Presented By: Muhammad Raza SEVP & Group Head Consumer Banking & Marketing Meezan Bank Limited Islamic Housing Finance - Snapshot

 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  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 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. 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 – An Industry Overview

YEAR Fresh HF Disbursement by overall industry (All Banks/DFIs /HBFC & Islamic industry) (PKR in Billions) Only Islamic Banking Industry (PKR in Billions) Share of Islamic Banking Industry Year % Year % Year % Share of Islamic Housing Finance in Overall industry Fresh Housing Finance Disbursements Growth of Islamic Housing Finance in Pakistan

Share of Islamic Housing Finance in Overall Gross Outstanding YEAR Gross Outstanding of overall industry (All Banks/DFIs /HBFC & Islamic industry) (PKR in Billions) Only Islamic Banking Industry (PKR in Billions) Share of Islamic Banking Industry Year % Year % Year % Growth of Islamic Housing Finance in Pakistan

Non Performing Loans (NPLs) in Housing Finance market of Pakistan

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. Islamic Housing Finance Available Structures Murabaha IjarahIstisna’a Diminishing Musharakah Islamic Housing Finance Structures

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 Concept & Application of Diminishing Musharakah BankCustomer Gradual Transfer of Ownership

Illustration

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. Why Islamic Housing Finance?

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