Muslim Canadians 'left out' of purchasing homes due to lack of halal mortgages: experts

Halal mortgage demand outweighing supply in Canada Mohamad Sawwaf, CEO and founder of Islamic financial institution Manzil, explains the barriers that exist for Muslim homebuyers in Canada.

For many prospective homebuyers in Canada, obtaining a mortgage can be a challenge due to elevated home prices. But for members of Canada’s Muslim community, those looking to purchase a home may be faced with an additional barrier – securing a mortgage that aligns with their faith.

Shariah, the body of Islamic religious law, prohibits the use of riba, otherwise known as interest charged on loans. As a result, conventional mortgages offered by Canadian banks, which charge clients interest, are not considered Shariah-compliant, or halal.

Mohamad Sawwaf is the co-founder and CEO of Manzil, an Islamic financial institution based in Toronto. Because major Canadian banks do not currently offer Shariah-compliant mortgages, this leaves many members of the Muslim community “financially excluded” from obtaining one, Sawwaf said.

“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,” Sawwaf told CTVNews.ca in a telephone interview on Oct. 13. “Not everyone is receiving equal benefit when it comes to banking.”

According to Statistics Canada, Islam is the second-most commonly reported religion in Canada, with nearly 1.8 million people as of 2021. In the span of 20 years, Canada’s Muslim population grew to 4.9 per cent in 2021 from two per cent in 2001.

Companies such as Manzil and the Canadian Halal Financial Corporation based in Alberta offer financial alternatives they say are considered halal.

Halal mortgages can be obtained through two common Islamic financing structures, Sawwaf said. The first is called murabaha, or cost-plus financing. Through this method, the Islamic financial company purchases a home directly from the seller, becoming the owner of the home. The company will then immediately sell the home back to their client with an embedded profit rate, said Sawwaf. This involves the client entering a purchase and sale agreement to buy the home at a profit. Contract terms can reach up to 10 or 15 years and involve fixed monthly payments.

The second option is known as musharaka, which is when the company and their client enter the transaction as partners. Through this method, the client’s name will also appear on the title to the home. The company starts as co-owner of the property while their client occupies it. With every mortgage payment, the company’s equity position decreases until their client fully owns the home, Sawwaf said. The amortization period is usually between 25 and 30 years.

While these options may not involve interest, they do come with additional fees imposed by financiers, said Imam Mahmoud Omar, who works with the Canadian Halal Financial Corporation. The company bases its mortgage fees on the Bank of Canada’s overnight rate, which currently stands at 3.75 per cent after another hike on Wednesday.

“It’s an unfortunate factor,” Omar told CTVNews.ca on Oct. 13 in a telephone interview.

Prices may also be adjusted depending on how much capital a financial institution has, where it obtains this capital from, and additional costs required to operate the company, which is agreed upon by the company and client. Compared to large banks, smaller companies such as Manzil have access to less capital. As a result, they may charge more for their products as lending becomes more of a risk, Sawwaf said. Both financing options also require a sizeable down payment, usually of at least 20 per cent.

Despite the lack of interest fees, halal mortgages remain identical to conventional ones, Sawwaf said.

“The process and documentation is what makes the transaction halal,” he said. “This embedded profit rate that we build in is benchmarked against [the overnight] rate, but when we look at the product at the end, it’s still a mortgage.”

Additionally, financial institutions such as Manzil also offer these mortgages to Canadians who are not Muslim.

Based on Canada’s National Household Survey conducted in 2011, the average home ownership rate among Muslim Canadians was the lowest of all religious groups included, at 44.3 per cent. Thomas Lukaszuk is director and co-founder of the Canadian Halal Financial Corporation. A large portion of Muslim Canadians are renters because they can’t obtain a conventional mortgage, he said.

“Most of our clients were born in Canada [and] are what I would consider to be rather young families and … above-average educated,” Lukaszuk told CTVNews.ca in a telephone interview on Oct. 18. “We have medical doctors and specialists who have been renting homes for [up to] 20 years and would qualify for a conventional mortgage [at a major bank] no questions asked.”

Halal mortgages can act as an alternative for those who can afford to enter the housing market, but are stuck renting due to a lack of Shariah-compliant options available, Sawwaf said.

“There’s a lot of people participating in renting when they don’t have to,” Sawwaf said. “[These options] allow us to bridge the gap of financing that's required so that they can move from rental into homeownership.”

CTVNews.ca reached out to the five largest banks in Canada for comment. TD Bank declined to participate in the story, and the remaining banks were not immediately available for comment.

DEMAND FOR ISLAMIC FINANCING EXPECTED TO RISE: EXPERTS

Part of the importance in expanding access to Islamic financial services is the strong demand for them, Sawwaf said. While his company, Manzil, currently services about 35 families, more than 12,000 others are currently sitting on a wait list. With the average mortgage application requesting $500,000, this amounts to $6 billion required in financing, he said.

“I suspect demand will grow exponentially over the coming years,” he said, pointing to data showing Canada’s Muslim population is expected to reach nearly 2.7 million by 2030. “You're going to get an additional million Muslims that are coming from countries that are used to having Islamic banking products.”

This issue his company faces is a lack of supply in capital, Sawwaf said, as well as limited awareness around Islamic banking in Canada.

“Any bank in Canada … could create a balance sheet for this,” he said. “But I think they’re always caught up on this being an ‘unknown’ product and they don't want to get themselves involved in what they may perceive as higher risk.”

Saeed Teskie, who recently secured a musharaka mortgage through Manzil, said major banks are missing out on the opportunity to connect with members of Canada’s Muslim community by not offering Shariah-compliant mortgages.

“For any major bank, if they decided to implement such arrangements, it will be a huge win for the bank because they will be attracting a big percentage of the Muslim community [who] are wanting something like this,” Teskie told CTVNews.ca in a telephone interview on Wednesday. “It will be available to more people.”

Teskie, a business owner based in Hamilton, Ont., said he was not willing to budge on securing a halal mortgage when purchasing his home this year. He submitted his mortgage application to Manzil in June and received approval in August, he said. He only required a mortgage of $150,000 to pay for the rest of the freehold townhouse he recently purchased, having been able to pay the balance himself.

“It is very important to make sure that financial agreements are Shariah-compliant, that’s part of my faith,” he said. “I feel more comfortable and more satisfied [with my purchase].”

Demand for services provided by the Canadian Halal Financial Corporation is also on the rise, said Omar, who works with a committee of scholars specializing in Islamic finance and economics at the Al Rashid Mosque in Edmonton. He is involved in creating and reviewing mortgage contracts administered by the Canadian Halal Financial Corporation.

Since the company launched in December 2021, it has approved 600 applications, and continues to receive 15 to 20 new applications each week, said Lukaszuk. While the company is currently focused on serving clients in Alberta, there are plans to expand services nationwide, he said. The company has already received numerous requests from residents outside the province who are interested in applying for mortgages.

“I’m disheartened by the fact that there’s a large number of Canadians who have been left out of what we consider to be a right – owning a house,” Lukaszuk said.

ADDITIONAL BARRIERS TO ACCESS

Immadaldeen Moussa is a hairstylist based in Edmonton who recently purchased his home through the Canadian Halal Financial Corporation. He said he was only aware that halal mortgages existed in August, just before submitting his application to the company.

Moussa was approved for a musharaka mortgage to purchase a bungalow earlier this month.

“It’s a nice way to get a mortgage that follows our ways of life,” Moussa told CTVNews.ca in a telephone interview on Thursday. “When we face our Lord, we don’t have to tell him we took interest.”

This underscores the need for awareness around these services, Sawwaf said. Part of the solution also comes down to political will, as there are other financial hurdles Muslim Canadians may face when purchasing a home, particularly for the first time.

First-time homebuyers using Islamic financial services to purchase a home are not eligible for a rebate on their land transfer tax in certain provinces, for example. This rebate is only available to individuals and not corporate entities, which play a prominent role in assisting Muslim Canadians with purchasing a home interest-free.

Increasing education and removing hurdles such as this can make it easier for members of Canada’s Muslim community to enter the housing market, Sawwaf said.

“I hope people keep an open mind with respect to that banking,” Sawwaf said. “I’m just asking for us, who are already put at a disadvantage, to be on equal footing.”

Omar said he would like to see major banks begin to offer Islamic financial services to Canadians, as well as an increase in housing supply. The importance of making these services more widely available goes beyond simply owning an asset, he said, especially for members of the Muslim community who immigrate to Canada.

“It’s for them to feel more like they are Canadian [and] part of the fabric of the community,” he said. “Like [Canada] is home.”