The document discusses Islamic house financing through diminishing musharakah. It begins by outlining the housing shortage and demand in Pakistan. It then introduces ABN AMRO Bank's Islamic home financing product based on the principle of diminishing musharakah where the bank and client are joint owners of the property. The ownership is transferred gradually to the client through monthly rental and ownership purchase payments until full ownership is attained. The document also discusses differences from conventional mortgages, the product process flow, an example case study and concludes with answering some frequently asked questions.

1. Islamic House Finance
Mohammad Shaheed Khan
Islamic Finance Division
ABN AMRO BANK

2.  Growing rate of Housing Demand in Urban areas 8% p.a.
 Housing Units in the country 19.649 million.
- Ownership 80.8% 15.876 m
- Rent free 10.2% 2.004 m
- Rented 9.0% 1.768 m
 Units required for the population of 149 million. 25.839 million
 Shortfall of Housing Units 7 million*
* Estimated
Housing –
A Critical Issue

3.  Additional Supply required 700,000
( Due to Population Growth )
 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
Housing –
Facts

4. Per Year
• Urban Housing Needs 400,000
• At average cost of Rs.1.0 Mn/Unit Rs.400 Billion
• Mortgage Finance potential at
35% of Urban Housing needs Rs.135 Billion
(3% of GDP)
• Current Mortgage Finance (2005) Rs.18 Billion only
(0.5% of GDP)
Industry -
Potential

5. ABN AMRO
Islamic Home Finance

6. 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.”

7. 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 bank’s share of the asset. Simultaneously
client will purchase of banks share and eventually becoming the sole owner of the
asset.
 Purchase of a constructed residential house/flat
 Construction of a residential house
 Balance Transfer Facility
Availability

8. Process Flow
Bank Client
Joint
Ownership
Asset
Monthly Payment =
Rental + Ownership Units
Asset ClientBank
Complete Ownership
To Client
Diminishing Musharakah Agreement
& Agreement to Mortgage
Rental Agreement
Agreement To Purchase

9. Differences & Risks
 Joint ownership with the client
 Sharing losses
Responsible (as a co-owner) for
any damage to the structure of
the house/property
 Eligibility criteria, financing
limits and profit rates would be
similar to that of the conventional
products.
 Mortgaged with the bank
 Asset Risk
• Property Insurance
• Stability in Price
• Sale of Asset
 Charity Recovered
 Default Risk
 Asset Risk
• Destruction of
Property
• Death of Client
• Incomplete
Construction
 Late Payment
Differences Risks Mitigation

10. 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 -

11. 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

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

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

14. 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.
Agreements

15. Illustration
Case Study: Housing Finance

16. Month Bank's O/S Inv Clients O/S Inv Rental Unit Purchase Monthly Payment
0 6,000,000 4,000,000 65,000 10,915 75,915
1 5,989,085 4,010,915 64,882 11,033 75,915
2 5,978,053 4,021,947 64,762 11,152 75,915
3 5,966,900 4,033,100 64,641 11,273 75,915
4 5,955,627 4,044,373 64,519 11,395 75,915
178 149,397 9,850,603 1,618 74,296 75,915
179 75,101 9,924,899 814 75,101 75,915
180 0 10,000,000 0 75,915 75,915
Case Study: Housing Finance
Value of Property*: Rs. 10,000,000/-
Bank’s Contribution (60%) Rs. 6,000,000/-
Client’s Contribution (40%) Rs. 4,000,000/-
Repayment Plan:
Tenor 15 years
Rate of Profit: KIBOR + 4 % p.a. (KIBOR = 9%)
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17. 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 customer’s monthly Acquisition and Profit Payments are applied,
respectively, to acquire the bank’s share in the property and for the
customer’s 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

18. 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

19. FAQs
Bank’s 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

20. 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
 Bank’s ownership in the asset vests by way of the Musharakah agreement