Canada: A Marriage Made In The Heavens

First published in Gulf News, Dubai.

Canada Claims It Offers A Rare Combination: Great Investments, And A Tradition Of Welcoming Foreigners

Although Canadian winters may be cold, the investment climate is almost always warm. There would be no other way for a country of 33 million people to maintain its relative wealth and G8 status without strategically and effectively engaging the world in the areas of trade and finance.

Canada is well positioned to become an important global Islamic finance market.

It has one of the world's most transparent and investor-friendly foreign-investment regimes, world class investment opportunities in sectors ranging from natural resources to hightech, a banking system that has recently been referred to as the most sound in the world, a rapidly growing and highly educated Muslim population as well as a historical commitment to multiculturalism, and a need to remain an attractive destination for foreign investment.

In a recent government report, a panel charged with assessing the country's global competitiveness found that, contrary to some commonly held notions, Canada benefits from openness to the world and that attracting greater foreign investment is in Canada's economic interest.

With the global recession now showing signs of recovery, investors from around the world, in particular those from Muslim nations, are taking a hard look at Canada as a place to invest.

As a result, in order to invite, and accommodate, important foreign investments to Canada, it is becoming increasingly necessary for the country to be able to facilitate Islamic finance transactions and potentially become a hub for North American Islamic finance.

While the pillars of Islamic finance find their roots in religious principles, properly approached, they are in effect a form of "back-tobasics" banking practices that have become the trend throughout the Muslim and non-Muslim financial world in the wake of the most recent financial crisis.

A key principal of Islamic finance is the prohibition of interest and an emphasis on partnership/ shared-risk model which helps create the necessary discipline in financial transactions. This sentiment has been reiterated by many recently including Secretary of Treasury Timothy Giethner, and White House Director of the National Economic Council Lawrence Summers, when they wrote that to avoid future financial crises, it was necessary, among other things, to "require the originator, sponsor or broker of a securitisation to retain a financial interest in its performance". In addition, a partnership/sharedrisk model is consistent with other marketdriven and democratic ideals such as the efficient allocation of resources including money to and from the most productive hands. Such an approach ultimately facilitates positive things within societies such as economic meritocracy and wealth recirculation, to mitigate against the risk of excess concentration of wealth.

Notwithstanding the prohibition on interest, there are methods of structuring a transaction in order to provide a competitive and profitable return relative to the conventional global markets — which are driven by interest based returns — without violating Islamic restrictions.

Pillars

Other pillars of Islamic finance include a need to avoid excessive risk, along with an emphasis on transparency, certainty of terms, and ethical or socially responsible investment objectives.

As a result, in many ways, the growth of Islamic finance today is also a part and a reflection, of an overall movement towards these more "back-to-basics" financial practices.

Most would agree that better adherence to these principles, whether couched in Islamic finance or just sound conventional finance terms, would have likely helped avoid many of the recent excesses in the financial world in which many institutions came perilously close to collapse and had to be put on life support by extraordinary government measures.

Islamic finance, while not immune to the global slowdown, has nevertheless shown signs of resiliency with impressive growth results during this tumultuous period.

As a result, it has attracted increasing attention from investors and governments.

In fact, Islamic bonds, international sukuk and GCC Islamic bonds were largely unaffected by the 2008 banking sector upheaval and even saw a significant increase in the latter half of 2009 after an initial drop in volume. Not surprisingly, it is projected that the sound investment practices espoused by Islamic finance will allow, for the first time, total Islamic financial assets to break the US$1 trillion dollars mark in 2010.

With the ability to pick and choose the best opportunities in the world, global Islamic finance investors are asking themselves where they should invest next. Although Canada has not necessarily been at the top of everyone's radar in recent years, the global recession has allowed its sound fiscal policies and diversified economy to stand out. In addition, over the past several years, Canada has demonstrated impressive capabilities in Islamic finance including the development of Islamic financial products for Canadian consumers.

Moreover, there is a increasing supply of well versed professionals and experts in the fields of law, tax, accounting and operational processes, who are available to help investors wanting to explore the growing opportunities in Islamic finance.

Opportunities

Some of the most attractive investment opportunities in Canada can be found in the areas of natural resources, energy, and infrastructure.

Canadian natural resources are not only plentiful, but well developed with specialised industrial manufacturing, sophisticated transportation and delivery networks. They are readily available, as is qualified labour.

With a growing demand for commodities driven by growth in BRIC countries (Brazil, Russia, India and China) and other emerging economies, experts have predicted that commodity prices will soar and remain high in the near future.

Canada remains a leader in the production of crude oil, tin, nickel and wheat, all of which will be in high demand now that the global economy is poised for a recovery.

Similarly, the mining sector, which plays an important role in the Canadian economy and which is responsible for more than one-quarter of total exports, presents many interesting opportunities. Nickel, potash, diamonds, cement, sand, gravel, bismuth, cadmium, cobalt, lead and coal production increased sharply in recent years, often in double-digits. There have been increasing levels of exploration in the Yukon, the Northwest Territories and Nunavut with reports of promising results of significant mineral deposits. Canada's importance and leadership position in the mining sector is reflected in the fact the TMX Group lists more public mining companies than any other exchange in the world with almost 60 per cent of the world's public mining companies listed on the TMX Group exchange.

Moreover, with more than $50 billion in North American index securities, Canada claims to offer the best access in the world for capital.

In the energy sector, in particular the oil and gas industry, Canada — being the third largest natural gas and eighth largest crude oil producer in the world — is very well positioned to meet rising global energy demands.

To meet this demand, the Canadian government and businesses say they have been working hard over recent decades to lay a foundation to allow oil sands production to reach 2.6 million barrels per day by 2015.

While the Canadian oil and gas industry is comprised of some 2,300 firms and is considered to be mature and sophisticated, the fact remains that it has one of the largest oil reserves in the world.

With technological advancements reducing production costs, the potential return on investment in the Canadian oil and gas industry makes it an attractive proposition.

The oil and gas industry has said there is an immediate need for capital for this sector to continue growing and meeting global energy demand.

The government has estimated an investment of roughly $50 to $120 billion dollars would be required in Canada in the next few years. Federal and provincial governments have been seeking foreign investors willing to fund various publicprivate partnership ("P3") projects. The need stems from a well developed national infrastructure needing modernisation and governments being unable to finance these projects singlehandedly. P3 projects that have been launched or for which partnerships are being sought include bridges, utilities and highways. Partners are also sought to help build new schools, hospitals, and the justice sector, for a growing Canadian population.

Canada also claims that it is set apart by its tradition of welcoming foreign investors and investments. Canada prides itself on having one of the most liberal regulatory regimes with a predictable and transparent process whereby foreign investments can be assessed. By taking note of the important role that stateowned enterprises ("SOEs") play in the global economy and by adopting a principle-based approach to foreign investments by SOEs, Canada has sent a clear signal that it remains open for business and that it will ensure a level playing field for all.

Investment opportunities in Canadian natural resources, energy, and infrastructure projects should be of particular interest to investors who wish to structure transactions in accordance with the principles of Islamic finance.

Outside of the Middle East, several financing projects have now begun using Islamic financing structures for various projects.

For example, in 2009, General Electric issued a $500 million sukuk issuance which was based on an ijara structure with aircraft assets as its underlier, and involved some aspects of commodity murabaha.

The sukuk offering held a five-year maturity and guaranteed fixed distributions of 3.875 per cent a year. Another example includes the financing of a $50 million pipeline in Pakistan using a five-year ijara facility.

The idea is that by using Islamic finance structures such as ijara, musharaka/mudaraba, murabaha, istisna'a and sukuk, investors can structure transactions and invest in the Canadian natural resources, energy and infrastructure sectors, all of which are in compliance with sound Islamic principles.

While it is true that investors who adhere to the pillars of Islamic finance have many options, Canada claims that it offers a rare combination of great investment opportunities, a tradition of openness to foreign investors and investments, and a proven track record of sound economic and banking practices.

Canada, as John Maynard Keynes once said "is a place of infinite promise".

Dany H. Assaf is a partner at Bennett Jones LLP and Daud Vicary is Deloitte's Global Islamic Finance Leader.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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