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DUBAI/TORONTO: The insolvency of an Islamic mortgage lender in Canada may hinder the growth of sharia-compliant finance in North America, where the industry has struggled to gain traction in the absence of a supportive regulatory framework.
UM Financial Inc was ordered into receivership in October,leaving about $32 million worth of mortgages in the hands of Toronto's legal system. Accounting and business advisory firm Grant Thornton was appointed receiver by the Ontario Superior Court of Justice. The case has exposed uncertainty over the legal treatment of sharia-compliant mortgages in default, and questions over the transparency and oversight of smaller Islamic lenders. Industry experts said this could make investors in Canada and the United States more wary of considering Islamic finance in future.
“The failure of an Islamic financial institution should not immediately be construed as a failure of sharia-based financing,” said Sheikh Muddassir Siddiqui, sharia scholar and partner at SNR Denton in Dubai. But he added that the insolvency could give Islamic finance a bad name if the Canadian legal system determined that Islamic mortgage holders were not the ultimate owners of property for which they had been paying.
Since Islam forbids the use of interest, sharia-compliant mortgages rely on a “diminishing musharaka” contract to help Muslims finance home buying. A lender and a home buyer share the costs of purchasing a home; the homeowner then pays rent to the lender while purchasing the lender's share of the house in installments. When the value of the house is eventually paid off, full title is transferred to the homeowner.
However, it is unclear who ultimately owns the home in the case of a bankruptcy by the lender, if legal title remains with the lender. This raises concern that mortgage holders could lose their homes if creditors come after the lender's assets.
Omar Rahman, a 28-year-old recent college graduate, said the mortgage on his family's home in the suburbs of Toronto was nearly paid in full. But the insolvency means the mortgage could be transferred to a non-Muslim lender, violating the family's conservative religious ideology, he said.
“The contract between us and UM Financial was sharia-compliant,” Rahman said. “There are no guarantees that it won't be sold to a company that is not sharia-compliant, and that's a scary thought for us. We have actually stopped making any payments until everything gets resolved.”
Another Toronto-based client of UM Financial Inc, who asked not to be named, said the experience had made him think twice about the use of Islamic finance. “I thought that by working with a sharia-compliant lender and paying a premium over what I would have paid with a traditional mortgage, I was doing the right thing as a Muslim,” he said. “I almost think it would have been better to go the traditional route. At least there would be some accountability.”
Such dissatisfaction is bad news for the development of Islamic finance in Canada, home to about 1.3 million Muslims. UM Financial Inc was one of the most established sharia-compliant mortgage providers in the country.
“I think this situation will cause reputational damage to the industry, similar in some ways to the situation in Egypt years ago when Egyptians lost millions of dollars in a corruption scandal involving a sharia-compliant institution,” said Nabil Issa, partner at law firm King & Spalding in Dubai.“That was a majority Muslim country and (the scandal) had repercussions on the growth of Islamic finance that are still being felt today.”
