Islamic law meets western finance
By Faisal Kutty – CANADA’S 500,000 MUSLIMS face a moral dilemma when it comes to conventional banking and investment. Under Islamic law, the charging of interest is prohibited, as is investment in businesses dealing in alcohol, gambling, pornography or other taboo products and services.
To meet the needs of this community and a growing number of socially conscientious investors who would prefer to use institutions that follow the ethical guidelines laid down in Islam, financial experts and Islamic scholars met in Toronto last May for the first Islamic banking conference in Canada.
“There is a huge opportunity for Islamic banking and finance in Canada,” says Donald Blenkarn, chair of the conference and former chairman of the House of Commons Finance Committee. Blenkarn, who is also a former chairman of the Special Committee on Banks and Banking, told the more than 75 participants – including representatives from government, the Export Development Corporation, Bombardier Inc. and Gulfstream Resources Canada Ltd. – that local Islamic financial institutions would benefit Canadians by providing another banking alternative and increasing competition.
The conference, co-sponsored by the Islamic Society of North America, Zafar & Associates, management consultants specializing in Islamic banking and political risk analysis, and the American Journal of Islamic Finance, examined ways to create an Islamic bank in Canada and to develop an interest-free financial system relying on leases, mutual funds, profit-sharing ventures and other schemes.
There are already Islamic banks in more than 50 countries. These banks, some of which are headquartered in Geneva, have holdings of more than $80 billion and are growing at a rate of 15% a year. In addition, some conventional banks in the United Kingdom have set up Islamic banking units: for example, the British bank Kleinwort Benson nowhas an Islamic banking research institute to develop new trade finance instruments.
Past attempts to establish an Islamic bank in North America have not taken off because of strict banking and securities regulations. In Canada, for instance, the main obstacles centre around the Bank Act, which requires a bank to keep a prescribed share of its deposits as a primary reserve with the Bank of Canada – which would accrue interest. The act also restricts the type of activities and investments that a bank can participate in, and requires that depositors be given the option to have savings accounts, on which they must be given interest.
A group from the Toronto and Region Islamic Congregation hopes to work around these restrictions by trying to establish a credit union, which would not have to satisfy all the stringent rules.
In fact, the outgoing Ontario government was encouraging the different community groups to establish their own credit unions.
Despite the hurdles in creating an Islamic bank, two mutual funds, a number of housing cooperatives and other investment vehicles that adhere to Islamic law have been established since Islamic finance began making inroads in North America in the early 1980s.
While Islamic investors are not allowed to receive a guaranteed return (interest), they can invest in profit-sharing ventures (which involve a business risk) and lease deals without interest. Islamic financial instruments include: Morabaha (markup financing), Ijara (leasing), Ijara Wa Iqtina (lease purchase financing), Modaraba (trust finance) and Musharaka (equity participation).
In compliance with these laws, Pervez Nasim, CMA, helped found the Islamic Cooperative Housing Corporation in Toronto in 1980. The cooperative, which uses a leasing system as opposed to traditional mortgages, has issued capital of $22 million. Nasim has since helped establish two other organizations – Ansarco Inc. and Al-Amin Association – that provide venture capital and an Islamic alternative to investing in RRSP funds.
Nick Angell, a partner with the New York-based law firm Afridi, Angell & Baker, which advises many Islamic investors, says “the two systems (the conventional and the Islamic) ought to supplement and cooperate with each other.”
American and Canadian Muslims agree. Even without a North American bank, however, Islamic finance is on the rise on this continent. Nicholas Kaiser, president of the company in Bellingham, Washington that manages the $20-million Amana Mutual Funds in accordance with Islamic law, says, “I wouldn’t say that this is a major part of American finance, but it’s definitely growing.”
Note: First Published in CA Magazine, September 1995 Edition, page 5.
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