Riba-free private financing in Quebec: partners, contracts and risks

Who private lenders are in Quebec

They may be individual investors, mortgage investment corporations or pooled funds of several savers. They mostly step in when a bank declines the file, when income is hard to document or when the closing deadline is very short.

The conventional model: high cost for a short term

A typical private loan runs one or two years at a rate well above bank rates, with file fees and sometimes a broker commission. It serves as a bridge to refinancing, which assumes the exit is already planned.

The second hypothec, an underestimated risk

Many private loans rank behind the main hypothec. On default, the creditor can serve a prior notice of the exercise of hypothecary rights and, once the period expires, seek in particular taking in payment or sale of the property.

Where the religious problem lies

According to many scholars, interest charged by a private lender is riba just like a bank's. Commitment fees that simply reward the act of lending raise the same question. Consult a qualified scholar before committing.

Turning a private investor into a partner

Musharaka lets an investor buy a share of the property with you. You pay rent on that share and gradually buy it back, as explained on our page about diminishing musharaka for property.

Private ijara: the investor buys, then leases to you

In ijara, the investor buys the property, leases it to you and may sell it to you at the agreed end. According to many scholars the owner must carry ownership risks, so the contract spells out major maintenance, insurance and the final price.

Murabaha for a one-time need

For a specific purchase, a private investor can acquire the item and resell it to you with a markup fixed upfront. Genuine ownership before resale and no increase for late payment are the conditions scholars check most often.

A relative or a commercial lender: the difference

A relative advancing money with nothing added is practising qard hassan. A business lending money to consumers in Quebec must hold an OPC permit. Our page on halal person-to-person lending looks at the first case in depth.

The notary, a required step in Quebec

In Quebec, an immovable hypothec must be granted by notarial deed en minute. The notary checks title, publishes the rights and can draft sale, lease or partnership clauses; see our guide to the notary in Islamic financing.

Checking the broker and the business before signing

A mortgage broker working in Quebec must be registered with the Autorité des marchés financiers, which keeps a public register. Searching that register, along with the OPC list of permit holders, keeps you away from unauthorized intermediaries.

Red flags in an offer marketed as halal

Be wary of a rate called profit with no asset ever bought, late penalties pocketed by the financier or fees demanded before anything is signed. Our page on checking sharia compliance helps you ask the right questions.

Planning the exit on signing day

Private financing should always state how it will end: buyback of shares, takeover by an established halal provider or sale of the property. Without a realistic exit, a temporary structure becomes a lasting burden and can lead to losing the property.

Setting up compliant private financing with an investor

1. Define the exact need, amount and term, and how the private financing will be repaid or replaced at the end.
2. Choose the right structure with the investor: musharaka for a partnership, ijara for a lease, murabaha for a one-time purchase.
3. Check the broker's AMF registration and, for a business lending to consumers, its OPC permit.
4. Have the property valued by an independent accredited appraiser so shares, rent or resale price rest on an objective basis.
5. Submit the draft contract to a qualified scholar or sharia board, then to an independent lawyer or notary.
6. Sign before a notary, publish the rights in the land register and keep a written schedule of payments and share buybacks.

Private loan costs compared with a halal private structure

Documents to gather for a private investor

• Deed of acquisition or accepted promise to purchase
• Recent certificate of location
• Independent appraisal report
• Statement of the existing hypothec with current balance
• Notice of assessment and proof of income
• Municipal and school tax bills
• Draft partnership, lease or sale contract

Dangers specific to private financing

• Signing a short-term second hypothec with no refinancing plan, then finding at maturity that no provider will take over the file.
• Accepting interest simply relabelled as profit when the investor never buys, leases or holds any share of the property.
• Paying upfront fees to a so-called private lender before any notarial signing, a common pattern in credit fraud.
• Skipping an independent review of buyback, default and penalty clauses by a lawyer or advisor before signing.
• Failing to check whether the existing hypothec restricts additional charges, which could put you in default with the first creditor.

Halal private financing in Quebec: your concerns