Islamic Housing Finance
An Overview
Presented by
Muhammad Raza
EVP & Head of Consumer Banking
Meezan Bank Limited
Premier Islamic Bank in Pakistan
Karachi – Creek Vista
KPK – Saif-ul-Malook
Islamabad – City View
Pakistan –Snapshots
Lahore – Motor Way
Pakistan – Country Highlights
Pakistan emerged
on the world map
on August 14,1947
The country
borders Iran on the
west, India in the
east, Afghanistan
in the north-west,
China in the north
and Arabian sea on
the south.
Population: 180 Million (6th most populated country in the world)
37% population lives in Urban areas
63% population lives in Rural areas
Area :
796,095 sq-km
Official Language:
Urdu & English
GDP
US $ 200 Billion
GDP Growth Rate
3.7%
GDP by sector:
Agriculture 21%, Industrial 25% & Services 54%
SBP Discount Rate:
9.5 %
Banking Sector:
(No. of Banks)
Central Bank
Public Sector Banks
Private Sector Banks
Islamic Banks
Foreign Banks
Specialized Banks
Micro Finance Banks
DFIs (HBFC etc.)
1
5
17
5
7
4
10
8
Islamic Banking – Global & Regional Perspective
Islamic Banking Industry - Global Perspective
The recent past has
shown that while
the world faced
severe economic
crisis, Islamic
banking Industry
continued to grow
Persistently
making the world
take note of this
lesser known field.

Although the word “Islamic” refers to the beliefs specifically related to Muslims. But
Islamic Banking is not for Muslims alone.

In Islamic banking, all transactions are asset-based that gives rise to the economic
activity.

Globally, the Islamic banking is growing 50% faster than the overall banking sector.

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
shown that while
the world faced
severe economic
crisis, Islamic
banking Industry
continued to grow
Persistently
making the world
take note of this
lesser known field.
Pakistan



The share of Islamic banking is around 10% of over all banking industry.
Currently 5 full fledged Islamic Banks with725 branches and 13 conventional banks with 372 Islamic
branches operating in the country.
Meezan Bank Limited was the first to get license of Islamic Banking in the year 2002. The bank has
shown tremendous growth in just 10 years. The Bank demonstrated robust business growth and
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.
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 &
construction
industry
represents one of
the most critical
areas of economic
growth and
stability.
Shelter and
development are
mutually
supportive.
Housing forms an
important part of
any government’s
strategy for the
alleviation of
poverty and
employment
generation.

Significant gap in demand & supply :
 Backlog of 8.0 Million housing units is estimated.
 Annual increase in demand is estimated at 0.6 Million units.

Boom in Real Estate Market (2003 – 2008) :
 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.

Role of Banks / DFIs in Housing Sector :
 Till 2003, HBFCL (House Building Finance Co) was the only specialized
housing bank in the country providing housing finance since 1952.
 While commercial banks entered the mortgage business in the year 2003.
 Also the Nation’s first Islamic Housing Finance facility was launched by
Meezan Bank Ltd in the year 2003.

Story of the recession period :
 In the year 2008, the real estate bubble came to an end and property market
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
in the country has
led to the
establishment of
mortgages as the
flagship financing
product in almost
all Islamic banks
and subsidiaries
Share of Islamic Housing
Finance in Banking Sector
Islamic Banking in Pakistan’s
banking industry is close to 10%
However incase of house
financing the share of Islamic
Banking Industry is 25% in
terms of gross outstanding as of
Dec-2012.
Disbursement Share of
Islamic Housing Finance
Statistics of last year (2012)
showing that almost 50% of total
housing finance disbursement in
Pakistan in a single year was
through Islamic Banking Industry.
Islamic Housing Finance in Pakistan
For Housing
Finance, four
primary processes
are used. However,
in Pakistan only
“Diminishing
Musharakah” has
achieved any
significant scale,
although each has
merit for different
consumer segments
and product
usages.
Islamic Housing Finance
Available
structures
Murabaha
Ijarah
Istisna’a
Diminishing
Musharakah

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
means joint
venture. This mode
is based on the
Shirkat-ul Milk
sub-mode which
specifically defines
joint ownership in
property.
In Pakistan, most
of the banks use
Diminishing
Musharakah as
mode of house
financing.
Payment
House
Financier
Consumer
Seller
Title
It involves taking share in the ownership of a specific asset and then gradually
transferring complete ownership to the other partner. This concept is based on
Declining ownership of the bank.
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
means joint
venture. This mode
is based on the
Shirkat-ul Milk
sub-mode which
specifically defines
joint ownership in
property.
In Pakistan, most
of the banks use
Diminishing
Musharakah as
mode of house
financing.
General Process Flow for Diminishing Musharakah Transaction (Continued …)
c)
The Bank’s share is divided into ownership units and is given to the customer on rent
via Monthly payment agreement (Ijarah agreement).
d)
The Customer promises to purchase Bank’s share (units) over the tenure of the
transaction. This promise from customer is made in writing through Undertaking to
Purchase.
e)
Every month customer pays rent for the use of the Bank’s share in the property.
f)
The customer also purchases the Bank’s Musharakah units every month.
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
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
1
Bank takes Ownership and Risk

In Islamic Housing Finance, the nature of contract is a co-ownership. The transaction
is not based on lending & borrowing of money but on the joint ownership of an asset.

Bank takes risk in property up to the extent of it’s ownership share.

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
availability and
rapid proliferation
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
2
Monthly Payment

In Islamic Housing Finance, monthly payment consists of two components:
1) Musharakah unit price
2) Monthly Rental Payment

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 nonavailability of asset, rent cannot be charged.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the
availability and
rapid proliferation
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
3
Early Payment Option

There is no restriction on early payment. Customer can purchase additional
musharakah units along with monthly installment. The rental is reduced
according to the remaining ownership share of bank in the property.

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
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
4
No Late Payment Penalty

Incase of late payment of monthly installment, no penalty is taken from the customer
as interest.

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
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
5
Bank Pays Insurance Premium

Since the bank is joint owner in the property, incase of Takaful (Islamic
Insurance), the bank pays the insurance premium up to the share it’s ownership.

Life Takaful (Islamic Insurance) is kept optional and customer is not forced to
compulsorily obtain Life Takaful to secure financing. Incase of death of the
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
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
6
Repayment Schedule

Repayment Schedule is very simple and consumer friendly.

Customer can calculate monthly installment very easily.

Schedule on next slide.
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
With the
availability and
rapid proliferation
of Islamic
mortgages, the
benefits of Islamic
financing have
been brought to
not only the
interest-averse, but
the traditionally
non-Shariah
compliant as well
Repayment Schedule
House Cost Price
1,000,000
60
Customer Share
400,000 40%
Total Units
Bank Share
600,000 60%
Unit Sale Price
10,000
Profit Rate
13.00%
Monthly Rent/Unit
108.33
Monthly Payment
Balance Unit
Price
5
Tenure in Years
Months
0
1
2
3
4
5
56
57
58
59
60
Rent
Unit Price
6,500
6,392
6,283
6,175
6,067
10,000
10,000
10,000
10,000
10,000
16,500
16,392
16,283
16,175
16,067
542
433
325
217
108
198,250
10,000
10,000
10,000
10,000
10,000
600,000
10,542
10,433
10,325
10,217
10,108
798,250
Balance
Units
600,000
590,000
580,000
570,000
560,000
550,000
60
59
58
57
56
55
40,000
30,000
20,000
10,000
0
4
3
2
1
-
Islamic Housing Finance
Diminishing Musharakah – Meeting the Consumer Demand
Housing is one of
the basic human
requirements, as
every family needs
a roof. Providing
shelter to every
family has become
a major issue as a
result of rapid
urbanization and
higher population
growth.
WAY FORWARD

Currently rental calculation is benchmarked with Central Bank rate. There is a need to
formulate a mechanism to calculate rent based on real-life market rate for rent in the
area where property locates.

The State Bank of Pakistan is planning to set up a window for long term funds for low
cost housing. There is an extreme need to extend financing to the lower-middle class
segment which is in dire need of home shelter.

Further research required to pass on maximum benefits to the consumer.
Thank You