Pakistan –Snapshots

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 (6 th 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:
GDP
GDP Growth Rate
Urdu & English
US $ 200 Billion
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.)
10
8
7
4
17
5
1
5

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.
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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.
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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.
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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.
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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 :
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Backlog of 8.0 Million housing units is estimated.
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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.
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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.
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While commercial banks entered the mortgage business in the year 2003.
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Also the Nation’s first Islamic Housing Finance facility was launched by
Meezan Bank Ltd in the year 2003.
 Story of the recession period :
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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.
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The Rise of Islamic Housing Finance :
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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
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.
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.
Murabaha
Islamic Housing Finance
Ijarah
Available structures
Istisna’a Diminishing
Musharakah
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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
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) b)
Customer approaches Bank with the request for House financing.
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
General Process Flow for Diminishing Musharakah Transaction (Continued …) 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. c) d) e) f)
The Bank’s share is divided into ownership units and is given to the customer on rent via Monthly payment agreement (Ijarah agreement).
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.
Every month customer pays rent for the use of the Bank’s share in the property.
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
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1
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.
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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
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2
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
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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
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4
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
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5
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
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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
Customer Share 400,000 40%
Bank Share
Profit Rate
Tenure in Years
600,000 60%
13.00%
5
Months
0
1
2
3
4
5
Rent
6,500
6,392
6,283
6,175
6,067
Unit Price Monthly Payment
10,000
10,000
10,000
10,000
10,000
Total Units
Unit Sale Price
Monthly Rent/Unit
16,500
16,392
16,283
16,175
16,067
60
10,000
108.33
Balance Unit
Price
600,000
590,000
580,000
570,000
560,000
550,000
Balance
Units
60
59
58
57
56
55
56
57
58
59
60
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
40,000
30,000
20,000
10,000
0
4
3
2
1
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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
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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.
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Further research required to pass on maximum benefits to the consumer.