In Canada, paying interest is a fact of modern life. The vast majority of adult Canadians hold at least one credit card, putting them on the hook for eye-watering charges if they miss a payment. Home buyers have mortgages to contend with, any kind of loan comes with a rate, and benchmark changes by the Bank of Canada are front page news.
For some Muslim Canadians, this poses a problem. In Islam, interest is known as riba, and is strictly forbidden – both to pay, and to charge. For one thing, it’s considered exploitative, as it transfers risk from lender to borrower: if I ask for a loan for a business, but my idea doesn’t work out, I eat all the risk, while the bank keeps getting its interest (assuming I keep paying, of course). More theologically, Islam sees all wealth as being property of God, with humans as its stewards. Using money to make money, or letting the wealthy increase their share without effort or risk, is seen as a sacrilegious abuse of trust.
Curiously, however, these restrictions don’t amount to a total ban on banking; in fact, Islamic finance is not only alive but thriving. A series of innovative tools let observant Muslims engage in the markets while avoiding financially haram behaviours, and it’s become a big business: last year, the global Islamic banking sector was valued at nearly US$6 trillion, a record high, and is expected to reach US$9.7 trillion by 2029.
Canada, too, is seeing newfound interest in interest-free banking. Several sharia-compliant financiers are already operating here, and an ambitious newcomer, Manzil, has lent millions to customers across the country. For Muslim Canadians, that means more options for their finances that don’t conflict with their faith. And for the rest, it offers a fascinating case study into a parallel world of finance.
Islamic banking came into vogue in the latter half of the 20th century, as part of a broader turn towards Islamic principles in several Muslim-majority countries. To allow banks to still make money without charging interest, Islamic financiers take a profit-sharing approach, where the lender accepts a share of the risk (and reward) of their borrower’s venture. If it goes south, both lose together, but both benefit from success.
This arrangement means investments are always grounded in fundamentals, since banks can only put their money behind real ventures. Heady, abstract financial creations (like derivatives) are out of the question. This, too, is in line with Islamic principles: along with interest, speculation is also forbidden, as it is the act of making money from money. In Islam, cash is only meant as a means of exchange, not a good itself, and these provisions ensure it’s kept that way.
Another consequence is a hard-nosed approach to risk: since each financier stands to lose from their borrower’s actions, they’re incentivized to make only safe bets. In theory, this creates a banking system less vulnerable to shocks from, say, crashes in the subprime mortgage market.
The S&P 500 Shariah Index has beat the S&P 500 by five percentage points over the past year.
In addition to how Muslims are allowed to invest, Islamic law also restricts what they can invest in. Investments in forbidden – or even discouraged – practices and products aren’t allowed, which means observant investors have to keep their money out of ventures selling alcohol or providing gambling services. Nor can they lend their own money to banks that provide interest. These restrictions pose quite a challenge when it comes to the modern stock market, where the average ETF tracking the S&P 500 is more than likely to include a few booze-selling companies in the mix.
To get around these challenges, Islamic banking institutions developed unique investing vehicles like the S&P 500 Shariah Index, which tracks all of the Shariah-compliant companies on the regular S&P. Any company that derives more than 5% of its profits from pornography, alcohol, non-Islamic financial services, gambling, pork-related activities, tobacco, non-medical cannabis, and gold and silver trading is excluded. The result is an index that's beat the S&P 500 by five percentage points over the past year – but has lagged it by nearly 62 points over the past five years.
More unique is the ‘sukuk’ instrument: certificates of ownership that function similarly to bonds, but without interest and with provisions that avoid any forbidden activities. With a sukuk, instead of lending a country or government money and charging interest (not allowed!) you instead get partial ownership over an asset purchased with your funds. The issuer promises to buy back your certificate at a future date, for whatever it may be worth at that time. So long as the underlying asset appreciates in value, you make a profit. Since the first sukuks were offered in Malaysia in 2001, the global market for them has grown to more than US$1 trillion.
The musharaka method sees the financier and buyer buy the property together, with the buyer providing about 20% of the cash, and the financier the rest. The two then become co-owners of the property.
While the shariah index and sukuks are both available to Muslim investors in Canada, the same isn’t always true for the most impactful financial instrument in most Canadians’ lives: mortgages. Like most other Western financial instruments, interest-bearing mortgages are a no-go in Islamic law, which creates a challenge for some Muslim Canadians looking to settle down.
To address this, several private lenders have popped up offering halal mortgages for Canadians. These come in a few different flavours. The ‘murabaha’ method works on a cost-plus-financing basis: once the buyer and financier find a suitable property, the financier purchases it, then transfers the title to the buyer. As it does so, the financier charges the buyer for the price of the property plus an agreed-upon profit margin, which the buyer repays in monthly installments over a fixed term.
Another method, ‘musharaka,’ sees the financier and buyer buy the property together, with the buyer providing about 20% of the cash, and the financier the rest. The two then become proportional co-owners of the property. Each month, the buyer pays rent on the financier’s share, plus an amount that goes towards buying out the financier’s share. Eventually, the buyer takes full ownership of the property.
Both cases are conceptually similar to traditional mortgages, but they avoid charging or paying interest while still giving the financier a path to profit. Other religious pitfalls are avoided as well: in the murabaha (cost-plus-financing) method, by agreeing on the profit margin up front, both parties avoid the sin of speculation, since the costs, profits, and risks are all known from the get-go. Likewise, the rents in the musharaka (rent-to-own) model are determined up front, providing certainty for both parties.
Homebuyers can find these arrangements with several Islamic financing companies across Canada. Oakville, Ont.-based Eqraz offers murabaha (cost-plus-financing) mortgages in all provinces west of Quebec, while the Alberta-based Canadian Halal Financial Corporation offers both types country wide. Lately, the breakout star has been the Toronto-based Manzil, an Islamic bank which has come to manage more than $250 million in assets since its launch in 2020, and now claims to have over 10,000 clients in Canada.
The average halal mortgage in Canada costs about 4% more than a traditional one.
For the sector to grow much further, however, several things will have to change. Canada’s banking laws assume the traditional, interest-charging way of doing things, which creates friction when it comes to Islamic banking methods. In an op-ed co-authored by Ontario Real Estate Association CEO Tim Hudak Manzil founder Mohamad Sawwaf complained that halal mortgage holders can’t access the same tax credits as traditional homebuyers, and may even be double-taxed. Plus, a lack of legal definitions specific to interest-free loans means mortgage insurance providers don’t insure them.
That’s a particularly thorny issue for Islamic mortgages, which, outside of their religious bonafides, have little going for them on the financial front. The average halal mortgage in Canada costs about 4% more than a traditional one. The lack of insurance raises the risk of lending, and therefore the cost of borrowing. And the legal difficulties have resulted in a relative dearth of Islamic financiers compared to the evident demand for their services, limiting competition and therefore driving up prices.
Efforts to fix those barriers have been stop and go. The Trudeau government caused a rush of excitement in 2024 when budget documents mentioned “new measures to expand access” to “halal mortgages.” And yet, the subsequent budget featured no such thing, and the Carney government appears to have dropped the topic. Alberta, for its part, made changes to its financing laws to permit interest-free mortgages in 2024, and has introduced its own government-supported murabaha (cost-plus-financing) mortgages.
There’s no reason for the government to drag its feet on this. The CMHC has said itself that implementing the requisite changes would take little effort, and Canadians deserve financial tools that fit their beliefs. It’s possible that, with a functioning market and regulatory framework, Islamic practices could provide unexpected benefits to Canadians beyond just those they set out to serve. The few Islamic banks that do exist market to non-Muslim Canadians as well, and their commitment to tangible, non-speculative investments could appeal to those fearful of Bay Street’s more creative machinations. Profit-sharing mortgages, too, could compare favourably to traditional ones if competition drives prices down, rather than up. There are benefits to trading with a principled partner – especially if it means a better deal for you.
