STANDING COMMITTEE ON FINANCE
EVIDENCE
[Recorded by Electronic Apparatus]
Monday, October 16, 2000
The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora,
Lib.)): I'd like to call the meeting to order.
This is meeting 88 of the Standing Committee on Finance, and the
order of the day is Bill C-38, an act to establish the Financial Consumer Agency
of Canada and to amend certain acts in relation to financial institutions.
It is a pleasure to have with us individuals from the following
organizations: Islamic Financial Institutions, Canada; We will begin with the
chairman of the Islamic Financial Institutions, Canada, Mr. Zafar. Welcome.
Mr. Said Zafar (Chairman, Islamic Financial Institutions of
Canada Committee): Thank you very much.
First of all, it is a great pleasure to see you again, Maurizio.
As you are no doubt aware, the comptroller of the currency of the
United States has recently issued an interpretative letter declaring that
murahaba, which is a markup basis accounting, is permissible banking
activity within federal banking law. Accordingly, national banks may engage in
this type of financing to meet the financing needs of Muslims.
In view of the above and the recent ruling of the Minnesota County
Board of Commissioners approving interest-free real estate contracts, I would
appreciate that favourable consideration be given to our most reasonable
request.
We Muslims number over 500,000, the third-largest religious
community in Canada, and our standard of living is above average. I do not think
I need to familiarize you with these demographic details. You are quite aware of
the growth of the Muslim population in Canada, and we are looking forward to
progressive banking legislation.
At this time I should also support your Bill C-38 in regard to
holding companies. The legislation would introduce for the first time provisions
to allow for the creation of regulated, non-operating holding companies that
offer financial institutions the potential for greater operational efficiency
and lighter regulations.
That is all very well. Why don't we have a subclause in there that
should they decide to have an Islamic financial institution as a holding
company, they should be allowed to do so? I fail to understand why this has been
missed. It is completely ignored.
The reason I am so disappointed is because Mr. Harold MacKay
stated in his findings, “I do not find any difference between our system and
your Islamic banking system.” I said if you have any religious worry about it, I
am willing to remove the word “Islam” from it.
As you all know, the Canadian economy is based on free enterprise.
Major economic decisions are shaped by the economic forces of demand and supply,
profits, markets, and competition. Given the anticipated demand for Islamic
institutions offering Islamic financial products, there is a need for such an
institution in the Canadian financial market.
The Islamic bank is not just a bank, but also an investment
company or investment fund. With the current trend towards providing one-stop
shopping for financial services, there is an even greater need to integrate
Islamic financial product offerings in the market for financial services in
Canada. Islamic financial products offer such a niche market.
Recent years have seen a significant shift in the investment
choices and patterns of Canadian investors and a definite increase in equity
participation. Given the equity-based nature of Islamic financing, it will be in
a major way a significant source of working capital for small and medium-sized
business.
Furthermore, the stable investment climate in Canada—and I would
like you to think about it—has appealed for international investors, especially
from the oil-rich Middle East countries. The presence of Islamic financial
institutions in Canada would act as a stimulus and offer the potential for
attracting foreign capital into Canada.
We again submit to you—as we submitted before—that Islamic
financial institutions be allowed to establish in Canada as regulated financial
institutions and offer financial products. If this is somehow not possible,
could you possibly consider permitting conventional Canadian banks and financial
institutions to cater to the niche market and offer Islamic financial products
in Canada at their retail branches through Islamic windows?
What I am suggesting is that you give the banks, some banks... We
are in the process of discussions with two banks, and they tell us that the
regulatory framework at the moment would not allow us. So I come here to appeal
to you to allow the banks, with your Order in Council or whatever methodology
you want to use, to provide services through an Islamic banking window. This is
all we have come here to ask.
Mr. Saleem Ansari, who is the president of Ansarco, a leasing
company, does 100% of his business on an interest-free basis on a leasing
arrangement, and he is prosperous.
We have Islamic cooperative housing that we started 10 or 12 years
ago with zero money. I had to put some of my savings into it to start. Now the
total assets are over $30 million. That is only in Ontario. We are opening up
cooperative plants in Alberta and British Columbia. In Quebec we have housing on
a non-interest base.
So, ladies and gentlemen, I beg of you, I plead to you to have a
regulation that allows our banks, should they desire to have an opportunity in
this niche market, to open an Islamic banking window. Bill C-38, commendable as
it is, has missed the opportunity of mentioning anything about this.
Thank you very much.
The Chair: Thank you very much, Mr. Zafar.
Mr. Richard Harris: . I want to ask Mr. Zafar a question,
if I could. I thank you for your presentation, and I really have to apologize,
because probably everyone else in the room here knows what Islamic financial
products are all about except me. Can you give me some significant differences,
the difference between your Islamic financial products and conventional
financial products? Again, I apologize, but I'm looking forward to being
informed.
Mr. Said Zafar: We are only one billion people and a lot of
people still don't understand Islam. There are 1.1 billion Muslims around the
world and 500,000 in Canada, and still we are asked the same question time and
time again. It is a pleasure for me to answer. I'm glad you asked this question.
As Mr. Harold MacKay said, there is no difference between Islamic
finance and our system. The only difference is that in Islamic finance basic
fixed interest is not allowed. Any interest-based dealings are not allowed. This
is based on the Old Testament. It is based on Jesus Christ going to the temple.
Interest is forbidden.
For that, the principle has evolved to four different
methodologies: one is murahaba, where you buy the thing and put on costs
plus. Mudaraba is trust financing: you appoint me as your trustee and you
give me authority to trade or do whatever as your adviser. Then
ijara—leasing—is exactly the same as the one without interest. That is
Islamic banking.
Mr. Richard Harris: Okay.
Mr. Said Zafar: The problem we have here, and it is
written—I have sent you all the details about murahaba, mudaraba,
and musharaka. The fourth principle is that profit-sharing... what was
known in the olden days as merchant banking. That is what musharaka is.
These four concepts are loosely called Islamic financial institutions.
If you find any difference between our system and Islamic finance,
except the interest basis, I don't see any. But the word “Islam” scares the
shoes off people. I'm telling you, I have lived in Canada for forty years, and
for forty years Islam has created, because of the happenings in the Middle East
political situation... They bring it back to it. They never say that Islamic
countries are peaceful, or things like that. But that's the way it is.
On behalf of the Committee on Islamic Financial Institutions, as
the chair, I am willing to take, if any one of you have the word “Islam” out in
non-interest-based financing... I only want you to allow us, please, to have
some banks at regulation that can, should they want—naturally, banks won't go on
a charity basis—to have Islamic banking windows. Islamic banking windows are in
England, Switzerland, Holland—I'm talking about western countries—and in Muslim
countries, Egypt, United Arab Emirates... You must be wondering why they allow
Islamic banking windows and not the full Islamic bank. Look, our system is so
good we'll have the interest-free system and the non-interest system compete in
a free competition. That's what it is.
Mr. Richard Harris: Thank you.
Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr.
Chairman, and thank you, witnesses.
I wanted to pick up on one point, Mr. Zafar. Mr. Harris said the
rest of us must know all about this. I have a confession to make: this is the
first I've been acquainted with the issue. I'm quite curious.
In this bill the intent is to lower the hurdles in terms of
establishing a bank and also for community-based banking. What you've described
is somewhat akin to merchant banking, as you've pointed out. Is there something
in the legislation, the Bank Act now, or what we propose in Bill C-38 that would
preclude an Islamic bank?
Mr. Said Zafar: No. The question is there's a section on
holding companies. I'll read it to you, the summary of key legislative measures,
statement of government policy, holding companies:
The legislation would make amendments to introduce, for the first time,
provisions to allow for the creation of regulated, non-operating holding
companies that offer financial institutions the potential for greater
operational efficiency and lighter regulation.
And it goes on. Have you mentioned the word “Islamic”, such as
Islamic banking, where they can indulge in it?
Mr. Roy Cullen: There is nothing... If there were a holding
company structure—a wholly owned subsidiary, for example, could be what we might
call a merchant bank, which you would call an Islamic bank—why would you need to
mention the word “Islamic”? I guess what I'm saying is where is the section of
the act that would preclude you setting up a bank along the lines you described?
Mr. Said Zafar: My opening statement was that Bill C-38
omitted the words “Islamic bank”.
Mr. Roy Cullen: But I suppose by the same token omitted a
number of references to a whole range of different types of banks.
Mr. Said Zafar: Why not Islamic banks?
Mr. Roy Cullen: I guess my question is—
Mr. Said Zafar: Sir, I'm asking a question. I'm supposed to
be... Why not Islamic banks?
I presented twice, once with Harold MacKay, when I had a two-hour
discussion with another person with me, and with this chairman in Brampton, with
another lawyer with me, and we pleaded. We have come all the way from Toronto,
this time bowl in hand. Please consider this. What is wrong with putting
“Islam”?
Mr. Saleem Ansari (Member, Islamic Financial Institutions of
Canada Committee): Mr. Chairman, with your permission, it is not the name as
such that's important. It's the basis on which the banking depends.
In Canada, the States, and western countries, the basis of
financial transactions is interest. Without interest, you cannot enter into
financial transactions, and that's where we have a problem. What we are looking
at is to allow a financial institution to be based on profit sharing, on equity
participation, rather than on interest.
If we look at the Bank Act, the Credit Union Act, or any other act
that allows the establishment of any financial institution, whether on a
national or provincial level, they require interest as the basis. That's where
we have difficulty, because interest is not allowed in our religion.
Mr. Roy Cullen: I understand that, but is there something
in the legislation that says you must charge interest? Where does it preclude
the banking you're referring to?
Mr. Saleem Ansari: How else can you open your savings
account?
Mr. Roy Cullen: So the context you're talking about, then,
is deposit-taking?
Mr. Saleem Ansari: Exactly.
Mr. Roy Cullen: Your banks don't take deposits.
Mr. Saleem Ansari: No, we do take deposits, but without any
interest. We charge service charges.
Mr. Roy Cullen: Okay. Is there something in the Bank Act or
in Bill C-38 that says you must charge interest?
Mr. Saleem Ansari: Well—
Mr. Roy Cullen: I'm going to certainly take it up with the
department. Maybe the chairman is more apprised of this than I am, but I'm
surprised.
The Chair: I was going to ask what the service charges
were.
Mr. Said Zafar: I beg your pardon?
The Chair: What would you charge an individual to open an
account?
Mr. Said Zafar: What do we charge? I'm going back to what
the current practice is in Islamic banks. We have different rates—2%, 0.5%, 3%,
5%—for service charges on deposits, non-refundable deposits.
The Chair: Okay.
Mr. Said Zafar: It's as low as 0.5%. In some places, in
Malaysia for example, there is 0% interest on deposits.
Mr. Roy Cullen: I'll go through your brief in detail, but
if there are specific provisions of the Bank Act or Bill C-38 that preclude the
establishment of a bank along the lines you've described, if you could highlight
those for me, I'll certainly take it up with the department.
Mr. Said Zafar: Sure.
Mr. Roy Cullen: Thank you.
Ms. Pauline Picard (Drummond, BQ): Mr. Zafar, I'm a member
of this committee and this is the first time I've heard of Islamic financial
institutions. I didn't quite grasp how they operate. You stated that your
religious code prohibits interest-based dealings, but that you debit funds upon
opening an account to cover administrative feeds. When your clients entrust
their savings to your institution, no doubt they receive rebates or dividends.
They want to see their assets grow.
When you award loans, you are undoubtedly required to collect a
fee of some kind to cover your administrative costs, including personnel costs.
If that isn't charging interest, what is it?
Far be it for me to offend you, but aren't you simply playing a
word game by talking about fees, rather than interest? I'm trying to understand
how your institutions operate. I once worked in a financial institution, a
Quebec co-op, which charged administrative fees. I can understand that. We gave
rebates to our members. Depositors want to see their money grow. What do you do
to attract customers? How does your institution operate?
Mr. Said Zafar: I'm very glad you asked that question. You
asked about five or six questions, so let me answer them one by one, beginning
with the one on how the deposit insurance works, and on deposit interest.
The Islamic bank is based on the following type of deposit:
murahaba. Suppose I have $100 in my pocket that I want to put on a fixed
deposit. I come to you as a banker and say I want to make a deposit. When you
put the deposit in, the banker asks you—in this case, you are asking me—what
profit you want. Is it 100%, 200%, or what? Depending on what your request is,
he makes an investment of that money in that deposit. On that profit and sharing
basis, $100 is put on opening a hamburger stand on a profit-sharing basis of
50-50, 40-60, 30-70, or whatever it is. From those charges, that 50-50, it is
stipulated that administrative charges, which you referred to in your second
question, are handled. Administrative charges are shared by the first 50% and
the other 50%. The bank makes a profit on the administrative side, and then it
is done. So that is the first question.
Your second question is on dividends. Dividends in the Islamic
banking system are some of the most lucrative things. I'll give you a stat.
There's an association of Islamic banks. There are 57 Islamic banks that are
members of that association. They did a survey of all the annual reports of the
Islamic banks, and the average short-term investment return is 22.5%. How do
they make it? It's simple. They make vigilant investment choices and they make
dividends for the shareholders.
In the Islamic Cooperative Housing Society—which is based on an
Islamic basis in Mississauga, Ontario, now that we have changed the head
office—I don't own a house on an interest basis, I paid cash. What I now do for
my savings is invest in the Islamic Cooperative Housing Society. For the last
ten years, my investment dividend has been between 9.5% to 11.5%, which is far
above...
So for the question you're asking, Islamic banking is very simple
to understand. It is a change of thinking. What I'm trying to do is get rid of
the whole concept of fixed interest. That is the major challenge for us:
dividends.
What was your third question?
Ms. Pauline Picard: Thank you. Now I have a clear picture
of how your institutions work.
I have a question for you, further to the question put by my
colleague Mr. Cullen, who has been elevated to chairman.
Some members: Oh! Oh!
The Acting Chair (Mr. Roy Cullen): That's right, I have.
Ms. Pauline Picard: Which provisions in the bill prohibit
you from applying for a charter which would allow you to have your own bank?
The previous witness explained about the interest. Have you
proposed an alternative of some kind?
Mr. Said Zafar: Yes. As a matter of interest, this lady has
reminded me that in 1982 a group of Islamic bankers from Cairo, the Islamic
Development Bank, came over. I made an appointment to see Mr. Mackenzie, who was
the superintendent of financial services. We met and he said he couldn't allow
us because we don't take any interest. The chairman of the board, his president
and vice-president came all the way at my initiative. Like the question you
asked, Mr. Mackenzie said they would not be allowed to function in this country
because Canada has legislation saying “thou shalt take interest”, although he
didn't use the words “thou shalt take interest”. That was the end of our first
opening. Privately, Mr. Mackenzie told me we had to familiarize a quaint
Canadian legislature and lobby to open an Islamic bank because interest is part
of our system.
The Acting Chair (Mr. Roy Cullen): Okay.
Yes, Mr. Ansari.
Mr. Saleem Ansari: I guess the summation you made is quite
valid. What we're going to do now is go back, look at the Bank Act, and point
out the sections that prohibit us right now from starting a bank because we
don't accept interest. That's the only difference.
But to respond to your question, yes, our investors, our
depositors, like to increase their worth. They like to make money on their
money, but the way we are allowed to make money is not by charging fixed
interest. GICs or fixed-term deposits are not allowed—
Mr. Said Zafar: RRSPs.
Mr. Saleem Ansari: —whereas the profit participation is
100% allowed, like leasing is allowed. Those types of transactions are allowed
under the Islamic banking system.
The Acting Chair (Mr. Roy Cullen): Thank you.
Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you very
much.
I want to just follow up on this little bit. Can I, as a
non-Muslim, come to a Muslim—
Mr. Said Zafar: Of course.
Mr. Ken Epp: I have $50,000 in my pocket—and this is
strictly hypothetical. I have $50,000 and I want to deposit it with you. I'm
going to come back in ten years to get it. How much am I going to get?
Mr. Said Zafar: Before we accept your deposit, we will ask
you if you want a low-risk investment, a high-risk investment, or no deposit.
You answer.
In Islam, as in Christianity and Judaism, man is responsible for
his economic welfare. Let me repeat that: According to the saying of our
prophet, man is responsible for his economic welfare. You are responsible for
$50,000 becoming $70,000 or for $50,000 becoming $5,000 on the gambling
instinct.
Mr. Ken Epp: Okay, now I want to ask you this question.
Here I am, coming to you with $50,000. I say I'm coming back in ten years and I
want $120,000. Would you promise me that I'll get it?
Mr. Said Zafar: I'd say no, we won't be able to do it.
We'll give you $70,000.
Mr. Ken Epp: Oh, so we'll barter.
Mr. Said Zafar: Of course. Life is a bargain.
Mr. Ken Epp: Okay, now here's the second me. I come to your
window. I want to buy a house. I need a loan of $150,000.
Mr. Said Zafar: Beautiful.
Mr. Ken Epp: Will you give it to me?
Mr. Said Zafar: Of course.
Mr. Ken Epp: And what do I have to—
Mr. Said Zafar: You'll sign the Islamic Cooperative Housing
Society's application form—
Mr. Ken Epp: Do I get it interest-free? Because I don't
believe in interest either.
Mr. Said Zafar: No. I'll tell you, you won't get anything
free in life. Being a member of Parliament wasn't free for you, I don't think.
You haven't gotten anything free in your life.
Mr. Ken Epp: No.
Mr. Said Zafar: Thank God.
Now, the question is about a house. You come over and fill out an
Islamic Cooperative Housing Society form. We'll issue you a share of $120,000.
Suppose your house is $250,000—and I'm just giving figures. We'll loan you the
balance of $250,000 to $120,000, meaning $130,000. We'll give that to you on the
condition that we will put the rent on your house. That rent will buy the share
for your cooperative until you pay your $250,000 down to $130,000.
Mr. Ken Epp: So in other words, it will cost me
more than $120,000 to get a $120,000 loan.
Mr. Said Zafar: Yes, of course it will cost you more. And
more is what? More is 15% you get from the local bank?
Mr. Ken Epp: Well, I actually... I won't get into it.
Mr. Said Zafar: Why don't you say it? We are among friends.
Mr. Ken Epp: Yes.
The Chair: Have you sold any accounts?
Mr. Said Zafar: You are the first one, because you have the
largest Muslim population in your riding.
The Chair: Oh, is that right?
Mr. Said Zafar: Yes.
The Chair: Okay.
Mr. Ken Epp: I want to ask one more question.
Mr. Said Zafar: Please, go ahead.
Mr. Ken Epp: It's a follow-up on what Mr. Cullen got, and
unfortunately he gave up the question.
Mr. Said Zafar: No.
Mr. Ken Epp: But I want to come back to that question.
Mr. Said Zafar: Please.
Mr. Ken Epp: Is there anything now in the Bank Act, or
anything in Bill C-38, or anything anywhere that prevents you from opening up a
bank that says “Muslim bank; we deal according to Muslim rules here”?
Mr. Said Zafar: No. We deal under Christian and Jewish
rules, because Judaism and Christianity don't allow interest either.
Mr. Ken Epp: No. I'm asking you the question—
Mr. Said Zafar: Yes.
Mr. Ken Epp: —can you tomorrow, or if Bill C-38 were
passed, could you go out and start a Muslim bank, or what is there anywhere in
legislation that prevents you from doing that?
Mr. Said Zafar: Sir—
Mr. Saleem Ansari: Yes.
Mr. Said Zafar: —my colleague has responded to it. We will
let Mr. Cullen know.
Mr. Roy Cullen: Through the chair.
Mr. Said Zafar: But you are going to write to me. You said
you were going to let me know.
Mr. Roy Cullen: I think I was basically saying the same
thing as Mr. Epp, that if you can indicate to us what provisions preclude the
establishment of a bank, and if you could send that through the chair, then
we'll all be apprised of it.
Mr. Said Zafar: Okay, fine.
Mr. Chair, you will be receiving another letter from me. You are
quite used to receiving letters from me.
The Chair: I like receiving letters.
Mr. David Thibaudeau: I would make a comment regarding the
Islamic issue here, about whether you can start a bank or whatever.
In listening to the gentlemen describe one of their deposit
products, I would think there would be some issue there as to what kind of
product it would be, whether it would be a bank product or a securities product,
and there would be other issues related to securities commissions in the
different provinces. So there would be a lot of work to do to get it to a point
where all your products would be sanctioned by whatever authority is there to
sanction them. It's just a comment.
Mr. Said Zafar: Mr. Chairman, that was a simplified
statement. I was fully aware there were other ramifications, but it was
simplified.
Mr. David Thibaudeau: Right, I appreciate that.
The Chair: On behalf of the committee, I would like to
thank you very much. As you know, we try to improve bills here, and you've given
us certainly some food for thought. Thank you very much.
The meeting is adjourned.
Islamic Banking An
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