April 8, 2022
9 mins

A Guide to Islamic Banks in Canada

Muslims make up over 3.2% of Canada's population. This percentage represents more than a million people, and the community adds rich cultural diversity to this great nation. Perhaps you're a practising Muslim. You may want to know more about finding an Islamic bank in Canada.

An Islamic bank is Shariah-compliant. In other words, its services and activities adhere to Islamic law. In this week's post, we explore Islamic banking in Canada.

What is Islamic Banking?

You might hear someone refer to Islamic banking as Islamic- or Shariah-compliant finance. These terms refer to financial activities that adhere to Islamic law.

There are two essential principles of Islamic banking. The first principle is that of sharing of profit and loss. The second involves the prohibition of traditional profit. Islamic banks can't earn profits on interest collection or payments. Instead, Shariah-compliant institutions make a profit using equity participation.

The Origins of Islamic Banking

Historians trace Islamic banking back to the Middle East. It began with financial transactions involving Middle Eastern business people and their European counterparts, with both parties utilizing similar economic principles.

Eventually, however, trade developed further. European interests started to establish local bank branches in Middle Eastern countries. Some of those banks adopted local customs. Primarily, these customs involved a no-interest financial system.

This system works based on the profit and loss sharing method. In this way, European financiers could serve the needs of local Muslim businesspersons.

The Re-emergence of Shariah-compliant Finance

Islamic banking re-emerged in the modern world in the 1960s. Since 1975, many Shariah-compliant banks have opened their doors.

Local financiers founded most of these banks in Muslim countries. However, many founded Islamic banks in Western Europe in the early 1980s.

The government of Iran and Sudan have also developed national interest-free banking systems. To a lesser degree, so has Pakistan. Today, the Mit-Ghamr Savings Bank continues to serve as the first example of Islamic banking.

Islamic Banking in Canada

Experts expect the Canadian Muslim population to grow between 5.6% and 7.2% by 2036. Yet, a limited amount of professionally-managed investment options in Canada align with Shariah law.

The lack of compliant banking products has forced Muslim consumers to accept alternative financial solutions. But unfortunately, they've often resulted in negative implications for their retirement savings.

Around the world, Shariah-compliant finance is gaining momentum. If you'd like to track global Shariah-compliant finance, you can follow the S&P 500 Shariah Industry Exclusions Index.

Islamic Banks vs Traditional Institutions

One big difference between Islamic banks and traditional financial institutions is that Islamic banks forbid usury and speculation. These practices are defined as Haram.

Shariah strictly forbids any form of gambling or speculation. And Shariah labels these practices as Maisir.

Again, Shariah forbids the collection of interest on loans. It also forbids investment involving substances or items prohibited by the Qur'an, the sacred scripture of Islam. Accordingly, these items include alcohol, gambling, and pork.

The Foundations of Islamic Banking

Canada's Islamic banking rests on the foundation of the Islamic faith related to commercial transactions. These principles come directly from the Qur'an.

With Shariah-compliant banking, all transactions must comply with the legal code of Islam. There are special rules covering these transactions. The Qur'an refers to them as Fiqh al-Muamalat.

Staffing at Islamic Banks

Grounded in faith, Islamic employees at Shariah-compliant institutions comply with Islamic banking rules. They do not deviate from the fundamental principles of the Qur'an. In all aspects of life, they maintain this accountability while doing business.

Sometimes, however, an Islamic banker may need more guidance. They'll turn to learned Islamic Scholars or a Mufti in these instances. Alternatively, they may use independent reasoning based on customary practices and what they have learned from the Qur'an.

How Islamic Banks Operate

Islamic banks must earn money without charging interest. They accomplish this task using an equity participation system.

For example, an Islamic bank might loan money to a business. The business will pay back the loan without interest. Instead, it will give the bank a share of its profits. If the company fails or does not earn a profit, the bank does not benefit from the loan.

An Islamic bank operates entirely using Islamic principles. However, traditional banks might provide an Islamic window. An Islam window is a dedicated window or section that serves the financial needs of Muslim clients.

Canada and the Muslim Population

Do No Harm.

Canada certainly isn't the center of global finance. However, in recent years the market has attracted increased interest from investors.

These investors are both local and international in origin. The area has developed several rising-star Shariah-compliant investment and finance offerings.

These offerings have emerged because more Muslims seek Halal ways to bank and invest wisely. Also, the general public wants more socially-conscious investment options.

The Influence of Muslim Finance Consumers

Some researchers estimate the Canadian Islamic population as closer to 1.5 million or 4% of the Canadian population. This estimate would make Islam the second-largest religion in the country, in addition to being the fastest-growing. Researchers estimate that the Canadian Muslim population will double in the coming decade.

Most Canadian Muslims are immigrants. Yet, a growing percentage of Muslims are native Canadians. Moreover, an even smaller portion of the Muslim community has recently converted to Islam.

Most Muslims live in Greater Toronto and Montréal. They're primarily middle-class, well-educated, and possess considerable levels of financial literacy. This means that any Islamic banking products must be respectful of Islam, thoughtful in intent, and savvy regarding potential returns.

Islamic Banks in Canada List

From mining to hydrocarbons, Canada is rich in natural resources. Also, the government has ambitious plans for infrastructure development.

These circumstances present countless prospects for Shariah-compliant opportunities. The following list of Islamic banks in Canada shows some Halal financiers that have captured these prospects.

Already, there are several Canadian Islamic finance players. These established institutions include the following:

  • Al Yusr

  • Al-Ittihad Investment

  • Amana Auto Finance

  • An-Nur Housing Cooperative

  • Ansar Co-operative Housing Corp

  • Assiniboine Credit Union

  • Habib Canadian Bank

  • Ijara Community Development Corp

  • Islamic Co-operative Housing Corp

  • Manzil Bank

  • Qurtuba Housing Co-op

  • United Muslim Financial

There are also several newer Shariah-compliant financial institutions in Canada. These organizations include:

Several smaller and medium-sized Shariah-compliant financial institutions have also recently emerged in Canada.

Islamic Financial Interests in Canada

Some Canadian community members work toward a common cause. They want to turn Toronto into a global financial center of Shariah-compliant products.

For instance, Sukuk are Shariah-compliant bonds. Around the world, they could generate $130 billion in domestic infrastructure investment. Meanwhile, the Canadian banking sector currently holds $18 billion of Shariah-compliant mortgages.

Also, Takaful is a Shariah-compliant insurance product. Large companies like Sun Life Financial and Manulife Financial are already making plans to offer Takaful based on learning from their Islamic subsidiaries.

Challenges of Finding an Islamic Bank in Canada

There are many developments and possibilities in Islamic banking. Still, there aren't enough Islamic banking services in Canada.

So far, cooperatives and non-bank financial institutions have put timid initiatives in place. Their goal is to meet the needs of Muslim consumers. Yet, they face challenges in balancing the requirements of Shariah with Canadian legacy legislation.

Some Islamic institutions continue to expand worldwide. Yet, none of these institutions have broken ground in new areas such as Peer-to-Peer lending or payment processing services. So, the expansion of Shariah-compliant services has come to a halt.

Islamic Finance in Canada: A Growing Market

Yet, there's increasing interest in providing Shariah-compliant services in Canada. Much of this interest focuses on Toronto. Islamic finance is one of the fastest-growing financial sectors in the world. So there are many opportunities left for interested parties to explore.

Toronto is an international financial center. Shariah-compliant services could help to expand the capabilities of the Toronto financial sector. They could also boost its reputation.

What Needs to Change?

Banking experts suggest that Canadian legislators face a challenge. They must balance the safety and soundness of Shariah-compliant finances with financial stability. They must also support economic activity.

With this in mind, Canadian lawmakers could consider relaxing institutional capitalization requirements. These kinds of measures could even reduce the impact of the COVID-19 pandemic.

Islamic banking was in a strong position before COVID-19. However, the Islamic banking sector now faces a challenge: It must maintain a healthy financial outlook in worsening economic conditions. A growing number of loan defaults adds to this issue.

Market Gaps in Shariah-Compliant Financial Services

Major financial players welcome inclusion. They view Shariah-compliant banking as another product that can help meet consumers' needs.

Still, supporters of Shariah-compliant banking must expand their offerings. Expansion in this financial sector is especially important for:

  • Cars

  • Commercial real estate

  • Equipment leasing

  • Payment processing services

  • Peer-to-Peer (P2P) lending

Also, there's still a massive service gap in Shariah-compliant banking. There aren't enough services to serve the existing Muslim consumer base. They need more basic financial services like those for everyday transactions and deposits.

An Underserved Islamic Base

In Canada, the Halal retail market is strong. Likewise, the Halal investment product market is also expanding.

Much of this expansion is due to the grassroots demands of Muslim communities. Still, a vacuum exists for Shariah-compliant banking products. As a result, there's a disproportionate gap between supply and demand.

However, the Canadian Muslim community is actively involved in consumerism. As a result, the Shariah-compliant finance sector is evolving even more than in other Western regions.

Learn More Lessons about Managing Money

We hope this brief guide has provided you with a basic understanding of Islamic banking in Canada. Still, however, there are many things that you can learn about managing your money.

Creditpicks is here to provide you with the information to make informed financial decisions. So, please feel free to read our post on innovative money management and subscribe to our blog.

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