By: Dr. Muhammad Imran Usmani Shariah Advisor Meezan Bank Ltd. Islamic Finance in Real Estate – Ideal for Shariah Compliant Investments By: Dr. Muhammad Imran Usmani Shariah Advisor Meezan Bank Ltd.

Presentation Overview Islamic Retail Banking Housing Finance Islamic Models Islamic Real Estate Fund Conclusion

Islamic Retail Banking Retail Banking is one of the most important sectors of any economy. Helps consumers obtain financings at affordable price Improves life standard Development of sectors Employment opportunities Good margins for Banks

Islamic Retail Banking Islamic Banks are developing alternate conventional retail banking products to help Muslim community. However, it should aim at facilitating consumers Without creating unnecessary debt culture

Housing Finance

Importance of Housing Finance Housing - One of the basic necessities In fact in Hadith Prophet Muhammad (SAW) said:

Need for Housing Finance In Pakistan, need for Housing Finance is mainly due to: High prices Reduced purchasing power Status consciousness

Islamic Housing Finance - Modes Islamic alternate of the conventional housing finance schemes can be developed by using any of the three following modes: Diminishing Musharaka Ijarah Murabaha

Islamic Housing Finance - Modes DIMINISHING MUSHARAKA Offers the most viable solution for housing finance. Under this mode, the Financial Institution and client jointly purchase the house. The share of the bank is divided into a number of units and it is agreed that the client will purchase the units of the share of the bank gradually, thus increasing his own share until all the units of the Bank are purchased by him so as to make him the sole owner of the asset after a specified period. During the financing period bank’s share is leased to the client who pays rent for using bank’s share in the asset

Islamic Housing Finance - Modes DIMINISHING MUSHARAKA The solution has been successfully implemented in USA UK Pakistan.

Islamic Housing Finance - Modes DIMINISHING MUSHARAKA Gained widespread acceptability and offered a optimum mix of risk & return for the financial institutions. However, local laws of some countries does not allow transaction under the Diminishing Musharaka structure.

Islamic Housing Finance - Modes IJARAH Ijarah is an Islamic alternate of Leasing. Under the mode, Bank purchases property for the client and give the property on lease to the client for an agreed period against an agreed rent. After the agreed time period ownership of the asset is transferred to the client.

Islamic Housing Finance - Modes IJARAH A viable and a practicable alternate, however, some tax laws & risk profile makes some Financial Institution hesitant to finance under this mode. The solution has been successfully implemented in UK

Islamic Housing Finance - Modes MURABAHA Murabaha is most commonly used mode of finance in Islamic Banking. Financing under the mode is simple, Bank purchases property for the client from the market and sells the property to the client after adding profit thereon. Ownership of the asset is transferred to the client at the inception of the transaction .

Islamic Housing Finance - Modes MURABAHA A practicable alternate, however, as housing finance is for a longer tenure, the chances of prepayment during the tenure of the facility are high. Prepayment modality used by the Islamic Financial Institutions needs Shariah approvals. The solution has been successfully implemented in USA

Comparison of Three Options Islamic Housing Finance - Modes Comparison of Three Options   Diminishing Musharaka Ijarah Murabaha Title Holder Joint Title Financier Customer Rate Fixed/Variable Fixed Prepayment Allowed Yes No/Controversial Refinance Available No Asset Risk Joint Late Payments Controllable Loss to the Bank

Islamic Real Estate Fund

Islamic Real Estate Fund Features Possible sources for Financing the funds Equity Shariah Complaint Leverage Assets Purchase property & rent it out.

Islamic Real Estate Fund Usage of Property Halal Lease Agreement should be Shariah compliant Income Rentals Capital Gains (Appreciation in property value)

Islamic Real Estate Fund Types Open Ended Closed Ended Islamic Real Estate Funds are succefully operating in: GCC Countries

Conclusion

Conclusion Islamic Financing modes can be easily used to finance Real Estate ventures and projects. Shariah Compliant Real Estate funds are an efficient way to provide profitable investment avenues for investors. As well as fulfilling the needs of those who require economical housing. However, there is a need for a more academic research in order to develop more products.

Conclusion For this purpose Shariah scholars and Finance experts need to collaborate more frequently. Support at Government level is necessary.