TORONTO - The insolvency of an Islamic mortgage lender in Canada is leaving many Canadian Muslims in limbo, with some analysts believe that the bankruptcy could hurt the Islamic finance industry in North America.
"The contract between us and UM Financial was Shari`ah-compliant," Omar Rahman, a 28-year old recent college graduate in Toronto, told Reuters on Monday, December 5.
"There are no guarantees that it won't be sold to a company that is not Shari`ah-compliant, and that's a scary thought for us.
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.
Since Islam forbids the use of interest, Shari`ah-compliant mortgages rely on a "diminishing musharaka" contract to help Muslims finance homebuying.
A lender and a homebuyer 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 instalments.
When the value of the house is eventually paid off, full title is transferred to the homeowner.
But 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.
Rahman said 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.
We have actually stopped making any payments until everything gets resolved."
Some analysts opine that the bankruptcy may hurt the growth of Shari`ah-compliant finance in North America.
"The failure of an Islamic financial institution should not immediately be construed as a failure of Shari`ah-based financing," said Sheikh Muddassir Siddiqui, a Shari`ah 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.
UM Financial Inc was one of the most established Shari`ah-compliant mortgage providers in Canada, home to nearly 1.3 million Muslims.
"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 Shari`ah-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."
Thousands of Egyptians were hurt in the 1980s by money management companies that touted Islamic investments at returns above prevailing interest rates and did not deliver on their promises.
Egyptians were left with a distrust of the industry, which is one reason that the country has lagged Gulf Arab states in promoting Islamic finance.
The Islamic finance is one of the fastest growing financial sectors in the world.
The system is being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.But in Canada and the United States, Islamic finance has largely been confined to mortgages because of a lack of regulatory standards in place to accommodate full-scale Islamic banking and issuance of sukuk, or Islamic bonds.
Reproduced with permission from OnIslam.net