2. 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.

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

4. 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

5. 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

6. Housing Finance

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

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

9. 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

10. 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

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

12. 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.

13. 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.

14. 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

15. 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 .

16. 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

17. 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

18. Islamic Real Estate Fund

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

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

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

22. Conclusion

23. 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.

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