Our Halal Mortgage – No Waitlist!

Halal mortgages are structured in one of three ways. We discuss below each of the approaches and note why EQRAZ will offer only a Murabaha-based product.

Murabaha-based products work on the principles of purchase and resale between the home financier and the customer, similar to EQRAZ’s home-financing product. However, the traditional Murabaha product where the financier purchases the house and resells to the customer is very restrictive, as it applies the entire financing term’s profit upfront, and the customer is stuck with the full principal and Murabaha profit. For example, for a CAD 800,000 financing, the financier purchases the home for CAD 800,000 then sells it to the customer at, say, CAD 1.3 million. Now, if the customer sells the home and wishes to close the mortgage even three months later, they MUST pay the financier the full CAD 1.3 million! This makes a traditional Murabaha mortgage very restrictive and prohibitive for the customer. There are also many tax issues in this product, which lenders try to overcome by having title under the name of corporations. EQRAZ has resolved these issues through its monthly Murabaha product while remaining 100% Shariah- and AAOIFI-Compliant.

In Ijara-based products, the financier purchases the property and rents it out to the customer against equal monthly (or otherwise agreed) payments, then transfers ownership to the customer at the end against a nominal residual value. This is not a very common product; the below-mentioned Diminishing Musharaka is a much more commonly used and popular, very similarly structured, product across the world.

In Musharaka-based products, the financier and the customer jointly purchase the property. Then, each month (or other agreed payment period) the customer pays to the financier two types of payments: (a) property purchase payments wherein the customer buys a slice of the property from the financier, and (b) rental payment through which the customer compensates the financier for using the latter’s portion of the property. In almost all cases, the regular payments follow the exact same amortization pattern as that of a conventional mortgage.

In Canada, Musharaka mortgages are very difficult to offer without breaking both Canadian as well as Shariah laws. Most firms offering such products force customers to sign a cover agreement, followed by an interest-bearing second contract. This is obviously not Shariah-compliant. Some firms try to avoid tax hurdles by having the property kept under the ownership of a Corporation, and then split the shares of the Corporation between financier and customer. This avoids capital gains and land-transfer tax in a very risky way, as these taxes are imposed on fair market value and are based on beneficial ownership, which the financiers try to hide through the corporation tactic. A further problem is that the financiers force the customers to become their maintenance agents for the property “for free”, and avoid HST payments to the government, which adds further tax-related risks. Unfortunately, most customers remain unaware of the tax avoidance implicit in these products, and unaware of the significant risks they face later on due to the tax non-compliance and non-disclosures. It is for this reason that EQRAZ does NOT offer Musharaka-based mortgages in Canada.

*To ensure Shariah-compliance beyond doubt, all reputable Islamic Financial Institutions (“IFIs”) across the world follow the globally recognized Accounting, Auditing and Governance Standards issued by AAOIFI. Compliance with Shariah and AAOIFI is monitored by each IFI’s (mandatory) Shariah Supervisory Board (“SSB”); the seniority and experience of the SSB scholars is a strong indication of the integrity and comprehensiveness of the IFIs products and processes.

Canada – unlike other jurisdictions such as the UK, US, and EU – has several unique characteristics which pose major challenges towards offering halal home financing at scale in Canada:

In Canada, only Murabaha-based products can be offered without compromising Shariah or Canadian Law
*Diminishing Musharaka and Ijara products are incompatible in Canada due to the following reasons:

• They attract double capital gains and land transfer taxation
• The financier MUST own the property, hence the client does NOT benefit from property price increases
• Although the financier MUST take on the property downside risk in order to be Shariah-compliant, almost all Diminishing Musharakah-based financiers force the customer to take on the property price downside risk to protect themselves DESPITE being official co-owners in the property.
• The financier must, as a co-owner of the property, take on property maintenance responsibilities for their share of the property ownership. In other countries, financiers get around this by forcing clients to become their “maintenance agent” without compensation. This is NOT permissible in Canada, which requires any such transaction to be assessed at “fair market value” and for HST/GST to be paid on such transactions accordingly. This increases not only the administrative cost but also significantly increases the complexity and risk in the product
• There is no institutional funding available in Canada for these products, as the investing bank or credit union will need to take all the property pricing risk (to remain Shariah-compliant and to comply with Canadian law as well), maintenance risk and other liability risk. As a result, no institutional bank or other investor in Canada is ready and willing to take on such risks for what is, to them, a small incremental increase to their much larger conventional financing portfolios

A halal mortgage financier can only offer halal financing SAFELY if they have scalable, compliant operations. This requires partnership with recognized, well-established and fully regulated Canadian third-party providers to do mortgage origination, administration and funds-management. Without this, there is a major risk that the halal financier would be non-compliant with Canadian rules and non-compliance, bankruptcy or other problems could result in clients losing their homes. This happened a decade ago when a major and very popular halal financing company collapsed due to internal management reasons.

EQRAZ’s halal home financing offers the following benefits:

• A Murabaha-based product that does NOT compromise either Shariah law or Canadian law
• Both Shariah-compliant and AAOIFI-compliant
• Shariah Certificate not only for product but also for all processes, operations and third-party agreements
• A Shariah Supervisory Board comprising four globally-renown scholars with Mufti Irshad Ahmad Aijaz – Chairman, Shariah Advisory Committee, State Bank of Pakistan as EQRAZ’s SSB Board chair
• A five-year renewable fixed or variable profit-rate mortgage (in accordance with Canadian industry norms)
• Can be fully or partially prepaid, or ported with Canadian industry-standard fees only
• No double capital gains or land-transfer taxation
• 100% tax compliance for EQRAZ, clients and investors. We have a tax opinion confirming this from a reputable Canadian tax law firm
• Offers second and third mortgages, subject to credit approval
• NO WAITLISTS – when we launch, EQRAZ is expected to be fully funded
• Full transparency; no “undeclared side-agreements”

Equally importantly, EQRAZ is the FIRST AND ONLY halal home financing company that has, over three years, developed partnerships with Canada’s best-in-class third party mortgage companies, including origination and mortgage closing, reporting and compliance, servicing, and client management – all agreements thoroughly vetted and approved to be Shariah and AAOIFI-compliant. This ensures that our clients not only receive the best industry-standard services with EQRAZ, but their mortgages are ALWAYS SAFE independent of EQRAZ’s status as corporation.