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The new federal budget announced measures to improve access to housing. Among the measures mentioned is the option of offering parallel financial products to Muslim customers such as “halal” mortgage loans. The budget paper did not give any more information about this, leaving the door open to many interpretations. In the following, we propose to answer important questions on the subject, whether for the user or for financial institutions and regional and federal regulatory agencies.

What do we mean by “halal” mortgage?

This is a “special” mortgage contract insofar as its provisions are in accordance with the precepts and teachings of the Muslim faith. The basic principle is that the financial institution issuing the mortgage loan must not charge a specific fee (or interest) as this is a practice that is not permitted by Islam. The doctrine explains that the prohibition of the use of usury aims to protect people who need to borrow money because this would worsen their financial situation and keep them in poverty.

It is important to say that even if the use of interest is not allowed, the structure of the “halal” loan is built so that financial institutions can still make money. For example, the formula known as “Ijara” is equivalent to a hire purchase contract where the borrower pays monthly payments equal to rent until the price of the property is fully paid. Or the “Musharaka” formula, according to which the borrower gradually earns a percentage of the property as he pays. There is also a scheme called “Murabaha”, where the borrower buys the property at a high price upfront and then pays monthly installments to pay off this high amount. back.

In all the cases mentioned above, the payments will be in the same order as a traditional mortgage loan, with a slight extension that reflects the cost incurred by the financial institution to provide this type of “special” financial product to offer. It’s like eating organic or vegan or eco-friendly: it costs a bit more than eating the traditional way. Basically, the consumer agrees to pay a premium​​​​to satisfy his preferences, be it gastronomic or ecological or religious.

Why did the federal government choose this type of financial product to include in its budget?

A portion of Canadian Muslims would certainly be willing to pay a bit more to have a halal mortgage. The more competitive the market for financial products, the cheaper it will be. This type of financial return is especially important for working Muslims, as they are more orthodox in the practice of their religion. They represent less than 1% of the Canadian population.

In this sense, the impact of this provision on the real estate market, on banking profitability and on access to real estate would be relatively small. In addition, since these products are aimed more at the Muslim consumer group in Canada, this would make it possible to integrate them into the Canadian banking system, whose activities are subject to the scrutiny and scrutiny of the regulatory authorities. relevant (OSFI and FINTRAC at the federal level, as well as regional agencies).

Financial integration is important for regulatory bodies as it increases the transparency of transactions made by different financial operators. If part of the population does not have access to financial services in a particular market, the Canadian market in our case, they tend to look for another market that will serve them. Islamic financial markets in Southeast Asian countries as well as the Middle East are thriving and offer Shariah-compliant financial services.

It is precisely those situations where Canadian customers are served from markets outside of Canada that regulators are trying to avoid.

What does this new provision in the budget mean, once it is implemented?

Costs, costs and costs!

Financial institutions must equip themselves with the technological infrastructure to integrate these products into their systems. They also need to acquire the legal and financial knowledge to be able to serve these customers. The bill is likely to be passed on to customers.

Regulatory bodies must also resource themselves with expertise in this area so that they can effectively implement their directives. An essential aspect of Islamic financial products is the sharing of risks between the lender and the borrower (“ profit and loss sharing).

This aspect has an impact on the risk that financial institutions take and, in turn, on their capital levels, which must be adjusted to take into account the risk associated with these new products . Costs incurred by regulators are usually passed on to financial institutions so that they are not borne by taxpayers. Financial institutions provide them to consumers based on the financial products they offer their clients.

In short, how can we evaluate this initiative in the federal budget?

At a political level, it certainly sends an attractive signal to the Muslim population, regardless of their intention on a halal mortgage (or not). The campaign would be seen as a sign of consideration for Canadian Muslims, especially in the context of the world where Canada had supported Israel in the conflict that followed the attack by Hamas in October. So it’s a clever attempt to redeem himself by the Muslim community, who would rather feel betrayed by Canada’s relatively anti-Israel foreign policy.

In addition, from an economic and financial point of view, the impact is small as the population targeted by this provision of the budget does not represent more than 1% of the mortgage loan market .

Finally, it must be said that the approach adopted by the federal government is a bit quick, which explains the limits of the initiative. In fact, a halal mortgage loan cannot be given, if we rely on the teachings, by a non-Islamic bank. It’s like making a stew with halal and non-halal meat mixed together: it’s clear that not everything is halal together anymore. Then, a halal mortgage loan cannot be granted without opening a checking or savings account. Would these accounts be halal? Therefore it will be necessary to create these products in the same way as a halal mortgage.

In addition, any account at a Canadian financial institution is protected by the Canadian deposit insurance system (or its equivalent in the region). The fact is that insurance is a non-halal concept, which means that the Islamic equivalent (called embarrassing »).

All this is to say that the halal mortgage initiative proposed by the federal government is only the tip of the iceberg of a whole system, and that an active user can agree to adhere to it (still according to the teachings of the Koranic text), you have to offer him the halal “combo”: he will not accept an Islamic product here and other non-Islamic products there.

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