Islamic Housing Finance

An Overview

Presented by

Muhammad Raza
EVP & Head of Consumer Banking
Meezan Bank Limited
Premier Islamic Bank in Pakistan
Islamabad – City View Karachi – Creek Vista
Pakistan –Snapshots

Lahore – Motor Way KPK – Saif-ul-Malook

Pakistan – Country Highlights
Pakistan emerged Population: 180 Million (6th most populated country in the world)
on the world map 37% population lives in Urban areas
on August 14,1947 63% population lives in Rural areas

The country Area : 796,095 sq-km

borders Iran on the
west, India in the Official Language: Urdu & English
east, Afghanistan
in the north-west, GDP US $ 200 Billion
China in the north
and Arabian sea on
the south. GDP Growth Rate 3.7%

GDP by sector: Agriculture 21%, Industrial 25% & Services 54%

SBP Discount Rate: 9.5 %

Central Bank 1
Banking Sector: Public Sector Banks 5
(No. of Banks) Private Sector Banks 17
Islamic Banks 5
Foreign Banks 7
Specialized Banks 4
Micro Finance Banks 10
DFIs (HBFC etc.) 8
Islamic Banking – Global & Regional Perspective
Islamic Banking Industry - Global Perspective

The recent past has

shown that while
the world faced  Although the word “Islamic” refers to the beliefs specifically related to Muslims. But
severe economic Islamic Banking is not for Muslims alone.
crisis, Islamic
banking Industry  In Islamic banking, all transactions are asset-based that gives rise to the economic
continued to grow activity.
Persistently
making the world  Globally, the Islamic banking is growing 50% faster than the overall banking sector.
take note of this
lesser known field.
 The size of Islamic banking industry has grown to $1.63 Trillion with the annual
growth rate of more than 20%. The size is forecasted to reach US$1.8 Trillion in
2013 and beyond the milestone of US$ 2.0 Trillion by 2014.

 Globally the Islamic financial industry comprises 430 Islamic banks and financial
institutions and around 191 conventional banks with Islamic banking windows
operating in more than 75 countries
Islamic Banking Industry - Regional Perspective
The recent past has Pakistan
shown that while
 The share of Islamic banking is around 10% of over all banking industry.
the world faced
severe economic  Currently 5 full fledged Islamic Banks with725 branches and 13 conventional banks with 372 Islamic
branches operating in the country.
crisis, Islamic
banking Industry  Meezan Bank Limited was the first to get license of Islamic Banking in the year 2002. The bank has
continued to grow shown tremendous growth in just 10 years. The Bank demonstrated robust business growth and
Persistently termed as Fastest Growing Islamic Bank in Pakistan. With a branch network of 310 branches in 90
cities across Pakistan, Meezan Bank is the largest Islamic bank in Pakistan.
making the world
take note of this
lesser known field.
Bangladesh
 The history of Islamic banking started with the establishment of Islamic Bank Bangladesh Limited
(IBBL) in 1983.
 Today the Islamic banking industry in Bangladesh comprises of 7 full fledged Islamic banks and 13
conventional banks having Shariah compliant windows and counters constituting more than 15
percent share of overall banking industry.

Sri Lanka
 In Sri Lanka, Amana Bank started operations as the first full fledged Islamic Bank in the year 2003.
 In Sri Lanka Muslim population is around 9% but there is a strong demand for Islamic financial
products from the Muslims as well as from non-Muslims.
 The government owned Bank of Ceylon has started its own Islamic windows model operating under
the brand name of “Al-Noor” more than a year ago.
The Housing Industry in Pakistan
The housing &  Significant gap in demand & supply :
construction
industry  Backlog of 8.0 Million housing units is estimated.
represents one of  Annual increase in demand is estimated at 0.6 Million units.
the most critical
areas of economic
growth and  Boom in Real Estate Market (2003 – 2008) :
stability.  Pakistan witnessed a real estate boom during 2003 to 2008. Property prices
skyrocketed across the country and to buy a home was impossible for an
ordinary Pakistani due to the frequently increasing prices.
Shelter and
development are
mutually
 Role of Banks / DFIs in Housing Sector :
supportive.  Till 2003, HBFCL (House Building Finance Co) was the only specialized
Housing forms an housing bank in the country providing housing finance since 1952.
important part of  While commercial banks entered the mortgage business in the year 2003.
any government’s  Also the Nation’s first Islamic Housing Finance facility was launched by
strategy for the Meezan Bank Ltd in the year 2003.
alleviation of
poverty and  Story of the recession period :
employment
 In the year 2008, the real estate bubble came to an end and property market
generation.
witnessed a slump.
 All the banks engaged in housing finance business either stopped or slow down
the mortgage business.

 The Rise of Islamic Housing Finance :

 The Islamic Housing Finance emerged as most demanded option for Housing
Finance.
Islamic Housing Finance in Pakistan
The proliferation
of Islamic banking Share of Islamic Housing Disbursement Share of
in the country has Finance in Banking Sector Islamic Housing Finance
led to the
establishment of
Islamic Banking in Pakistan’s Statistics of last year (2012)
mortgages as the
flagship financing banking industry is close to 10% showing that almost 50% of total
product in almost However incase of house housing finance disbursement in
all Islamic banks financing the share of Islamic Pakistan in a single year was
and subsidiaries Banking Industry is 25% in through Islamic Banking Industry.
terms of gross outstanding as of
Dec-2012.
Islamic Housing Finance in Pakistan
For Housing
Finance, four Islamic Housing Finance
primary processes
are used. However,
in Pakistan only
“Diminishing Available
Musharakah” has structures
achieved any
significant scale,
although each has
merit for different
consumer segments
Istisna’a Diminishing
and product Murabaha Ijarah
Musharakah
usages.

 Murabaha means “Profitable sale” where profit amount is know to the buyer.

 Ijarah means “To give something on rent”.

 Istisna’a is “An order to manufacture or construct”. It can be applied for

construction finance.

 Diminishing Musharakah is based on partnership. This structure is most popular

and widely used by Islamic Banks in Pakistan.
Diminishing Musharakah
Musharakah Payment
means joint
venture. This mode
is based on the
Shirkat-ul Milk House Financier Seller
sub-mode which
specifically defines
joint ownership in Title
property. Consumer

In Pakistan, most
of the banks use It involves taking share in the ownership of a specific asset and then gradually
Diminishing
Musharakah as transferring complete ownership to the other partner. This concept is based on
mode of house Declining ownership of the bank.
financing.

General Process Flow for Diminishing Musharakah Transaction:

a) Customer approaches Bank with the request for House financing.

b) Bank enters into a Musharakah (Joint Ownership) agreement with the customer and
both the parties provide their investments to be utilized for the purposes of purchasing
a property from the seller of the asset. (This Musharakah is based on the principle of
Shirkat ul- Milk).
Diminishing Musharakah
Musharakah General Process Flow for Diminishing Musharakah Transaction (Continued …)
means joint
venture. This mode
is based on the c) The Bank’s share is divided into ownership units and is given to the customer on rent
Shirkat-ul Milk via Monthly payment agreement (Ijarah agreement).
sub-mode which
specifically defines
joint ownership in d) The Customer promises to purchase Bank’s share (units) over the tenure of the
property. transaction. This promise from customer is made in writing through Undertaking to
Purchase.
In Pakistan, most
of the banks use
e) Every month customer pays rent for the use of the Bank’s share in the property.
Diminishing
Musharakah as
mode of house f) The customer also purchases the Bank’s Musharakah units every month.
financing.

g) The rental amount is adjusted according to the bank’s share (units) remaining in the
property.

h) Eventually customer becomes the owner of the property and bank’s ownership
diminishes.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the
availability and
rapid proliferation 1 Bank takes Ownership and Risk
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to  In Islamic Housing Finance, the nature of contract is a co-ownership. The transaction
not only the is not based on lending & borrowing of money but on the joint ownership of an asset.
interest-averse, but
the traditionally
non-Shariah  Bank takes risk in property up to the extent of it’s ownership share.
compliant as well
 Bank shares the loss in the property in case of any type of natural disaster.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the

2
availability and
rapid proliferation Monthly Payment
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
 In Islamic Housing Finance, monthly payment consists of two components:
not only the
interest-averse, but 1) Musharakah unit price
the traditionally 2) Monthly Rental Payment
non-Shariah
compliant as well
 With the purchase of musharakah share consistently, the rental amount is gradually
reduced every month.

 Incase musharakah property is collapsed, rental payment is stopped, as due to non-

availability of asset, rent cannot be charged.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the

3
availability and
rapid proliferation Early Payment Option
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
 There is no restriction on early payment. Customer can purchase additional
not only the
interest-averse, but
musharakah units along with monthly installment. The rental is reduced
the traditionally according to the remaining ownership share of bank in the property.
non-Shariah
compliant as well  No fixed penalty on early termination. Bank’s profit on early purchase of
musharakah share is subject to the appreciation of the musharakah property
value.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the
availability and
rapid proliferation 4 No Late Payment Penalty
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but  Incase of late payment of monthly installment, no penalty is taken from the customer
the traditionally as interest.
non-Shariah
compliant as well
 However to discourage late payments, the customer undertakes to pay an amount
towards charity which the bank utilizes for charitable purposes and do not consider it
as income.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the
availability and
rapid proliferation
of Islamic
5 Bank Pays Insurance Premium
mortgages, the
benefits of Islamic
financing have
 Since the bank is joint owner in the property, incase of Takaful (Islamic
been brought to
not only the Insurance), the bank pays the insurance premium up to the share it’s ownership.
interest-averse, but
the traditionally  Life Takaful (Islamic Insurance) is kept optional and customer is not forced to
non-Shariah
compulsorily obtain Life Takaful to secure financing. Incase of death of the
compliant as well
customer (i.e. one partner of the musharakah), the bank may enter into fresh
musharakah agreement with the legal heir of the deceased customer.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the
availability and
rapid proliferation 6 Repayment Schedule
of Islamic
mortgages, the
benefits of Islamic
financing have
 Repayment Schedule is very simple and consumer friendly.
been brought to
not only the
interest-averse, but  Customer can calculate monthly installment very easily.
the traditionally
non-Shariah
compliant as well  Schedule on next slide.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the Repayment Schedule
availability and
House Cost Price 1,000,000
rapid proliferation
of Islamic Customer Share 400,000 40% Total Units 60
mortgages, the Bank Share 600,000 60% Unit Sale Price 10,000
benefits of Islamic Profit Rate 13.00% Monthly Rent/Unit 108.33
financing have Tenure in Years 5
been brought to
not only the Balance Unit Balance
interest-averse, but Months Rent Unit Price Monthly Payment Price Units
the traditionally
0 600,000 60
non-Shariah
compliant as well 1 6,500 10,000 16,500 590,000 59
2 6,392 10,000 16,392 580,000 58
3 6,283 10,000 16,283 570,000 57
4 6,175 10,000 16,175 560,000 56
5 6,067 10,000 16,067 550,000 55
56 542 10,000 10,542 40,000 4
57 433 10,000 10,433 30,000 3
58 325 10,000 10,325 20,000 2
59 217 10,000 10,217 10,000 1
60 108 10,000 10,108 0 -
198,250 600,000 798,250
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
Housing is one of WAY FORWARD
the basic human
requirements, as
every family needs  Currently rental calculation is benchmarked with Central Bank rate. There is a need to
a roof. Providing formulate a mechanism to calculate rent based on real-life market rate for rent in the
shelter to every area where property locates.
family has become
a major issue as a
result of rapid  The State Bank of Pakistan is planning to set up a window for long term funds for low
urbanization and
cost housing. There is an extreme need to extend financing to the lower-middle class
higher population
growth. segment which is in dire need of home shelter.

 Further research required to pass on maximum benefits to the consumer.

Thank You