Islamic Housing Finance - Snapshot
Presented By:
Muhammad Raza
SEVP & Group Head
Consumer Banking & Marketing
Meezan Bank Limited
Islamic Banking – An Industry Overview
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.

Globally, the Islamic banking is growing 50% faster than the
overall banking sector. The size of Islamic banking industry has
grown to US$ 1.8 Trillion with the annual growth rate of approx
20%. The size is forecasted to reach US$ 5 Trillion by the year
2020.

In Pakistan, currently 5 full fledged Islamic Banks and 17
conventional banks having Islamic windows are operating with a
network of over 1,500 Islamic banking branches.

Meezan Bank Limited was the first in Pakistan to get license of
Islamic Banking in the year 2002. The bank has shown tremendous
growth in just 12 years. The Bank demonstrated robust business
growth and termed as Fastest Growing Islamic Bank in Pakistan.
With a branch network of 430 branches in 117 cities across
Pakistan, Meezan Bank is currently the largest Islamic bank in
Pakistan.
Growth of Islamic Housing Finance in Pakistan
Share of Islamic Housing Finance in
Overall industry Fresh Housing Finance Disbursements
YEAR
Fresh HF
Disbursement by
overall industry
(All Banks/DFIs
/HBFC & Islamic
industry)
(PKR in Billions)
Only Islamic
Banking
Industry
Share of Islamic
Banking Industry
(PKR in
Billions)
Year 2012
7.71
3.66
47%
Year 2013
10.75
5.93
55%
Year 2014
12.11
7.64
63%
Growth of Islamic Housing Finance in Pakistan
Share of Islamic Housing Finance in
Overall Gross Outstanding
Gross Outstanding
of overall industry
(All Banks/DFIs
/HBFC & Islamic
industry)
(PKR in Billions)
Only Islamic
Banking
Industry
Year 2012
55.00
13.80
25%
Year 2013
51.30
13.10
26%
Year 2014
53.70
18.41
34%
YEAR
Share of Islamic
Banking Industry
(PKR in
Billions)
Non Performing Loans (NPLs) in Housing
Finance market of Pakistan
Islamic Housing Finance Structures
Islamic Housing Finance
Available
Structures
Murabaha
Ijarah
Istisna’a
Diminishing
Musharakah
1.
Murabaha means “Profitable sale” where profit amount is known to the buyer.
2.
Ijarah means “To give something on rent”.
3.
Istisna’a is “An order to manufacture or construct”. It can be applied for
construction finance.
4.
Diminishing Musharakah is based on partnership. This structure is most popular
and widely used by Islamic Banks in Pakistan.
Concept & 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 & 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 & Application of Diminishing Musharakah
Cont….
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.
Concept & Application of Diminishing Musharakah
Joint
Ownership
Bank
Gradual Transfer of Ownership
Customer
Illustration
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.
Real Musharakah with asset-based transaction
which gives rise to the economy.
3.
In Islamic Housing Finance, bank takes risk in
property up to the extent of it’s ownership share.
Why Islamic Housing Finance?
4.
Incase musharakah property is collapsed, rental
payment is stopped, as due to non-availability of
asset, rent cannot be charged.
5.
With the purchase of musharakah share
consistently, the rental amount is gradually reduced
every month.
6.
Normally there is no restriction on purchase of
additional musharakah share.
Why Islamic Housing Finance?
7.
No compulsory penalty on early termination.
Bank’s profit on early purchase of musharakah
share is subject to the appreciation of the
musharakah property value.
8.
Incase of late payment of monthly installment,
no penalty is taken from the customer as interest.
However to discourage late payment, the
customer undertakes to pay an amount towards
charity which the bank utilizes for charitable
purposes and does not consider it as income.
Why Islamic Housing Finance?
9.
The charity structure is helpful for customers in
real financial crunch and punitive for willful
defaulters.
10.
Life Takaful (Islamic Insurance) is kept optional
and not made compulsory for the customers.
Incase of death of the customer (i.e. one partner
of the musharakah), the Islamic Bank may enter
into fresh musharakah agreement with the legal
heir of the deceased customer.
Jazak Allah
&
Thank You