On 16th April, Canada said that it plans to explore new measures to expand access to alternative financing products such as halal mortgages. The rapport report on Budget for the financial year said, “Canada is home to a vibrant and growing market of alternative financing products, including halal mortgages, that enable Muslim Canadians, and other diverse communities, to further participate in the housing market.”
It read, “Budget 2024 announces that the government is exploring new measures to expand access to alternative financing products, like halal mortgages. This could include changes in the tax treatment of these products or a new regulatory sandbox for financial service providers while ensuring adequate consumer protections are in place.”
The Canadian government started consulting financial service providers and diverse communities to understand how federal policies could be improved to support the needs of “all Canadians seeking to become homeowners.” An update on Halal Mortgages is expected to be provided in the 2024 Fall Economic Statement.
For those who are unaware, the Shariah law or Islamic faith considers interest to be a form of usury. To make the mortgages “Shariah compliant” or “Halal”, the financial institutions operating in the Islamic world often offer mortgages and lending products that do not have conventional interest payments. Some financial institutions in Canada offer some such mortgages, but the largest five banks in Canada have no such offerings. As Canada is exploring Halal Mortgage options, it may push the large banks in the country to have a separate section of mortgages for Muslims that are “Shariah compliant” or “Halal”.
A report from CTV News in October 2022 mentioned that experts believe Muslim Canadians were “left out” of purchasing homes as they did not have an option of Halal mortgages. Mohammad Sawwaf, CEO of Manzil, an Islamic financial institution from Canada, told CTV, “They’re basically keeping themselves outside of this conventional banking system because it doesn’t align with their religious or ethical principles, and so it becomes very difficult to access financing.”
According to Sawwaf, two options under Halal mortgages are: “murabaha” and “musharaka”. Under murabaha, the financial institute is a mediator and buys the property directly from the seller. The company then sells it immediately to the client with an embedded profit rate. Under musharaka, the seller and the buyer go into an agreement where the seller’s name stays in the title of the home. As the buyer pays off the mortgage, the seller’s equity in the property reduces. While murabaha takes around 10-15 years to complete the payment cycle, in the case of musharaka, it takes around 25-30 years to complete the payment cycle. The amount above and beyond the cost of the property is NOT mentioned as interest charged by the financial institute but as “additional fees”.
Raghuram Rajan tried to bring Islamic banking to India
While Canada is waking up to the Islamic banking system, it is noteworthy that Raghuram Rajan, the former governor of the Reserve Bank of India (RBI), proposed to have an Islamic banking system in India in 2008 when Congress was in power.
In August 2007, the Planning Commission of India formed a high-level committee on Financial Sector Reforms headed by Raghuram Rajan, who was working as a professor at the Graduate School of Business at the University of Chicago at that time. The committee presented its report in 2008 titled A Hundred Small Steps.
On page 72 of this report, there is a section titled “Improving infrastructure for financial inclusion”, where the idea of interest-free banking is discussed. A para in that section reads, “Another area that falls broadly in the ambit of financial infrastructure for inclusion is the provision of interest-free banking. Certain faiths prohibit the use of financial instruments that pay interest. The nonavailability of interest-free banking products (where the return to the investor is tied to the bearing of risk, in accordance with the principles of that faith) results in some Indians, including those in the economically disadvantaged strata of society, not being able to access banking products and services due to reasons of faith. This non-availability also denies India access to substantial sources of savings from other countries in the region.”
While the report does not mention the words Islamic banking or Shariah compliance banking, the text makes it clear that it is referring to Islamic banking only. It says that certain faiths prohibit the use of financial instruments that pay interest, which directly points towards Islam as earning interest on money is considered haram only in Islam. The report had said that while interest-free banking is provided by some NBFCs in India, it should be made available on a larger scale, including through the banking system.
The text “Improving Infrastructure for Financial Inclusion” is the exact title of the chapter where Islamic banking was proposed in the Raghuram Rajan report, which can be seen in the report. The proposal was rejected by RBI in 2017.
Though RBI disallowed Shariah banking in India, Sharia-compliant Indices for companies are available in the country. In June 2022, OpIndia reported that some X users (then Twitter) criticised Tata Group for offering Sharia-complaint mutual funds. Though most of the investors and people in general are unaware, India has the ‘Shariah Index’ for companies on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
What is Shariah Index?
In simple terms, Shariah Index can be defined as an index of companies that are compliant with the Shariah Law. These companies are screened by an authorized board before getting listed in the indices. Basically, these indices include only those companies that deal with Halal products and services, and do not do business in Haram items. For example, alcoholic beverage companies can’t be included Shariah indices because alcohol is Haram in Islam.
Such indices are present around the world, and in India, there are four main indices that index Shariah-compliant companies that are S&P BSE 500 Shariah Index, BSE Tasis Shariah 50 Index, Nifty 500 Shariah Index, and Nifty 50 Shariah Index. The boards that screen the companies for their inclusion in Shariah indices are required to be well-versed in the principles of the Quran governing personal law or Shariah. Shariah-compliant indices have been functioning in India since late 2000s. For example, NSE’s Shariah indices were launched in 2008. OpIndia’s detailed reprot on Shariah Indices can be checked here.
Canada to introduce Halal mortgages soon, was proposed by Raghuram Rajan for India (opindia.com)