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  FAQs on Islamic Housing Finance

Conventional Banks/DFIs (Excluding HBFC) HBFC Islamic Banking Industry Gross Outstanding as at 31-Dec-2012 (PKR in Billions) 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 Share of Islamic Banking in Housing Finance Portfolio of all banks/DFIs in Pakistan Growth of Islamic Housing Finance in Pakistan

Gross Outstanding as at 31-Dec-2011 (PKR in Billions) Gross Outstanding as at 31-Dec-2012 (PKR in Billions) Increase / Decrease in a year All Banks / DFIs (excluding Islamic Banks & HBFC) (5.20)14% Decline HBFC (0.40)11% Decline Full Fledged Islamic Banks % Increase TOTAL (4.30)7% Decline Source: SBP Quarterly Reviews for the year 2012 Last Two years comparison of Gross Outstanding of Housing Finance

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) % Qtr-2, 2012 (Apr to Jun) % Qtr-3, 2012 (Jul to Sep) % Qtr-4, 2012 (Oct to Dec) % Total % Source: SBP Quarterly Reviews for the year 2012 Share of Islamic Banking Industry in Fresh Housing Finance Disbursements

Islamic Housing Finance structures: Murabaha Ijarah Istisna Diminishing Musharakah (Mostly used in banks for Islamic Housing Finance)

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

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) 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 and Application of Diminishing Musharakah

CUSTOMER BANK Joint Ownership Gradual Transfer of Ownership

Illustration

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. Diminishing Musharakah Application

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 Documentation of Diminishing Musharakah Transaction

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.

 Why is the profit margin charged by Islamic Bank correlated to the conventional mortgage market trends and how is the Islamic HF is Shariah compliant if the profit is tied to the same factors that influence interest rates?  The end result of Islamic Banking and Conventional Banking is the same. They appear similar?  What if the customer wants to purchase the Bank’s share early i.e. before maturity? FAQ’s on Islamic Housing Finance

 If the property value decreases, why does bank not sells its share on decreased rates?  Since both Bank and the Customer are joint owners, why are the property title documents in the name of the customer?  In Home construction cases, bank receives rent of the property during construction period. Does Shariah allow taking rent on land? FAQ’s on Islamic Housing Finance

Jazak Allah & Thank You