Islamic Financial Services in Canada: Recent Developments and Long-Term Prospects

By Stuart Carruthers

As in many western nations, the awareness and availability of Islamic financial services in Canada continue to grow, although still at a relatively modest rate.

While some limited Shariah compliant products are available, there has been limited activity to date, and no major financial institution yet offers a meaningful suite of Islamic financial products or services.

However, given the burgeoning Islamic population in the country, the growing potential for Islamic financial services in Canada is being carefully followed by local financial institutions, regulators, government agencies, professional advisers and media outlets.

Much like in the UK, Canada’s Muslim population has experienced significant recent growth — from an estimated 253,000 in 1991 to between 800,000 and one million in 2006. By 2017, Muslim Canadians are expected to comprise 3.7% to 4.9% of the Canadian population. Moreover, the Muslim population, which is younger and more educated than the overall population, is concentrated in Canada’s largest cities.

Consequently, there is expected to be increased demand for Islamic financial services in Canada in the coming years, potentially providing a tremendous opportunity for financial firms prepared to serve this growing community.

Canadian financial and economic marketplace
The Canadian financial services marketplace is mature and heavily regulated. On the banking side, it is dominated by five large and fiercely competitive banking groups, which provide a broad range of retail and commercial services across the country.

The life insurance sector is dominated by three large conglomerates, which also compete vigorously internationally and are Canada’s “international champions” in the financial services world. Meanwhile, property and casualty insurance is dominated by Canadian subsidiaries of a small number of large foreign groups, although this sector is more fragmented, with more than 100 licensed insurers in the province of Ontario alone.

Further, Canada enjoys an environment of relative political and economic stability and has generally avoided the level of turmoil currently being experienced in the US with respect to subprime lending and restricted credit availability issues.

A world-class regulator, the federal Office of the Superintendent of Financial Institutions (Canada) (OSFI), regulates the solvency of most larger financial institutions, including the large banks and life insurance groups while also regulating the market conduct of the large banks. The market conduct of insurance companies, meanwhile, is regulated at the provincial and territorial level.

Canada also benefits from a strongly multicultural and tolerant society, a rapidly appreciating currency, robust regulatory and legal systems, a neutral and balanced foreign policy and favorable tax treaties with certain Gulf states.

Activity to date
Despite significant recent media coverage of issues related to Islamic financial services in Canada, there has been limited meaningful activity to date. As reported in Islamic Finance news, an Ontario-based Islamic mortgage provider, UM Financial, has been indicating for some time that it expects to launch a suite of products in collaboration with a major Canadian financial institution. No further announcements in this regard, however, have recently been made.

One of the large banks offers Shariah-linked notes through its private banking division. In 2004, it offered a similar retail investment product through its branches. The Co-operators mutual insurance group, meanwhile, offers certain limited Islamic insurance products.

Islamic mutual funds have also been sold across Canada. Many of the products, however, have been short-lived, including a group of funds, offered through a leading mutual fund group, which were discontinued in 2006 with only C$6.1 million (US$6.03 million) in assets under management.

Overall, participation in the Islamic financial services sector is still rather peripheral and limited, and no major financial institution is offering a meaningful package of Islamic financial services. It is suspected that the current significant credit crunch and subprime mortgage exposures, although not as significant an issue in Canada as in the US, are more pressing priorities for the larger Canadian financial institutions.

A number of applications have recently been made to OSFI, however, for newly incorporated Canadian banks offering Islamic financial services. While some of the applications are understood to be quite far advanced, they appear to be on hold pending the imminent report of a federal multi-agency task force, established last year to consider issues related to Islamic finance in the Canadian financial services marketplace.

Interestingly, earlier this year, the Canada Mortgage and Housing Corporation (pic), a federal Canadian crown corporation, also turned its attention to the issue of Islamic finance in the Canadian marketplace, issuing a request for proposal for a research report on the subject.

As previously reported in Islamic Finance news, the request generated some controversy and resulting media coverage, with UM Financial and others supporting the exercise and at least one other Islamic group in Canada criticizing the exercise.

Prospects
Canada still lags behind the UK, which is in turn still growing slowly. Major developments in Canada are likely some time away, although, as noted above, the demographic prospects are excellent.

The same structural issues are present in Canada as were identified in the UK by the Financial Services Authority’s November 2007 discussion paper in respect of developments in Islamic finance in that country. While there is significant interest from a wide variety of stakeholders, the eventual products will need to be extremely competitive to achieve wide distribution in the Canadian marketplace.

Future activity will likely include one or more of the major international financial institutions with Islamic windows offering retail home finance products in Canada, credit unions and mid-size banks offering home finance products in Canada, major existing Canadian banks breaking into the retail market, and, in the longer term, one or more newly established Canadian Islamic banks.

Stuart Carruthers is a corporate partner in Stikeman Elliott’s Toronto office. His practice is focused on international private M&A transactions and commercial matters, particularly insurance, reinsurance and related financial services transactions and regulatory matters. He also leads the Toronto office’s Islamic Financial Services working group. He can be contacted at (416) 869 5600 or via email at scarruthers@stikeman.com