From Wednesday’s Globe and Mail
January 30, 2008 at 4:25 AM EST
Canada Mortgage and Housing Corp. has launched a review of sharia mortgage lending practices, after receiving 10 proposals to deliver the housing loans in Canada.
The mortgages, which are designed to avoid interest payments to comply with Islamic law, have attracted controversy over the higher fees associated with the loans. A Muslim group is asking the national housing agency to cancel its study because it says the sector overcharges clients – in some cases by at least a full percentage point – and isolates the community.
CMHC’s study comes as the popularity of such products is ballooning worldwide. Islamic finance has grown about 15 per cent a year in recent years and is now worth about $500-billion globally, the U.K. banking regulator estimated in November.
“These types of loans, we know, are starting to emerge in Britain and the United States and … are being offered in Canada,” said Douglas Stewart, vice-president of CMHC’s policy and planning. “We wanted to get a better understanding of the nature of this type of lending and what some of the implications might be for the Canadian housing system.”
CMHC has no plans to start offering such mortgages, he stressed, but simply wants to have a better understanding of the practice. The study is expected to be completed by the end of the year.
CMHC’s call for proposals, obtained by The Globe and Mail, asks for details on how these products are offered in different countries, such as Britain, Brunei and Iran, and what the impact of such lending would be in Canada. It will also examine market demand.
Because interest payments are discouraged, sharia mortgages are transactions where an institution buys a house outright at current prices. The buyer then pays the institution in instalments, similar to a rent-to-own system, along with a “profit” that stands in for the amount they would ordinarily pay in interest.
No major Canadian banks offer such products and the mortgages currently offered by other lenders tend to be more expensive than conventional loans.
Farzana Hassan, president of the secular group Muslim Canadian Congress, issued an open letter yesterday to CMHC objecting to the practice.
Islamic banking services put undue pressure on Canadian Muslims to sign on to more costly products as an “act of religiosity,” she said.
A better approach would be a banking system that seeks to integrate Canadians, she said in the letter.
“What we need is a better deal from the banks for all Canadians, rather than dividing us up into religious groups and placing obstacles in the way of better integration of all Canadians,” Ms. Hassan said. “Religion has no place in the banking or mortgage industry.”
Proponents of Islamic financial services contend they are bringing people into the financial system who wouldn’t otherwise feel included, and that these services simply expand choice.
Mortgages at UM Financial tend to be about 60 basis points higher than conventional ones, said Omar Kalair, its chief executive officer. He likened such products to halal or kosher foods, where consumers willingly pay more, and said prices should come down with