Presented By:
Mohammad Raza
Vice Chairman - AMBP
EVP & Head of Consumer
Banking & Marketing
Meezan Bank Ltd.
Presentation Outline
Growth of Islamic Housing Finance – Statistics
Islamic Housing Finance Model – Diminishing Musharakah
Documentation of Islamic Housing Finance
Why Islamic Housing Finance.
Issues in Islamic Housing Finance
Growth of Islamic Housing Finance in Pakistan
Share of Islamic Banking in Housing Finance Portfolio of all
banks/DFIs in Pakistan
Conventional
Banks/DFIs (Excluding
HBFC)
HBFC
Islamic Banking
Industry
Gross Outstanding
as at 31-Dec-2012
(PKR in Billions)
28.40
12.80
13.80
Share in Percentage
52%
23%
25%
It is encouraging to note that share of Islamic Banking in Pakistan’s banking
industry is around 10% whereas incase of housing finance, the share of
Islamic Banking Industry is 25%.
Source: SBP Quarterly Reviews for the year 2012
Last Two years comparison of Gross Outstanding of Housing
Finance
Gross
Outstanding as at
Gross
Outstanding as at
31-Dec-2011
31-Dec-2012
(PKR in Billions)
(PKR in Billions)
37.40
32.20
(5.20)
14% Decline
HBFC
13.20
12.80
(0.40)
3% Decline
Full Fledged Islamic
Banks
8.70
10.00
1.30
15% Increase
TOTAL
59.30
55.00
(4.30)
7% Decline
All Banks / DFIs
(excluding
Islamic Banks &
HBFC)
Source: SBP Quarterly Reviews for the year 2012
Increase / Decrease in
a year
Share of Islamic Banking Industry in Fresh Housing Finance
Disbursements
Housing Finance
Quarterly Disbursements
in the year 2012
All Banks/DFIs
including HBFC &
Islamic Banking
Industry
(PKR in Billions)
Only Islamic Banking
Industry
(PKR in Billions)
Share of Islamic
Banking
Industry
Qtr-1, 2012 (Jan to Mar)
1.6
0.7
44%
Qtr-2, 2012 (Apr to Jun)
2.7
1.0
37%
Qtr-3, 2012 (Jul to Sep)
1.4
0.9
64%
Qtr-4, 2012 (Oct to Dec)
2.0
1.1
55%
Total
7.71
3.66
47%
Source: SBP Quarterly Reviews for the year 2012
Islamic Housing Finance structures:
•Murabaha
•Ijarah
•Istisna
•Diminishing Musharakah
(Mostly used in banks for Islamic Housing Finance)
Concept and Application of Diminishing
Musharakah
•
Diminishing Musharakah is kind of Shirkat-ul-Milk.
•
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.
Three components

Joint ownership of the Bank and customer

Customer as a lessee uses the share of the bank

Redemption of Bank’s share by the customer
Concept and Application of
Diminishing Musharakah

Musharakah is a form of partnership (Shirkat).
& there are two types of Shirkah:

1. Shirkat-ul-Milk : Joint ownership of two or
more persons in a particular property.

2. Shirkat-ul-Aqd : A partnership affected by
mutual contract. It can also be translated as a joint
commercial enterprise
Concept and Application of
Diminishing Musharakah
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).
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.
Concept and Application of
Diminishing Musharakah
Cont….
e)
f)
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.
Concept and Application of
Diminishing Musharakah
BANK
Joint
Ownership
Gradual Transfer of Ownership
CUSTOMER
Illustration
Easy Home - Home Buyer
House Cost Price
1,000,000
Customer Share
400,000 40%
Total Units
Bank Share
600,000 60%
Unit Sale Price
10,000
Monthly Rent/Unit
108.33
Monthly Payment
Balance Unit
Price
Profit Rate
13.00%
Tenure in Years
Months
0
1
2
3
4
5
56
57
58
59
60
60
5
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
-
Diminishing Musharakah Application
Islamic Housing Finance normally has following product options

Home Purchase
To buy a new house or apartment.

Home Building / Construction
To construct house on already owned land OR purchase a piece of land
and construct house thereon.

Home Renovation
To Renovate the existing house.

Home Financing Facility Transfer / Replacement
To transfer the existing home financing facility from one bank to
another.
Documentation of Diminishing
Musharakah Transaction
Musharakah Agreement:
This is the main agreement that establishes the share of bank and
customer in the musharakah Property.
Components:
- Both parties share
- Musharakah Property detail
Monthly Payment Agreement (Rent Agreement):
This agreement is signed after the Musharakah Agreement. Bank
gives out its share on rent to the customer via this agreement.
Components:
- Rent Schedule
- Formula of calculation of rent
Documentation of Diminishing
Musharakah Transaction
Undertaking to Purchase Musharakah Units:
This is an undertaking by the customer to purchase Bank’s
Musharakah units from time to time.
Components:
- Normal Sale Price
- Additional Unit Purchase Price
Undertaking to Sell Musharakah Units:
This is an undertaking by the bank to sell Bank’s Musharakah
units to the customer.
Components:
- Normal Sale Price
- Additional Unit Purchase Price
Why Islamic Housing Finance ?
1.
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.
2.
In Islamic Housing Finance, bank takes risk in
property up to the extent of it’s ownership share.
3.
Incase musharakah property is collapsed, rental
payment is stopped, as due to non-availability of
asset, rent cannot be charged.
Why Islamic Housing Finance ?
4.
With the purchase of musharakah share consistently,
the rental amount is gradually reduced every month.
5.
No restriction on purchase of additional musharakah
share.
6.
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.
Issues in Islamic Housing Finance
1. Use of Interest based benchmark for calculation of rent.
2. 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.
3. Unavailability of financing to lower-middle class
segment which is in dire need of home shelter.
Issues in Islamic Housing Finance
4. Although the public awareness about Islamic mortgages
is increasing but still at large, public is not aware of the
Islamic Mortgage.
5. Further research is need from shariah perspective to
develop more Islamic modes for mortgage financing.
Jazak Allah
&
Thank You