Halal Mortgages in Canada’s Budget – Equal but not Same

Abstract: In its 2024 budget, Canada has introduced the concept of halal mortgages, drawing diverse reactions. The Canadian Muslim community hails this as a key move towards inclusive housing, while some fear it gives Muslims an unfair edge due to misconceptions about Shariah law. Halal mortgages, although interest-free, incur costs through a profit margin to the lender, aligning with Islamic finance principles which forbid interest. This arrangement is not restricted to Muslims, thereby inviting a broader audience to consider this option. Canada remains the last G7 nation to integrate Islamic finance within its regulations, signaling a significant shift if it moves forward. The introduction of halal mortgages necessitates an effective plan involving government agencies, regulatory bodies, and financial institutions to ensure accessibility and adherence to both Shariah and Canadian laws. As Canada works to align its financial policies with inclusive practices, this change could open doors to home ownership for over two million Canadian Muslims, while promoting diversity and equity in housing across the nation.

The mention of halal mortgages in the Federal Budget 2024 has sparked varied reactions across Canada. This move is being celebrated by the Canadian Muslim community, who see it as a significant step towards inclusive home ownership. Some segments of the population, on the other hand, have expressed concerns about Shariah law and the “unfair advantage” that halal mortgages might offer to Muslims.

As the CEO of a halal mortgage lender, I have carefully observed the diverse responses. Colleagues within the banking and mortgage sectors have offered congratulations for what they perceive as a profound development. There is also caution circulating, with some advising against excessive optimism. Indeed, the discourse surrounding halal mortgages has been multifaceted, reflecting complex intersections between religious beliefs, financial practices, and societal attitudes.

At the heart of the issue lies the question: what exactly are halal mortgages, and why have they stirred such different reactions? To understand this, we must consider the needs and priorities of the key stakeholders involved.

Canadian Muslims have long advocated for the availability of halal mortgages, citing religious principles that prohibit interest (‘riba’). The Quran explicitly condemns interest, regardless of rate, as usury and a grave sin. The global Islamic finance industry, valued at USD 4.5 trillion 1 , is built on financial products structured in accordance with Islamic precepts of trade, partnership and agency. In Canada, an estimated 315,000 devout Muslim families 2 have been unable to purchase homes despite having the necessary income, savings, and credit ratings. Yet, Canada remains the only G7 country in which Islamic finance has yet to be integrated within regulations. The lack of attention from Canadian banks and government has left many Canadian Muslims feeling marginalized and disadvantaged, particularly in the face of rising home values. Thus, the government's acknowledgment of halal financing in the federal budget is seen as a positive step towards addressing these concerns and fostering greater inclusivity in the housing market.

For some non-Muslim Canadians, the mention of halal mortgages in the federal budget has raised concerns related to Shariah (Islamic) law. They believe that offering “interest-free mortgages” exclusively to Muslims would be unfair to other Canadians. However, this perception overlooks a crucial distinction: while halal mortgages are technically interest-free, they are not cost-free. Instead of traditional interest, halal mortgages involve a halal profit for the lender, often structured in a way that makes them costlier than conventional interest-bearing mortgages. Furthermore, access to halal mortgages is not limited to Muslims. Just as non- Muslims are welcome in halal restaurants, they are also eligible for halal financing. In fact, a significant percentage of customers of Islamic banks globally are non-Muslims attracted by the service and offerings.

The Canadian Human Rights Act prohibits discrimination in services under federal jurisdiction, including housing. The National Housing Strategy Act recognizes housing as a human right and requires the federal government to maintain a national housing strategy “taking into account key principles of a human rights-based approach to housing” 3 . While the reference to halal mortgages in the federal budget is a step in the right direction, there are challenges ahead in translating this acknowledgment into concrete action. A clear action plan must be developed to make halal financing a viable option for Canadian homebuyers. This will require collaboration between government agencies, regulatory bodies, financial institutions, and the mortgage industry.

A key player in this process is the Canadian Mortgage Housing Corporation (“CMHC”), the government-owned entity that underpins the Canadian mortgage market. The CMHC’s mandate includes ensuring access to housing and promoting diversity and inclusion in the housing market. A 2010 research report by the CMHC titled "Islamic Housing Finance in Canada" concluded that Shariah law does not inherently create any issues when interfacing with the Canadian legal system. The report, however, highlights that obstacles exist for the commonly used Murabaha and Diminishing Musharaka mortgage products as they require the lender to own the underlying property for either a short period or the entire term of the mortgage. Since all past and existing private halal lenders in Canada have used these existing product structures, they have failed to secure CMHC approval and hence at-scale funding from the Canadian banks. Fortunately, EQRAZ’s halal mortgage structures, developed in compliance with CMHC’s requirements, are already in the Canadian market, albeit at a smaller scale. By leveraging CMHC’s expertise to review and endorse these newer structures, the government can rapidly pave the way for the widespread adoption of halal mortgages in Canada with minimal cost and effort.

While the Canadian banking system is globally renowned for its soundness and resilience, Canadian banks and regulated financial institutions are not well suited to offer halal mortgages. First, regulations prevent banks from engaging in halal asset-backed transactions. While other G7 countries have amended their taxation and other laws to accommodate Shariah-compliant financing, Canada has yet to adapt. Second, even if regulations were to change, banks would need to develop and bring to market halal products and processes. This would involve significant investment in people, systems, and technology to ensure Shariah-compliance without compromising Canadian rules. Finally, Canadian financial institutions have many competing opportunities to consider. Limited exposure to the halal financing space, including its higher profitability without added risk, has sustained the banks’ misconception that halal financing poses high opportunity costs.

Despite these challenges, there is reason to be optimistic about the future of halal mortgages in Canada. Now that a CMHC-compliant halal mortgage product is available in Canada, by providing regulatory support, the Canadian government can immediately unlock access to broader capital markets for approved halal lenders and make home ownership possible for two million Canadian Muslims. In the words of American author and philosopher, Christina Hoff Sommers, “A fair and just society offers equal opportunity to all. But it cannot promise, and should not enforce, sameness.” The government’s recent announcement is a great step in fulfilling this principle and deserves to be followed up with concrete action by all stakeholders.

1. LSEG Data and Analytics Insight: Navigating uncertainty: “Global Islamic finance assets expected to exceed $6.7 trillion by 2027”, February 2024
2. Source: MaruBlu market survey commissioned by EQRAZ Inc., April 2023
3. Canadian House of Commons research publication: “A Primer on Housing Rights in Canada”, June 2019 by Ryan van den Berg, Economics, Resource and International Affairs Division