After a lengthy process to get up and running, founder sees significant opportunities in the space
They’re an effective way of helping Muslims purchase a home while adhering to the guidelines of their faith – but the growth of halal mortgages has been somewhat mild in Canada until now.
The offerings present a funding arrangement that remains compliant with Shariah (Islamic law), which prohibits the payment of interest, including on mortgages.
When Syed Zuhair Naqvi, founder and CEO of EQRAZ Inc., set out to expand the halal mortgage market in Canada in 2018, he was faced with an array of obstacles – many of which had been long deemed insurmountable.
“I was told that people have been trying to do this for decades, and that nobody’s been able to really do it properly and scale because of the various challenges involved in bringing halal finance to Canada,” he told Canadian Mortgage Professional.
“This means most existing companies are either not confirmed to be tax-compliant, Shariah-compliant, or both.”
Among those challenges were putting the appropriate product structures, which are compliant with Canadian as well as Islamic law, in place. Meanwhile, building the correct governance infrastructure – including AML (anti-money laundering), KYC (know your customer) funds management and fraud-proofing compliance – was essential, with investors and customers often “very suspicious” about new ventures in the space.
Still, Naqvi – a seasoned entrepreneur bankrolled by successful businesses he had established elsewhere – remained undeterred. “There was a lot of soul-searching, and I thought, ‘OK, if I’m going to work really hard for the next 20 years, I’d rather do something where yes, I can make money – but it should be meaningful,’” he said. “So that’s where it started.”
Over a five-year period from 2018, Naqvi set about putting together the structures his company needed to successfully offer halal mortgages – and that arduous process is bearing fruit, he said, with the groundwork laid for rapid expansion in the coming years.
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A lengthy journey toward success
The journey was by no means a straightforward one, beginning with a detailed and comprehensive research period that saw consultation with various industry professionals and mentors.
“After one year of deciding whether to do this, it then took me another year to develop the product structure,” Naqvi said. “I had to develop a completely brand-new product structure from first principles, because the traditional Islamic products that are used across the world do not work in Canada due to tax and other regulatory reasons.”
While other countries including the US and UK have amended their tax laws to allow for Islamic finance and halal mortgages, Naqvi said Canada continues to lag behind those economies in terms of making halal finance more accessible – something that presented a significant hurdle from the outset.
Banks, meanwhile, proved hesitant to fund an upstart new company doing its own underwriting, application approval and administration.
Those challenges meant that EQRAZ was required to design a product and process infrastructure compliant with all existing Canadian law and industry requirements.
“The way we solved it is by partnering with existing industry leaders who have extensive credibility in the mortgage and financial markets,” Naqvi said. “That took me around a year and a half to two years out of this five-year journey to convince very large industry leaders to work with us. We ended up convincing and signing up with some of the largest players in the industry.”
EQRAZ inked a deal with one of the largest broker networks in the country and its largest brokerage, Naqvi said, to sell and broker its mortgages, with a major lender and mortgage administrator handling the administrative, fulfilment, and customer management from the moment a mortgage is issued until it’s settled or closed.
Leading service providers including Filogix and Velocity, meanwhile, are also on board, making EQRAZ the only halal company in Canada, according to Naqvi, on those platforms.
Securing the support of a major mortgage administrator was a significant moment for EQRAZ, with Naqvi having long worked towards that milestone and expended sizeable capital to achieve it.
“I started this in September 2021,” he said, noting that the mortgage administrator’s backing was secured in July 2021. “So for those three years, I was working alone, full-time, not knowing if this was going to happen. By that time, I had raised $2.5 million of equity and put a lot of money in myself. So I really put my skin into this.”
The backing of those industry players helped secure the essential support of a Schedule One bank that agreed to work with the company, liking the diversity and inclusion aspect of helping a marginalized community.
A lengthy due diligence process required the production of a business continuity plan to be approved by the bank and a requirement to develop AML and KYC processes that were executable and auditable.
Complying with Shariah law
The company also kept a sharp focus on its need to comply with Shariah law, with its Shariah board tasked with making sure its policies and procedures fell in line with doctrine.
“Every document had to be approved not just by the lawyers at the bank here, but EQRAZ’s Shariah Islamic board – because everything has to be Islamic,” Naqvi explained. “We can’t use a single wrong terminology in any documents.
“When you’re discharging mortgages, when you’re following up on late payments you lose your Shariah certification if you use the wrong wording or mess up the timing or order of transactions. So we had to develop over 200 servicing and policy documents, get them approved, and get them implemented on the systems.”
One big challenge traditionally faced by companies on the halal mortgage front has been the inability to sign banks’ standard interest-bearing agreements, since sources of funding must be halal.
By using a structure of financing utilizing the principal and agent theory, entitled a Wakala Agreement, lenders can offer mortgages that remain Shariah compliant and fall in line with Canadian financial regulations.
Under that agreement, the bank became a principal and EQRAZ a fund manager, with the deal structured so the bank gives EQRAZ funds to issue monthly Murabaha mortgages.
Those are contractual arrangements in which Islamic banks procure assets from external vendors before selling it back to the customer, with the option for immediate payment or deferred instalments.
Again, ensuring those offerings were in regulatory compliance proved no easy feat. “What that entailed was getting tax opinions form lawyers who basically said that from a Canadian regulatory and legal point of view, what EQRAZ is doing satisfies the requirements of the Interest Act and other applicable regulations,” Naqvi said.
“At the same time, we are totally Shariah-compliant, because of our very sound commonly-globall-used Wakala structure.”
Naqvi’s perseverance over the years is paying off. EQRAZ is now licensed in Ontario, Alberta, British Columbia, Manitoba, Nova Scotia and Quebec, and has successfully completed proof-of-concept and built a $220-million pipeline with, according to Naqvi, little to no marketing.
The company founder aims to eventually reach $1 billion in mortgages originated within the next two years, as well as seeking the support of CMHC (Canada Mortgage and Housing Corporation) and other insurers to obtain mortgage insurance – allowing the company to access funding at scale at a much lower cost.
“According to a survey which we conducted… 73% of Muslims in Canada want a halal mortgage,” he said. “This translates to 315,000 households and a $332 billion market today. Almost half of the market wants to buy a house within 24 months if a valid mortgage becomes available. This market is expected to expand to $800 billion within 10 years.
“I feel very bullish that we will be able to address this in a big way – Inshallah, God willing.”