Presented by

Muhammad RazaEVP & Head of Consumer BankingMeezan Bank LimitedPremier Islamic Bank in Pakistan

Islamic Housing FinanceAn Overview

Pakistan –Snapshots

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Population: 180 Million (6th most populated country in the world)37% population lives in Urban areas63% 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 %

Central Bank 1Banking Sector: Public Sector Banks 5(No. of Banks) Private Sector Banks 17

Islamic Banks 5Foreign Banks 7Specialized Banks 4Micro Finance Banks 10DFIs (HBFC etc.) 8

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.

Pakistan – Country Highlights

Islamic Banking – Global & Regional Perspective

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

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.

Islamic Banking Industry - Global Perspective

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 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.

Islamic Banking Industry - Regional Perspective

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.

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.

The Housing Industry 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 Housing Finance in Pakistan

Share of Islamic HousingFinance in Banking Sector

Islamic Banking in Pakistan’sbanking industry is close to 10%However incase of housefinancing the share of IslamicBanking Industry is 25% interms of gross outstanding as ofDec-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.

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 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.

Islamic Housing FinanceIslamic Housing FinanceIslamic Housing FinanceIslamic Housing Finance

Availablestructures

Murabaha Ijarah Istisna’a DiminishingMusharakah

Islamic Housing Finance 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.

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).

House Financier Seller

Consumer

Payment

Title

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.

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.

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

Islamic Housing Finance

Bank takes Ownership and Risk1

Diminishing Musharakah – Meeting the Consumer Demand

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 non-availability of asset, rent cannot be charged.

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

Islamic Housing Finance

Monthly Payment2

Diminishing Musharakah – Meeting the Consumer Demand

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.

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

Early Payment Option3

Islamic Housing Finance

Diminishing Musharakah – Meeting the Consumer Demand

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.

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

No Late Payment Penalty4

Islamic Housing Finance

Diminishing Musharakah – Meeting the Consumer Demand

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.

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

Bank Pays Insurance Premium5

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 Schedule6

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

House Cost Price 1,000,000

Customer Share 400,000 40% Total Units 60

Bank Share 600,000 60% Unit Sale Price 10,000

Profit Rate 13.00% Monthly Rent/Unit 108.33

Tenure in Years 5

Months Rent Unit Price Monthly PaymentBalance Unit

Price Balance

Units

0 600,000 60 1 6,500 10,000 16,500 590,000 59 2 6,392 10,000 16,392 580,000 58 3 6,283 10,000 16,283 570,000 57 4 6,175 10,000 16,175 560,000 56 5 6,067 10,000 16,067 550,000 55

Repayment Schedule

56 542 10,000 10,542 40,000 4 57 433 10,000 10,433 30,000 3 58 325 10,000 10,325 20,000 2 59 217 10,000 10,217 10,000 1 60 108 10,000 10,108 0 -

198,250 600,000 798,250

Islamic Housing Finance

Diminishing Musharakah – Meeting the Consumer Demand

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.

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.

Islamic Housing Finance

Diminishing Musharakah – Meeting the Consumer Demand

Thank You