Islamic House Finance

Mohammad Shaheed Khan

Islamic Finance Division
ABN AMRO BANK

Housing
A Critical Issue
Growing rate of Housing Demand in Urban areas
Housing Units in the country
- Ownership
80.8%
- Rent free
10.2%
- Rented
9.0%

8% p.a.

19.649 million.
15.876 m
2.004 m
1.768 m

Units required for the population of 149 million.

25.839 million

Shortfall of Housing Units

7 million*
* Estimated

Housing
Facts

Additional Supply required

( Due to Population Growth )

700,000

Depletion of stock @ 1% p.a.

200,000

New Housing Need

1,200,000

Supply estimate

300,000

Persistent Gap adding to backlog

900,000

One third in urban housing

400,000

Industry Potential

Urban Housing Needs

Per Year
400,000

At average cost of Rs.1.0 Mn/Unit

Rs.400 Billion

Mortgage Finance potential at

35% of Urban Housing needs

Current Mortgage Finance (2005)

Rs.135 Billion
(3% of GDP)
Rs.18 Billion only
(0.5% of GDP)

ABN AMRO
Islamic Home Finance

Concept
Islamic House Financing, based on Diminishing Musharakah (Joint Ownership)
has been designed as a Shariah Compliant Alternative to Home Mortgage Financing

Basis of Diminishing Musharakah

Based on Shirkat-ul-Milk (joint ownership) and is the combination of assets of two or
more persons in a manner that creates a state of sharing in the realized profit or
income or benefiting from an increase in the value of the partnership assets. This
combination of assets for making profit necessitates losses, if any. This partnership is
created by the wish of the partners such as when two or more parties acquire common
shares in a particular asset.

Product
Objective: To Provide Shariah Compliant Housing Finance Facilities
Description: The bank and client would jointly own the asset. The client would
make periodic payments for the use of banks share of the asset. Simultaneously
client will purchase of banks share and eventually becoming the sole owner of the
asset.

Availability
Purchase of a constructed residential house/flat
Construction of a residential house
Balance Transfer Facility

Process Flow
Bank

Client

Joint
Ownership

Diminishing Musharakah Agreement

& Agreement to Mortgage

Asset

Rental Agreement

Monthly Payment =
Rental + Ownership Units

Bank

Asset
Complete Ownership
To Client

Agreement To Purchase

Client

Differences & Risks

Differences

Risks

Mitigation

Joint ownership with the client

Default Risk

Mortgaged with the bank

Sharing losses

Asset Risk

Asset Risk

Destruction of
Responsible (as a co-owner) for
any damage to the structure of
the house/property

Property
Death of Client
Incomplete
Construction

Late Payment
Eligibility criteria, financing
limits and profit rates would be
similar to that of the conventional
products.

Property Insurance
Stability in Price
Sale of Asset

Charity Recovered

Unique
Features
Property Insurance to be borne by the bank
Accidental Life Insurance to be borne by the bank
Charging of Rental when the client has legal possession of the property
Equal Monthly Installments
Client Friendly -

Industry Issues
Determination of Rentals Ideal Scenario (Islamic Finance
benchmark)
Promote construction, increase housing stock.
Asset Risk Destruction of Property
Mortgage of property Is it covered under present legal system?
Development of instruments like Securitization, REITS etc
Stamp Duty, Titling and Ownership Laws etc
Capital Gains
Legal Issues Legal Rights of Heirs
Testing of Documentation in Courts

Thank You
M Shaheed Khan
+92-333-3712606
Mohammad.shaheed@pk.abnamro.com

Thank You
M Shaheed Khan
+92-333-3712606
Mohammad.shaheed@pk.abnamro.com

Agreements
House Financing (Musharakah) Agreement would entail that the Bank and the client
are joint owners of the property, enjoying ownership rights in an undivided property.
Agreement to Purchase Musharakah Property would bind the client to purchase

the Musharakah units from the bank.

Rental Agreement would entail, whereby the bank would allow the client the exclusive
right to use the property in consideration of a monthly payment.
Agreement to Mortgage will mortgage the property with the bank.

Illustration

Case Study: Housing Finance

Case Study: Housing Finance

Value of Property*:
Rs. 10,000,000/Banks Contribution (60%) Rs. 6,000,000/Clients Contribution (40%) Rs. 4,000,000/Repayment Plan:
Tenor
Rate of Profit:

15 years
KIBOR + 4 % p.a. (KIBOR = 9%)

FAQs
Difference between Diminishing Musharakah and a
Mortgage Loan
In Diminishing Musharakah the relationship between the bank and the
customer is that of co-owners in a property and not one of lender-borrower
The initial financing provided by the Bank is applied to acquire a share in
the property and not to provide a loan
The customers monthly Acquisition and Profit Payments are applied,
respectively, to acquire the banks share in the property and for the
customers exclusive use of the whole property
These payments do not constitute a repayment of a loan with interest since
it does not involve an exchange of cash for a greater amount of future cash

FAQs
Determination of the Rentals
Benchmarked with prevailing interest rates
Islamic financing benchmark if one existed would be preferred
Pricing does not change the joint ownership nature
Can be adjustable

FAQs
Banks share in any gain or loss that may result from a
sale of the property
Not intended for making profits from trading in real estate
Incase of destruction, if the property in beyond repair, insurance proceeds
are to be divided proportionately which may result in a loss
Similarly, incase the property is sold for any reason, sale proceeds will
also be divided proportionately

FAQs
The bank as a co-owner on the title of the property
The bank would not go on record as the co-owner on the title of the property
Property mortgaged with the bank
Banks ownership in the asset vests by way of the Musharakah agreement