FINA Committee Meeting
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STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[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; Canada's Association for the Fifty-Plus; as an individual, Mr. Turley-Ewart; and the Canadian Association of Insurance and Financial Advisors.
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.
The Chair: Likewise.
Mr. Said Zafar: As I wrote to you, in general we are pleased with some of the legislative measures proposed in Bill C-38 but feel disappointed that our presentation for the need for Islamic financial institutions seems to be largely ignored.
We presented our community's needs to Mr. Harold MacKay and to you. What we have asked is that the banks could establish, should they deem it financially viable, community-based banks within their current structures, Islamic banking windows with services tailored to the needs of a specific clientele.
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.
We'll now hear from the Canadian Association for the Fifty-Plus, Mr. Rolf Calhoun, Ottawa representative. Welcome.
Mr. Rolf Calhoun (Ottawa Representative, Canada's Association for the Fifty-Plus): Good afternoon, Mr. Chairman, members of the committee and guests.
I would like to bring to your attention the following information.
CARP is Canada's Association for the Fifty-Plus, the largest national association of mature Canadians in our country, representing nearly 400,000 members across Canada. Our members are 50 or older, many of whom are working, while others are retired. A non-profit organization, CARP receives no operating funds from any level of government, in order to maintain our independence and autonomy.
Our mission is to express the concerns of mature Canadians, and indeed of all Canadians, regardless of age. Our mandate is to provide practical recommendations for the issues we raise.
We also provide information of interest to fifty-plus Canadians through our award-winning magazine CARPNews/FIFTY-PLUS, which looks like this and has a content that resembles Macleans in many ways. We also operate a website called www.fifty-plus.net. As well, members have access to a number of discounted savings, such as home and auto insurance, health and dental coverage and travel programs.
Turning to Bill C-38, we think Bill C-38 is a badly presented omnibus bill packing too many subjects under one proposed piece of legislation, even though some of the proposed changes are for housekeeping purposes. Nevertheless, as written, the bill is certainly not consumer friendly. Indeed, we hope that the proposed financial consumer protection agency will be far more consumer or user friendly than the bill that has been written to establish it.
Bill C-38 is extremely difficult for consumers to navigate, and this could give rise to unwarranted suspicion about the nature of its content. There is neither index nor easily identifiable division of subject matter. The clauses are not in sequence. The language is designed for lawyers, not people. There is no executive summary to guide consumers through the bill.
With respect to the consumer protection agency, we nevertheless support the notion of a financial consumer protection agency in principle, but only if it is easily accessible by consumers. That is to say, it needs to be broadly publicized and without costs or fees for those who wish to access it. We are not sure that voluntary codes of conduct go far enough to protect consumers against the problems that consumers encounter with the current banking systems, such as delays—and this is a very common complaint—delays in transferring funds from one financial institution to another. Perhaps you've seen it. I know I have. I think most Canadians have.
CARP does not believe that the maximum penalty for violations of $50,000 committed by a natural person and $100,000 by a financial corporation is high enough, especially for financial institutions. Furthermore, we ask, what are the types of violations intended for the proposed agency to consider? In any case, can violations of a voluntary code of conduct be prosecuted by government?
As we understand it, the proposed amendments to the Bank Act are intended to establish the rules for bank mergers and in this regard act as a green light for bank mergers, which your government, I might say, Mr. Chairman, so vigorously opposed and denied just a short while ago. What has changed your government's opinion on this matter since then? Moreover, allowing one owner up to 20% of equity in a bank, up from 10%, in financial terms represents a very high degree of concentration and opens excessive centralized control of an essential aspect of the Canadian economy.
Furthermore, as we understand it, the amendments allow insurance companies to set up banks and foreign banks to purchase Canadian banks. This will create a dangerous situation because of the relatively small size of the Canadian economy. We do not oppose foreign banks from operating in Canada, but we are concerned if they are permitted to own or control Canadian banks.
CARP's recommendations for Bill C-38 are that Bill C-38 should be redrafted in a consumer-friendly and accessible manner because of the importance of the subject for Canadian consumers, regardless of age, and the Canadian economy as a whole. This is important legislation; therefore, the omnibus nature of the bill should be revised by dividing the bill into its appropriate constituent parts. In particular, those clauses dealing with the new rules for bank mergers should be treated as a separate bill to enable more focused public discussion on this issue.
A well-publicized and easily accessible consumer- or user-friendly financial consumer agency should be established. This action should be treated as a separate issue from the proposed rules for bank mergers.
In regard to bank mergers, the degree of concentration of ownership proposed in Bill C-38 should be reduced. The amount for penalties for violations should be increased. And foreign banks should not be allowed to own or control Canadian banks. This will ensure made-in-Canada financial policies by banks.
Adherence to banking rules for nationally registered banking institutions should be mandated and monitored by the federal government, rather than being voluntary.
Thank you, Mr. Chairman. I would invite inclusion of this brief in the minutes of the committee. To that end, I have a few copies to give to the clerk.
The Chair: Thank you very much, Mr. Calhoun.
We'll now hear from John Turley-Ewart, Canadian banking historian. Welcome.
Mr. John A. Turley-Ewart (Individual Presentation): Thank you.
I recently completed a history of the Canadian Bankers Association as my doctoral thesis at the University of Toronto. What I'll try to do today is give you some historical context in which Bill C-38 perhaps can be seen.
All Canadian governments, beginning with Sir John A. Macdonald's, have struggled with demands for a competitive and safe banking system that guards consumers, the economy, and the federal treasury from the fallout caused by bank failures.
The politics of banking is not a modern phenomenon. By the time the Bank Act was enacted in 1871, two finance ministers had resigned, regional tensions had flared, and the manager of the Bank of Montreal, a dynamic Irishman, had retired.
The concerns Macdonald faced in 1867 persist today. Between 1871 and 1924 our banking legislation gave banks free reign and insulated Ottawa from any legal claims for assistance arising out of bank failures.
Politicians and bureaucrats had decided their policies could be achieved by leaving banking to bankers. The result, on one hand, was a dynamic banking sector that grew quickly and without regulation. It served the economic needs of an emerging national economy and helped fuel the economic boom that began in 1896 and continued to 1913. It also helped the federal government survive the unprecedented fiscal crisis that began with a sudden march to war in the summer of 1914.
But bankers could not reconcile competition and safety. A legacy of their failed attempt is with us today, the Canadian Bankers Association. One bank failure almost every two years during the late 19th and early 20th centuries raised popular demands for intensive government regulation. There are many CCBs and Northland Banks in our history.
Finally, in the aftermath of the Merchants' Bank scandal of 1922 and the Home Bank collapse in 1923, bankers faced their own crisis of confidence and the Liberal government of Mackenzie King responded by founding the office of the Inspector General of Banks. Ottawa's responsibility was widened, the Bank Act was enforced, and by the end of the 1930s the three, six, and three era in Canadian banking was on the horizon; that's 3% for deposits, 6% for loans, 3 o'clock on the golf course.
The innovation that characterized Canadian banking for more than half a century seemed to be lost and with it a great deal of the popular respect bankers had once enjoyed. Since then the trend, which began to accelerate in the late 1960s, has been toward restoring the flexibility that Canada's chartered banks lost when the Bank Act was first enforced in 1924.
While I have spoken of a bygone era, I want to leave you with what I believe the past has to say about the future, an issue that is at the heart of Bill C-38.
I wonder if you recognize any of the following banks: Bank of New Brunswick; Bank of Ottawa; Bank of Hamilton; Banque du Peuple; Bank of British Columbia; Metropolitan Bank; Standard Bank; Union Bank of Halifax; The Merchants' Bank of P.E.I.; Quebec Bank; The Union Bank of Canada. The list goes on. All of these banks and the competition they fostered disappeared from Canada's main streets because they did not successfully pursue new opportunities to grow and flourish. There was nothing to have stopped them except the shortcomings of their managers.
Today, what often prevents our surviving banks from pursuing new opportunities is a regulatory environment that we, as a society, impose upon them. If competition in the financial sector is to flourish, if our banks are to create high-value jobs for future generations, if they are to improve their ability to serve our economy's needs as it evolves, if we, as a society, are to temper the politics of banking that was so evident during the 1998 merger debate, banks need more flexibility than is currently being proposed.
Citibank's acquisition of Associates First Capital Corporation, a $100-billion consumer finance company with 350 branches in Canada, will extend the New York based bank's global reach as well as its resources if the investment is well managed. Under Bill C-38 a Canadian chartered bank would be discouraged from making such an investment. We need to encourage our banks to seize new opportunities, rather than leave them on the sidelines to watch others.
Perhaps some of you will be surprised to learn that many banks distributed insurance through their branches until 1923. It provided one means for the banks to secure well-qualified staff, especially in rural areas, by promising more attractive wages. Insurance companies prospered, and consumers could have all their financial needs met at a local bank branch if they chose to.
Prohibiting banks from distributing insurance through their branches puts them at a tremendous competitive disadvantage. It seriously complicates the business of selling financial planning services, and it cuts off revenue streams that affect retail banking operations across the country. Just this year the Bank of Montreal sold 54 of its branches in western Canada to a credit union. The credit union can make the branches pay by distributing insurance and doing car leasing.
Bolstering competition depends to a very great extent on legislation that allows our chartered banks to evolve with the changing needs of consumers and the economy. Bill C-38 goes some way to accommodate this reality, but it needs to go further. It is time the banks returned to the business of distributing insurance and for consumers to have the choice of leasing a car from their local bank branch if they want to. It is also time to speed up the process of giving back to banks the flexibility they need to invest in new ventures that will help them and the Canadian economy grow. Such change, especially around permitted investments, comes with risks, but refusing to manage those risks through OSFI, which has taken on a more interventionist role since 1996, suggests an overly cautious approach to reform that will have long-term consequences for Canada's banks and the quality of jobs they will produce and support.
The Chair: Thank you very much, Mr. Turley-Ewart.
Now we'll hear from Mr. David Thibaudeau from the Canadian Association of Insurance and Financial Advisors. Welcome.
Mr. David Thibaudeau (President and Chief Executive Officer, Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman.
The Canadian Association of Insurance and Financial Advisors appreciates this opportunity to provide the finance committee with our comments on Bill C-38. CAIFA is a not-for-profit professional organization representing 18,000 financial services advisers who are committed to putting client interests first. CAIFA's members provide financial advice as well as market and sell products from many types of financial institutions in Canada, from life insurance companies to mutual fund companies to banks.
With regard to just one of those sectors addressed in Bill C-38, the life insurance industry, CAIFA's members sell the majority of life and health insurance and wealth accumulation products in Canada. In 1998 those products included 847,000 individual and group life insurance policies totalling $194 billion in coverage, plus more than $17 billion in annuities, thereby providing risk management and investment solutions for 22 million Canadians. In terms of demographics and coverage, almost half of individual life insurance policies purchased by Canadians in 1997 were bought for individuals with incomes under $30,000 a year, with three in four Canadian households owning some form of life insurance protection.
As members of this committee are well aware, Bill C-38 is the culmination of many years of research and consultation by a variety of bodies, from the MacKay task force to the finance department to this very body. Bill C-38 has been a long time coming. It is no surprise, therefore, that major stakeholders, including CAIFA, have welcomed this legislation and called for its speedy approval. It should also come as no surprise that we are quite disappointed that this legislation may be a casualty of a rumoured fall election. If this legislation does in fact die on the Order Paper, CAIFA would ask all parties to support the speedy reintroduction of Bill C-38 as soon as a new Parliament convenes.
I would now like to highlight some of CAIFA's comments on the legislation before this committee, focusing on the areas of consumer protection, business powers, and taxation.
One of the important consumer protection measures contained in Bill C-38 is the creation of the Financial Consumer Agency to enforce the consumer-oriented provisions of the federal financial institutions statutes. We believe this agency has an important role to play by helping to ensure that consumers actually benefit from the protection measures contained in those statutes.
One of the key consumer protection measures to be enforced by the FCA will be the newly strengthened section 459.1 of the Bank Act, which deals with coercive tied selling. As studies by the MacKay task force and this committee have concluded, coercive tied selling is a prominent consumer protection issue since it puts into stark relief the issue of bargaining power between consumers and institutions or intermediaries. Mr. Chairman, since our full submission deals with the issue of tied selling in more detail, for now I would just recommend that the new agency make the elimination of tied selling a top priority.
A logical complement to the FCA is a visible and independent financial sector ombudsman with the power to assist consumers with obtaining redress from financial institutions. CAIFA therefore welcomes the establishment of a Canadian Financial Services Ombudsman. The ability of the CFSO to identify consumer abuses, such as coercive tied selling, and to recommend appropriate reparations is a welcomed addition to the regulatory framework. Consistent with our earlier recommendation, CAIFA also recommends that the new CFSO pay special attention to the issue of coercive tied selling and the considerable challenge of empowering consumers to come forward with detailed cases of their experiences in this area.
As the government has acknowledged, these proposed measures to empower consumers will take some time to become fully effective. It has therefore accepted this committee's recommendation that no new business powers in the area of insurance networking be extended to banks at this time. CAIFA supports this decision. As our full submission indicates, research indicates that Canadians are well served by the current agent-based distribution system.
Let me conclude with a word about corporate taxation, which I realize falls more logically under the heading of prebudget but which is an important factor in how Canada's financial services sector operates. In past submissions CAIFA has expressed concern that Canadian corporations face a greater tax burden than their American counterparts, with businesses in the service sector taxed as much as 50% higher than those in the United States. The 2000 federal budget's plan to reduce the general federal corporate income tax rate from 28% to 21% over five years will go some way toward addressing this disparity, but we remain concerned about the slow pace of corporate tax reduction. Indeed, in five years' time Canada's corporate income tax rates will remain among the highest in the world even if other countries do not reduce their rates even further, an unlikely prospect.
While CAIFA acknowledges the challenges posed by joint federal-provincial jurisdiction on the issue of determining capital taxes for financial institutions, the association would suggest that the issue is urgent enough to warrant considerable effort.
In conclusion, in an increasingly competitive financial services marketplace, strong and internationally competitive Canadian financial institutions bring benefits to all Canadians, from employment to tax revenues to better business ideas. But global ambitions must not be allowed to obscure the true origin of the success of Canada's financial institutions: the confidence and patronage of Canadian depositors, borrowers, investors, and policy holders. The measures contained in Bill C-38 that foster domestic competition and empower consumers are key to the long-term success of the financial services industry.
CAIFA wishes to reiterate its support for this legislation and its recommendation that this committee approve Bill C-38 so that Canadians may enjoy the benefits of a more competitive and consumer-friendly financial services marketplace.
Thank you, and we are prepared to answer questions.
The Chair: Thank you very much, Mr. Thibaudeau.
We'll now go to the question and answer session. We'll begin with Mr. Harris. We'll do a five-minute round.
Mr. Richard M. Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, Mr. Chairman.
Mr. Thibaudeau, I share your fears that an election may kill this bill, because this bill was going to bring some certainty to some of the things your industry has expressed alarm about, particularly in regard to banks retailing insurance products through their branches. I know that you know we have agreed in this regard, and we're fully supportive of the things you've said today.
One of the concerns we had in Bill C-38 was the incredibly broad range of powers that were given to one person, namely the Minister of Finance. Has your industry expressed any alarm about this? There is plenty of regulation in the industry now, and for the most part it has operated very well with the help of the Competition Bureau and under the Bank Act and OSFI. It seems as though bill is going well beyond what's needed, and there could be a tremendous amount of overlap in scrutiny and in decision-making throughout the industry if the minister is given this power. How do you respond to that?
Mr. David Thibaudeau: It hasn't been a big issue for us in terms of looking at the size of this legislation. We've focused on the areas that we feel impact on the financial adviser level more than at the corporate level, where those decisions can get made. We really don't have a strong position on that one way or another.
Mr. Richard Harris: Okay, thank you.
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.
The Chair: Thank you very much.
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.
Mr. Chairman, I just have a short question for Mr. Turley-Ewart.
Thank you for your brief and for your insight into the history of our banking system.
One question I had is around banks selling insurance through their retail branches. Something that has always puzzled me—and I've put it to bankers and insurance people that have come to this committee—is that when you're selling insurance, for example if over the counter at a bank I'm selling a term policy, I fill in the forms—$100,000, the beneficiary—and that's the end of the story. But if I'm selling insurance as part of a financial plan, then there are questions around whole life, around annuities, around term, and that's why we have certified financial planners.
I can understand, for example, for main branches in downtown Toronto, Montreal, or Vancouver, but if I have a branch in some small centre in rural Canada, are they going to be able to offer that sort of expertise if they are selling insurance? If someone comes into a branch, are they going to have certified financial planners who can offer the full... The idea of just selling a term or a whole-life policy without looking at it in the context of a whole financial plan doesn't make an awful lot of sense, in my mind.
Mr. John Turley-Ewart: Right. When I refer to the three, six, and three era in Canadian banking—and this is the period that basically started in the late twenties and really took off in the thirties and forties—that was where the government regulated the maximum you could charge on a loan for a bank at 6%. Three percent was the rate that you got on a deposit, and the old line was “and it's three o'clock on the golf course”. You didn't have the expertise; you didn't need to build that kind of expertise to sell that insurance.
Banking is changing so rapidly in many ways, and in very good ways. We have new delivery systems now. There are new revenue streams coming into branches, which means you can hire—for lack of a better word—better-educated staff, and staff who can deal with issues like financial planning. You need financial planners in Pembroke, in Quinte, and in small towns throughout this country.
But if you prevent the banks from selling insurance, what in essence you're doing is you're cutting off a revenue stream, and it prevents the bank from paying the kinds of wages that would attract a person who has the financial education to sell insurance products.
So it's a vicious circle. When we talk in Bill C-38 about how we want to increase competition, it's a rather funny thing that we prevent the banks from retailing insurance, but at the same time we promote the bill as increasing competition. From what my neighbour here was saying on how much of the market they have, it seems to me that it's time for the banks to get back into this business, just for the sake of competition.
Mr. Roy Cullen: Do I have time for one quick question?
The Chair: Yes.
Mr. Roy Cullen: Thank you, Mr. Chairman.
Mr. Calhoun, from CARP, you say in your letter... I'm sorry, I don't know if it's reflected in your brief, but in CARP's letter of August 10... Are you familiar with that letter to the committee?
Mr. Rolf Calhoun: I don't have that with me, I'm sorry.
Mr. Roy Cullen: It basically says:
As we understand the amendments to the Bank Act, they are
intended to establish the rules for bank mergers, and
in this regard, are a green light for bank mergers,
which your government so vigorously denied a few years
ago. What has changed your government's opinion
on this matter since then?
It's signed by Ms. Morgenthau, your president. Could you comment on her statement? I'm just wondering what would lead someone to that conclusion, because we want to set the rules, you know, institutionalize, if you like, the rules so that it's not quite as ad hoc as it was the last time. Does CARP interpret that as a green light for bank mergers?
Mr. Rolf Calhoun: I think it would probably be good for me to not try to intuit precisely what she might have been thinking at the time, because frankly I have not discussed it with her personally in preparation for this presentation today.
Mr. Roy Cullen: Thank you.
The Chair: 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. Ken Epp: I think I still have time.
The Chair: You have time for just one more question.
Mr. Ken Epp: Mr. Calhoun, you represent people who are fifty years old and older.
Mr. Rolf Calhoun: Yes.
Mr. Ken Epp: In your presentation, maybe I missed it, but did you say anything at all about the difficulty that seniors have in simply cashing government cheques or things like that? Is that an item of concern to you at all in terms of access to our financial institutions?
Mr. Rolf Calhoun: That is another issue, which was not part of my presentation today, but quite clearly there are seniors, as there are non-seniors, who face difficulties in cashing cheques. If they don't have bank accounts, if the bank doesn't have them as a regular customer, then the bank or other financial institution, by whatever name, would oftentimes make it difficult, shall we say, for such a person to cash a cheque. I believe it's not really an age-related issue; it's an economic-related issue.
Mr. Ken Epp: Okay, but the reason I gave you that preamble is now for the question. Bill C-38 addresses the issue of low-cost accounts and basically puts into legislation their requirement that banks provide low-cost accounts to people like seniors whose banking is very limited, who simply want to cash a government cheque or two and pay their rent and utility bills. Are you satisfied with the provisions in Bill C-38 on that? Should they be stronger? What's your reaction to them, or are you even aware of them?
Mr. Rolf Calhoun: Quite frankly, I haven't read that portion of the bill, so I couldn't comment other than on what you've just told me. But from what you have just told me, clearly this would be an advantage to seniors and to any other age group that faces this problem.
Mr. Ken Epp: Okay. I would invite you to check out perhaps that section of Bill C-38, and if you have any further direction to us on it, it might be good for us to get that.
Does anybody else have any comment... either of you two gentlemen over there?
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: Thank you very much, Mr. Epp.
Thank you, Mr. Cullen.
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.