premiums.

  8. Maybe I’m missing the point, but if the only way for a muslum to get a shiria mortage it to ‘rent’ off then lender, then why don’t they just get a normal rental in the first place? The lender would own the house anyway, so I’m not really clear on the difference.
    Also, does anyone else think its a bit silly to be playing semantics with god, surely he can see the difference between renting, and ‘renting’
    my 2c

  9. Blair, it is very much like rent-to-own.
    e.g. $400,000 home. You pay $200,000 and the bank pays $200,000. The bank has 50% ownership. the house would rent for $2000 in the market. Since you have 50% ownership, you only pay 50% of the rent = $1000 monthly. In addition, any money you put towards the principal, reduces your monthly rent payments.
    It is not playing semantics with God, because you really are paying rent to a co-owner based on their % of ownership.
    It has nothing to do with interest or borrowing money. The bank is literally a co-owner in a rental property, and hence you have to pay them their portion of the rent.

  10. As a RR salesperson, I can witness that there are lrage number of muslim clinets waiting for the sharia mortage with more than 25% down payment. I Personally know people who are making 85/hr before taxes and have 25% downpayment but renting as they can’t not get a shariah mortgage for the place they like so thay are renting.

  11. Call it what you want, but at the end of the day, banks aren’t in the home rental business; they’re in the money rental business.

  12. As it stands now, can anyone apply for these Sharia Mortgages or do you need to be Muslim? I realize there is a 5000 person waiting list but it still appeals to me.

  13. Just like Canadian supermarkets eventually figured out a way to squeeze in a separate fridge for ‘kosher’ meats, banks will eventually add an option for ‘Halal’ mortgages. Market forces of supply and demand will always triumph.
    Islam prohibits ‘usury’ (as does Christianity) – which is a term the Islamic world have come to define as ‘making money from money without any actual goods or services being exchanged’. In other words, Muslims can’t buy or sell ‘money’, let alone charge profit (interest) on the transaction.
    Muslims are allowed to participate in natural market activities. They can buy, sell, trade, and make profit out of the exchange of goods and services. That’s why in an Islamic mortgage transaction, the lender-borrower relationship has to be that of a seller and buyer.
    There are two methods for a mortgage to fit this criteria:
    1. The bank buys the house, then sells it to the borrower at a profit. The deed title is transferred to the buyer immediately. The bank further agrees to receive the payment for the transaction in the form of equal payments over a predetermined period of time.
    2. ‘Rent to Own’: The bank buys the house and adds their profit margin to it using a usury-free formula. The borrower pays the price in equal installments over a period of time as ‘rent’ while they live in the house. When the full price is paid, the deed title is transferred from the bank to the new owner.
    Determining which method to apply depends on how much collateral the borrower has, their credit-worthiness, and the amount of down payment they’re willing to put up.
    The mechanics of collecting payments, determining credit-worthiness, and dealing with defaulting mortgages are no different in an Islamic mortgage transaction than what would be used in a regular mortgage. Therefore the notion of charging a ‘premium’ due to increased risk will not fly with Muslim borrowers.
    In fact, an Islamic financing transaction offers LESS risk to the lender due to the requirement of high collateral and a larger down payment than what a bank would ask from a non-Islamic borrower.
    In Western countries, banks exist in a competitive environment, and so it wouldn’t make any sense for them to make less money on an Islamic mortgage than they would on a regular mortgage. Therefore, the formula they use to determine their ‘profit’ from the upfront sale price of an Islamic house inevitably adds up to what they would have made if they had charged interest for the house. This is fine for muslim borrowers. The seller can charge as much profit as they like using any method they want to determine what’s “fair”.
    When the bank (seller) goes to the market with their wares (house), the buyer makes a purchase decision based on the competitiveness of the final price. This way, Muslims don’t betray the usury rules, and the bank gets access to a new slice of customers who put up a higher collateral than regular customers and yet end up paying the same total amount for the mortgage as everyone else.

  14. I have not read the text, but I think Islam would say – save money and then buy a house. Dont buy a house on loan money. So why dont we just save for about a 30 years and we will have enough to buy a house when close to retirement?

  15. As a Muslim i feel this whole “Sharia Finance ” thing is a farce. Its just the convolution of the interest. At the end of the day you have to price these things as per the “interest rate” curve.

    I call BS on this.

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