Table of Contents Preface 3 1. Introduction to Islamic Banking 4 2. International Scenario 7 4.

Marketing Challenge 9 Need for Islamic Finance 9 Satisfying the need? 10 Suggested Solution 11 Challenges 11 5. Annexure 13 Population census 13 An Introduction to Islamic Finance 14 Islamic Bond (Sukuk) Market Update 17

Preface Canadian economy is striving to accelerate by utilizing untapped natural resources that are widely available all across Canada. In order to benefit from these resources, huge amount of capital and infrastructure is required to make them value added products. This marketing research paper focuses on identifying consumer (Canada as an economy) latent needs which are not spelled explicitly. International economies have benefited by utilizing the liquidity and wealth available with the rich oil producing nations. Canada is yet to explore this opportunity and have been isolated from cross continent capital market transactions. In order to attract the capital to support infrastructure development projects, Canadian natural resources provide a lucrative investment opportunity for the investors in wealthy oil producing nations. However, numbers of initiatives are required to invite international investments from Middle Eastern region to invest in Canadian development projects. One of those initiatives, i.e., Islamic Banking and how it can benefit the Canadian economy is explored in this paper. Information presented in this report is based upon Primary sources (personal experiences, interviews, observations and facts) and secondary sources (media reports, publications, and internet). 1. Introduction to Islamic Banking Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. [Wikipedia] [ADIB] Islamic Banking revolves around several well-established concepts - based on Islamic canons, these cover the following: First and foremost, Islamic banking must operate within the framework of the religion, based on Qura'n and Sunna (preachings of Holy Prophet). Hence only Halal activities are allowed. This holds ethical paramount and, consequently those activities forbidden to Muslims, i.e. gambling, liquor, hoarding and usury based lending are strictly avoided. The Bank does not, for example finance liquor manufacturing, transportation, storage or distribution companies. Scholars trained in Islamic law (Islamic Jurisprudence) screen the suitability of investments on an ongoing basis and provide guidance on products to the Bank's management. Interest, known as Reba in Islam is forbidden. Hence, all banking activities must avoid interest. Instead of interest, the Bank earns profit (mark-up) and fees on financing facilities it extends to customers. Also, depositors earn a share of the Bank's profit as opposed to interest.

Partnership and the sharing of Risks is another principle of Islamic finance and are based upon profit sharing partnership between the parties involved in a transaction. The return on savings and investment accounts are variable and dependent upon the Bank's performance and the profits. While these profits are not necessarily guaranteed and are subject to a degree of risk, these are managed professionally to ensure better returns than many other conventional alternatives. Current accounts do not earn income as they are taken as Qard (loan with no charges), from depositors to the bank and they can be drawn on demand by customers without notice. They do not bear any risk of loss since they are kept as safekeeping. In a layman s language, basic differences between Islamic and Conventional banking can be summarized as follows: Characteristics Islamic Banking System Conventional Banking System Business framework Based on Sharia laws. Secular banking laws. Balance between moral and material requirement The requirement to finance physical assets which banks usually take ownership of before resale reduces over extension of credit. Excessive use of credit and debt financing can lead to financial problems. Equity financing with risk to capital Enables several parties including the Islamic Bank to provide equity capital to project or venture. Losses are shared on the basis of equity participation while profits are shared on pre-agreed ratio. Management of the enterprise can be in one of several forms depending upon the financing structure. Not generally available through commercial banks, but through venture capital companies and investment banks which typically take equity stakes and management control of an enterprise for providing start-up finance. Prohibition of Gharar (uncertainty) Transactions deemed gharar are prohibited, which denotes various degree of deception pertaining to the price and quality of goods received by a party at the expense of the other. Derivatives trading are considered to have an uncertainty element, hence not permissible. Trading and dealing in derivatives of various forms is allowed. Profit and loss sharing All transactions are based on this principle. Returns are variable, dependent on bank performance and not guaranteed. But the risks are managed to ensure better returns than deposit accounts. Consumers can participate in the profit upside i.e., in a more equitable way than receiving a predetermined return. This principle is not applied in conventional banking. Returns to the depositors are irrespective of bank performance and profitability. The customer as depositor is like lender and does not share in the success of the enterprise beyond receiving a fixed rate of predetermined interest. Unlike the Islamic system the depositor cannot theoretically gain subject to improved bank performance. [Abu Dhabi Islamic Bank] One of the most important characteristics of Islamic financing is that it is an asset-backed financing. The conventional / capitalist concept of financing is that the banks and financial institutions deal in money and monetary papers only. 2. International Scenario As per one of the recent articles published on Reuters, it is estimated that Islamic finance has grew by over 20 percent annually during the recent past and its assets are estimated at around $1 trillion. Moody s Investors Service estimates that assets held by Islamic financial institutions may raise five-fold to more than $5 trillion as demand is on the rise for sharia compliant products. Standards and Poors (S&P) in one of their recent publications highlighted the fact that Islamic financing is gaining awareness in European countries. Following in the U.K. s footsteps, France is progressively introducing Islamic finance into its financial system. The sector remains in the embryonic stages within the French financial system, for the time being, but it is believed that the prospects are positive mainly

as a result of some political stakeholders support. Several other European countries, such as Italy and Malta, appear to be showing interest by organizing events to gain expertise in this field. The question arises as to why Islamic finance is progressing in non-muslim countries. Following factors can be attributed to the growth and acceptability of sharia compliant financial models: 1. During the early days of Islamic Banking, institutions primarily focused their marketing efforts on the muslim population. However, these institutions realized that non-muslim population has a need and interest for products which are based upon profit sharing principles. This triggered a great demand all across the world as Islamic banks pay substantially higher profit rates in comparison to their conventional counterparts. Their financial products are well structured and don t allow these institutions to get into speculative transactions, hence making them risk averse. 2. During the recent financial turmoil, it was evident that Islamic Financial institutions didn t suffer as much as the conventional counterparts. The precise reasons for avoiding these risks are yet to be determined. However, it is assumed that the mere nature of transactions, which are asset based, provide them a strong base to avoid speculative business thus avoiding unnecessary risk. 3. A closer look at the world map would reveal that Islamic Banking has major concentration is in Middle East region. The region, which has the biggest reserves of Oil and has ample liquidity due to stable and increasing oil prices over the years. In order for the international markets to do business with these rich economies, it is much easier if they talk in the same language, i.e., sharia compliant finance. If countries can provide investment opportunities for the oil rich economies through sharia compliant financial structures, they can attract huge capital which is a rare commodity after the 2008 financial crises. Number of international banks, e.g., HSBC have expanded themselves into Islamic finance market and have been extremely successful by diversifying their portfolios into different segments.

4. Marketing Challenge Need for Islamic Finance Is there a need for sharia compliant financial products in Canada? If yes, where is that need coming from? Well, these are the questions under discussion at present by entrepreneurs, financial institutions, regulators and the government. Canadian financial system has come out as one of the prudent systems and didn t face problems as was experienced by other economies during the financial crises. On the surface of it people may argue that there is no explicit need for a religious based financial system. The issue sparked controversy earlier this year when the Canada Mortgage and Housing Corp. launched a study on Islamic banking, as Ottawa considered its first applications to start up Canadian banks operating within Islamic law. The proposals drew fire from the secular Muslim Canadian Congress, which argued that faith-based banking had no place in Canada, and the presence of Islamic banks would pressure Canadian Muslims to subscribe to costlier products. [http://ribh.wordpress.com] Considering the fact that Canada is blessed with wealth of untapped natural resources specifically in Saskatchewan and Alberta (oil sands), and in order for these resources to be a value add for the Canadian economy, huge capital is required to fund the projects. At present, world economy is under tremendous pressure because of recent financial crises. However, there is only one market which is substantially liquid and can be a catalyst for the infrastructure development projects in Canada, i.e., Middle East with countries having huge oil resources. Furthermore, a rough estimate of muslim population in Canada is approximately 1 million in size, representing 3% of the total population. As more than 35% of the population lives in Ontario, a latent need of muslim community for sharia compliant financial product presents a huge business opportunity. As discussed in the introductory sections of this paper, it is evident in the economies whereby Islamic Banks have strong presence; non-muslim customers have huge inclination towards sharia compliant products. As seen in England, Islamic banks are strongly growing and have strong market acceptance. In

Canada, sharia compliant banking is mushrooming and numbers of marketers are providing products that are based upon the Islamic principles. However, these marketers have adopted Niche Marketing approaches and doesn t provide complete suite of sharia compliant consumer products. Absence of strong regulatory framework further imposes pressure on these niche marketers. Looking at the market dynamics and the requirement of capital for Canadian economy, proposition of Islamic Banking presents a great opportunity to cater to the latent needs discussed above. Satisfying the need? In order to attract capital from the Middle Eastern economies, it would be viable to develop financial models and structures which are readily acceptable to those economies. Setting up the infrastructure provides an opportunity for the local population to benefit from the profit sharing principles of Islamic banking as well. This will certainly help improve the confidence level of [sharia] investors to consider Canada as a lucrative market place and to participate in Capital Market transactions with Canadian issuers. Canadian banking industry, once reached to a level and achieved relevant expertise can act as a catalyst to manage and host sharia compliant capital market transactions for the entire North America. UK is a great example of this model, whereby majority of the Islamic finance transactions are hosted in London. As evident from the financial reports of the leading Canadian banks, retail banking has a huge potential in Canada. Products like, car loans, mortgages, student loans, saving and investment accounts, all fall within the scope of sharia compliant products. There could be many ways in which an Islamic bank can penetrative into the market by providing innovative and ethical solutions to muslim as well as nonmuslim population. Suggested Solution In an idealistic scenario, it would be viable for an existing bank to diversify into Islamic banking market by creating a subsidiary. This will allow them to leverage on strong existing infrastructure and use current operational facilities to deliver. In order to penetrate into the market effectively and to mitigate risks originating from controversies arising on religious grounds, the brand should be positioned as a Profit and Loss sharing Institution instead of an Islamic or Sharia compliant bank. This will make it relatively more acceptable within diversified ethnic groups. A strong campaign to create awareness is mandatory, as absence of it will not allow utilizing complete market potential. The biggest hurdle will remain within the regulatory and legal framework. This will require presentation of value proposition and should be focused on developing Canadian economy through attracting capital / investments from international resources. Government would be required to appreciate the underlined benefits and to accordingly provide legal and regulatory framework to ensure development of this new industry. Challenges Let s assume that the new concept of establishing a profit sharing financial system does not get approval to launch. The economy would have to rely on its existing and conventional source of funding infrastructure development. Liquidity in the international market is squeezed hence it would be a great challenge to raise needed capital. Establishing and launching a financial system which is based upon Islamic principles of profit and loss sharing would require time, resources and effort before it would start providing returns on investment. It can be anticipated that approvals from the regulatory authorities to launch such a system would be the most challenging part. Moving ahead a tremendous amount of effort would be required to convince the leading Canadian banks to pursue the initiative and establish an infrastructure and provide customers with an option of sharia compliant products. Finding relevant resources who are experienced in sharia compliant banking would be another challenge which might put pressure to source expensive human resources from the Middle Eastern markets.

Acceptance of such a system at consumer and institutional level is not guaranteed, though some positive and successful business cases are available, however this concept requires a paradigm shift and would require consistent marketing efforts to create awareness. In other words, demand for profit and loss sharing products has to be created and developed that would make it viable for an institution to pursue the model.

5. Annexure Population census Population by religion, by province and territory (2001 Census) (Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick) Canada N.L. P.E.I. N.S. N.B. Total population 29,639,035 508,080 133,385 897,570 Catholic 12,936,905 187,440 63,265 328,700 386,050 Protestant 8,654,850 303,195 57,080 438,150 263,075 Christian Orthodox 479,620 365 245 3,580 635 Christian not included elsewhere 780,450 2,480 3,205 10,105 8,120 Muslim 579,640 630 195 3,545 1,275 Jewish 329,995 140 55 2,120 670 Buddhist 300,345 185 140 1,730 545 Hindu 297,200 405 30 1,235 475 Sikh 278,410 135 0 270 90 Eastern religions 37,550 110 105 565 330 Other religions 63,975 135 100 1,155 790 No religious affiliation 4,900,090 12,865 8,950 106,405 57,665 Source: Statistics Canada, Census of Population. Last modified: 2005-01-25. Population (2006 Census) 1994 2004 2009p Canada 29,000,663 31,940,676 33,739,859 Newfoundland and Labrador 574,466 517,447 508,925 Prince Edward Island 133,437 137,674 140,985 Nova Scotia 926,871 939,376 938,183 New Brunswick 750,185 749,369 749,468 Quebec 7,192,403 7,535,929 7,828,879 Ontario 10,819,146 12,390,599 13,069,182 Manitoba 1,123,230 1,173,566 1,221,964 Saskatchewan 1,009,575 997,447 1,030,129 Alberta 2,700,606 3,239,471 3,687,662 British Columbia 3,676,075 4,155,170 4,455,207 Yukon 29,684 31,473 33,653 Northwest Territories 40,578 43,301 43,439 Nunavut 24,407 29,854 32,183 p preliminary Note: Population estimates as of July 1. Source: Statistics Canada, CANSIM table 051-0001.

719,710

An Introduction to Islamic Finance A book by Mufti Muhammad Taqi Usmani was used as a reference guide for this research paper. Following presentation from HSBC provides a detailed overview with underlined reasons for growth in Islamic Finance.

Islamic Bond (Sukuk) Market Update