Islamic House Finance
Mohammad Shaheed Khan
Islamic Finance Division
ABN AMRO BANK
Housing –
A Critical Issue
 Growing rate of Housing Demand in Urban areas
 Housing Units in the country
- Ownership
80.8%
- Rent free
10.2%
- Rented
9.0%
8% p.a.
19.649 million.
15.876 m
2.004 m
1.768 m
 Units required for the population of 149 million.
25.839 million
 Shortfall of Housing Units
7 million*
* Estimated
Housing –
Facts

Additional Supply required
( Due to Population Growth )
700,000

Depletion of stock @ 1% p.a.
200,000

New Housing Need
1,200,000

Supply estimate
300,000

Persistent Gap adding to backlog
900,000

One third in urban housing
400,000
Industry Potential
•
Urban Housing Needs
Per Year
400,000
•
At average cost of Rs.1.0 Mn/Unit
Rs.400 Billion
•
Mortgage Finance potential at
35% of Urban Housing needs
•
Current Mortgage Finance (2005)
Rs.135 Billion
(3% of GDP)
Rs.18 Billion only
(0.5% of GDP)
ABN AMRO
Islamic Home Finance
Concept
Islamic House Financing, based on Diminishing Musharakah (Joint Ownership)
has been designed as a Shariah Compliant Alternative to Home Mortgage Financing
Basis of Diminishing Musharakah
Based on Shirkat-ul-Milk (joint ownership) and “is the combination of assets of two or
more persons in a manner that creates a state of sharing in the realized profit or
income or benefiting from an increase in the value of the partnership assets. This
combination of assets for making profit necessitates losses, if any. This partnership
is created by the wish of the partners such as when two or more parties acquire
common shares in a particular asset.”
Product
Objective: To Provide Shariah Compliant Housing Finance Facilities
Description: The bank and client would jointly own the asset. The client would
make periodic payments for the use of bank’s share of the asset. Simultaneously
client will purchase of banks share and eventually becoming the sole owner of the
asset.
Availability
 Purchase of a constructed residential house/flat
 Construction of a residential house
 Balance Transfer Facility
Process Flow
Bank
Client
Joint
Ownership
Diminishing Musharakah Agreement
& Agreement to Mortgage
Asset
Rental Agreement
Monthly Payment =
Rental + Ownership Units
Bank
Asset
Complete Ownership
To Client
Agreement To Purchase
Client
Differences & Risks
Differences
Risks
Mitigation
 Joint ownership with the client
 Default Risk
 Mortgaged with the bank
 Sharing losses
 Asset Risk
 Asset Risk
• Destruction of
Responsible (as a co-owner) for
any damage to the structure of
the house/property
 Eligibility criteria, financing
limits and profit rates would be
similar to that of the
conventional products.
Property
• Death of Client
• Incomplete
Construction
 Late Payment
• Property Insurance
• Stability in Price
• Sale of Asset
 Charity Recovered
Unique
Features
 Property Insurance to be borne by the bank
 Accidental Life Insurance to be borne by the bank
 Charging of Rental when the client has legal possession of the property
 Equal Monthly Installments
 Client Friendly -
Industry Issues
 Determination of Rentals – Ideal Scenario (Islamic Finance
benchmark)
 Promote construction, increase housing stock.
 Asset Risk – Destruction of Property
 Mortgage of property – Is it covered under present legal system?
 Development of instruments like Securitization, REITS etc
 Stamp Duty, Titling and Ownership Laws etc
 Capital Gains
 Legal Issues – Legal Rights of Heirs
– Testing of Documentation in Courts
Thank You
M Shaheed Khan
+92-333-3712606
Mohammad.shaheed@pk.abnamro.com
Thank You
M Shaheed Khan
+92-333-3712606
Mohammad.shaheed@pk.abnamro.com
Agreements
House Financing (Musharakah) Agreement would entail that the Bank and the client
are joint owners of the property, enjoying ownership rights in an undivided property.
Agreement to Purchase Musharakah Property would bind the client to purchase
the Musharakah units from the bank.
Rental Agreement would entail, whereby the bank would allow the client the exclusive
right to use the property in consideration of a monthly payment.
Agreement to Mortgage will mortgage the property with the bank.
Illustration
Case Study: Housing Finance
Case Study: Housing Finance
Value of Property*:
Rs. 10,000,000/Bank’s Contribution (60%) Rs. 6,000,000/Client’s Contribution (40%) Rs. 4,000,000/Repayment Plan:
Tenor
Rate of Profit:
Month
0
1
2
3
4
15 years
KIBOR + 4 % p.a. (KIBOR = 9%)
Bank's O/S Inv Clients O/S Inv
6,000,000
4,000,000
5,989,085
4,010,915
5,978,053
4,021,947
5,966,900
4,033,100
5,955,627
4,044,373
Rental
65,000
64,882
64,762
64,641
64,519
Unit Purchase
10,915
11,033
11,152
11,273
11,395
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
178
179
180
149,397
75,101
0
9,850,603
9,924,899
10,000,000
1,618
814
0
74,296
75,101
75,915
Monthly Payment
75,915
75,915
75,915
75,915
75,915
●
●
●
●
75,915
75,915
75,915
FAQs
Difference between Diminishing Musharakah and a
Mortgage Loan
 In Diminishing Musharakah the relationship between the bank and the
customer is that of co-owners in a property and not one of lender-borrower
 The initial financing provided by the Bank is applied to acquire a share in
the property and not to provide a loan
 The customer’s monthly Acquisition and Profit Payments are applied,
respectively, to acquire the bank’s share in the property and for the
customer’s exclusive use of the whole property
 These payments do not constitute a repayment of a loan with interest since
it does not involve an exchange of cash for a greater amount of future cash
FAQs
Determination of the Rentals
 Benchmarked with prevailing interest rates
 Islamic financing benchmark – if one existed – would be preferred
 Pricing does not change the joint ownership nature
 Can be adjustable
FAQs
Bank’s share in any gain or loss that may result from a
sale of the property
 Not intended for making profits from trading in real estate
 Incase of destruction, if the property in beyond repair, insurance proceeds
are to be divided proportionately which may result in a loss
 Similarly, incase the property is sold for any reason, sale proceeds will
also be divided proportionately
FAQs
The bank as a co-owner on the title of the property
 The bank would not go on record as the co-owner on the title of the property
 Property mortgaged with the bank
 Bank’s ownership in the asset vests by way of the Musharakah agreement