islamic finance presentation

Project Name: Diminishing Musharakah Contract

(Easy Home Financing)

Presented To:Sir Arshad Haroon

Presented By:Israr Ahmad KhanGhazanfar RasoolShahzaib Khalid

Muhammad Mohsin Nawaz

CONTENT: Islamic banking & finance Musharakah Evidence Types of musharakah Concept of diminishing musharakah Components of diminishing musharakah Mode of fix assets financing What is easy home financing Banks that are providing easy home financing Selection of bank Benefits of easy home financing Basic structure of easy home financing Diminishing musharakah FAQs

ISLAMIC BANKING AND FINANCEIslamic banking (Arabic: إسالمية is a banking or (مصرفيةbanking activity that is consistent with the principles of sharia (Islamic law) and its practical application through the development of Islamic economics. As such, a more correct term for Islamic banking is sharia compliant finance.Islamic finance is a financial system that operates according to Islamic law (which is called sharia) and is, therefore, sharia-compliant. Just like conventional financial systems, Islamic finance features banks, capital markets, fund managers, investment firms, and insurance companies.

MUSHARAKAH Musharakah is also known as al-sharikah (الشركة) Literally:

Combination of property whereby one cannot be differentiated from the other

Mixing of two properties so that they could not be distinguished from each other

Technically: An agreement between two or more parties to

combine their assets, labor or liabilities for the purpose of making a profit.

Al-Qur’an:

Evidence

Reported by Abi Hurairah R.A that the Prophet S.A.W said “Allah had said that: “I am the third of the partners, as long as any one of them does not betray the other. If he/she does betray the other, I will withdraw (move away) from them”

Reported by As–Saib Al–Makhzumi R.A that he used to be a partner of the prophet S.A.W (in business) before his prophet-hood. During the opening of Mecca he said to the prophet S.A.W: “Welcome my brother and partner!”

Evidence Hadith:

TYPES OF MUSHARAKAH Musharakah is a form of partnership (Shirkat) and

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.

CONCEPT OF DIMINISHING MUSHARAKAH

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.

COMPONENTS OF DIMINISHING MUSHARAKAH

Joint ownership of the Bank and customer. Customer as a lessee uses the share of the bank. Redemption of the share of the Bank by the

customer.

MODE OF FIX ASSETS FINANCING

Diminishing musharakah is commonly use for the purpose of financing of fix assets by various Islamic banks.

House financing Car financing Plant and machinery financing All other fix assets

WHAT IS EASY HOME FINANCING?

Easy Home is a Shariah-compliant Home Finance facility! One that is comprehensive, affordable, and totally interest-free. The Bank is committed to meet customers’ needs in a truly Shariah-compliant manner coupled with dedicated service excellence. Easy Home not only allows you to own your own home by paying easy installments but also keeps you safely away from interest based financing.

BANKS THAT ARE PROVIDING EASY

HOME FINANCING

Meezan BankAl Baraka Islamic Bank

Bank IslamiDubai Islamic Bank

Bank AlfalahAskari Bank LimitedHabib Bank Limited

SELECTION OF BANK?

Different banks are available that are providing “easy

home financing ” but we select Meezan Bank (The Premier

Islamic bank).

Because the Meezan Bank first time Islamic bank in

Pakistan.

BENEFITS OF EASY HOME FINANCING (MEEZAN BANK)

High financing amounts Adequate financing against property value Flexibility to make partial prepayments Minimal processing charges Affordable and competitive installment

amounts with a regular reducing monthly rental

Basic Structure Of Easy Home

Financing

The customer approaches the Bank with the request for House financing.

The Bank enters into a Musharakah (Joint Ownership) agreement with the customer and both of them pay their respective shares to the seller of the asset.

Client promises to purchase Bank’s share (units) over the tenure of transaction with the help of Undertaking to Purchase.

CUSTOMERBANKJoint

Ownership

Musharaka

Rent

Client promises to purchase Bank’s share (units) over the tenure of transaction with the help of Undertaking to Purchase.

Customer pays rent for the use of banks share in the property.

Client purchases the units every month via a separate offer & acceptance every month and will eventually become the owner of the property.

CUSTOMERBANKJoint

Ownership

Musharaka

Gradual Transfer of Ownership

Ownership of the asset is gradually transferred to the customer upon payment of asset price. (with the help of a Sale transaction between bank & customer at the end of each period)

CustomerBANKJoint

Ownership

Musharaka

Gradual Transfer of Ownership

19

Diminishing Musharakah FAQs (Frequently Asked Questions )

EASY HOME PAYMENT CALCULATION

CalculationsNo. of Units * : 180

*MBL Share in the Property is Divided into Musharakah Units

Unit Sale Price ** (PKR) :

8333.33

**Price of Units = Total MBL Share / No. Of Units

Monthly Rent Per Unit (PKR) :

67.08

Total Starting Rent *** (PKR) :

12075.00

***Total Starting Rent = Rent Per Unit X numbers of MBL Units outstanding

Starting Month Payment (PKR) :

20408.33

*Segment Easy Home Category Tenure**Type of Plan Property Price (PKR)Financing Required (PKR) Number of Tranches

Salaried

Buyer

15yearsUMI3500000

1500000

1

* SEP includes Doctors, Engineers, Auditors and Architects.* Non Resident Pakistanis** UMI - Unequal Monthly Installment** SMI - Step-Up Monthly Installment

DIMINISHING MUSHARAKAH FAQS

Payment Plans UMI Model

Easy Home is structured under the concept of Diminishing Musharakah where Meezan Bank and Customer enter into a Musharakah Agreement whereby both the parties provide their investments to be utilized for the purposes of purchase the property. The Joint ownership is created in the property between Bank & customer by virtue of the Musharakah agreement. (This is based on the principle of Shirkat ul Milk) Bank’s share is divided into units and is given to the Client on rent and Client promises to purchase Bank’s share (units) over the tenure of transaction Client purchases the units every month and will eventually become the owner of the property. Rental amount is adjusted according to the bank’s share (units) remaining in the property. In UMI , the Musharakah unit price remains constant through out the financing period.

Easy Home Payment Plan SummaryCost Price: (PKR) 3,500,000 /- Total Units 180

Customer Share: (PKR) 2,000,000 /- Unit Sale Price: (PKR) 8,333 /-

Bank Share: (PKR) 1,500,000 /- Monthly Rent Per Unit: 67 /-

Profit Rate: 9.66 % Total Starting Rent: (PKR) 12,075 /-

Tenure in Years: 15 Starting Month Payment: 20,408 /-

Segment: Salaried Easy Home Category: Buyer (UMI)Takaful Contribution Rate: 0.298%

Tentative Payment Schedule

Months Rent(PKR)

Unit Price(PKR)

Takaful Contribution(PKR)

Monthly Payment(PKR)

Balance Unit Value(PKR)

Balance Units

0 1,500,000 1801 12,075 8,333 373 20,781 1,491,667 1792 12,008 8,333 370 20,712 1,483,333 1783 11,941 8,333 368 20,643 1,475,000 1774 11,874 8,333 366 20,573 1,466,667 1765 11,807 8,333 364 20,504 1,458,333 175

175 403 8,333 12 8,748 41,667 5176 335 8,333 10 8,679 33,333 4177 268 8,333 8 8,610 25,000 3178 201 8,333 6 8,541 16,667 2179 134 8,333 4 8,472 8,333 1180 67 8,333 2 8,402 0

DIMINISHING MUSHARAKAH FAQSStep-up-Model

The Step-up Payment plan is introduced for customers who intend to avail maximum financing facility with lower installments. The step up model is based on Shariah-compliant structure of Diminishing Musharakah. In this model, the bank’s share is divided into Musharakah units and in the initial half of the facility tenure, the customer purchases one Musharakah unit from the bank every month and in the later half of the facility tenure, the customer purchases two Musharakah units from the bank every month. Thus the monthly installment during initial years is comparatively lower which is easily affordable. This model is a Shariah-compliant alternative available to the customers who wish to avail maximum financing facility from the Bank.

Easy Home Payment Plan SummaryCost Price: (PKR) 3,500,000 /- Total Units 270

Customer Share: (PKR) 2,000,000 /- Unit Sale Price: (PKR) 5,556 /-

Bank Share: (PKR) 1,500,000 /- Monthly Rent Per Unit: 45 /-

Profit Rate: 9.66 % Total Starting Rent: (PKR) 12,075 /-

Tenure in Years: 15 Starting Month Payment: 17,631 /-

Segment: Salaried Easy Home Category: Buyer (SMI)Takaful Contribution Rate: 0.298%


Months Rent(PKR)

Unit Price(PKR)




Balance Units

0 1,500,000 2701 12,075 5,556 373 18,003 1,494,444 2692 12,030 5,556 371 17,957 1,488,889 2683 11,986 5,556 370 17,911 1,483,333 2674 11,941 5,556 368 17,865 1,477,778 2665 11,896 5,556 367 17,819 1,472,222 265

91 8,050 11,111 248 19,409 988,889 178

92 7,961 11,111 246 19,317 977,778 176

93 7,871 11,111 243 19,225 966,667 174

94 7,782 11,111 240 19,133 955,556 172

95 7,692 11,111 237 19,041 944,444 170

175 537 11,111 17 11,664 55,556 10176 447 11,111 14 11,572 44,444 8177 358 11,111 11 11,480 33,333 6178 268 11,111 8 11,388 22,222 4179 179 11,111 6 11,296 11,111 2180 89 11,111 3 11,203 0


Months Rent(PKR)

Unit Price(PKR)




Balance Units

DIMINISHING MUSHARAKAH FAQSProfit Calculations Meezan Bank's Profit margin is correlated to the

conventional market trends. At Meezan Bank, the profit margin is directly correlated to market trends to provide a competitive product to our customers. Shariah allows the use of any conventional market factor as a benchmark to determine the profit rate of a particular product. The simple fact that the applied profit rate of our product is based on similar factors used in determining the applied rate of interest of a mortgage does not render the transaction or the contract invalid from the Shariah perspective, and neither does it make the transaction an interest-bearing one. On the other hand, it is the underlying structure of the product that determines its Shariah compliance.


Fatwa on Housing

Finance


What makes Islamic Housing Finance Shariah compliant and how does it differ from a conventional?

A Shariah compliant house finance product, approved by Shariah Supervisory Board.

Based on the concept of Diminishing Musharakah, which is in conformity to Shariah Laws related to financing , ownership & trade.

The nature of the contract is co-ownership in which ownership is taken through a partnership and then transferring complete ownership to the consumer instead of simply lending money is the major factor that makes our product Shariah Compliant.

The profit is pre determined based on market trends, so the payments are hence completely Riba-free.

DIMINISHING MUSHARAKAH FAQSIslamic Housing Finance Vs Conventional Housing Finance

1. OWNERSHIP OF THE PROPERTY

Islamic Housing Finance Conventional Housing Finance

In Islamic Housing Finance, bank is the owner of the property up to the extent of its share. In Easy Home, Meezan Bank creates ownership through Islamic Housing Finance Agreement into Musharakah property.

Conventional bank does not become the co-owner of the property. It gives loan to customer for purchase of property.

2. RISK OF THE PROPERTY


In the event of any loss in the musharakah property due to any natural disaster, an Islamic bank shares the loss in the property. Hence an Islamic Bank takes high risk.

Conventional bank does not share in the losses in case of any type of damage to property as it has given loan to the customer.

DIMINISHING MUSHARAKAH FAQS3. MONTHLY PAYMENT


Monthly payment consists of two components.

1) Unit price 2) Monthly Rental Payment.

Monthly Installment consists of two following components.

1) Principal payment2) Interest / Mark-up

4. MONTHLY PAYMENT STOPPAGEIslamic Housing Finance Conventional Housing Finance

In case the musharakah property collapse, Rental payment will be stopped, as due to non-availability of assets, rent cannot be charged.

In case of Musharakah property collapse, monthly payments will not be stopped as bank has lent money and it not an owner in the financed property.

DIMINISHING MUSHARAKAH FAQS5. EARLY PAYMENTS / BALOON PAYMENTS


Customers can purchase additional units at any time during transaction tenure. There is no restriction on purchase of additional units.

Conventional banks usually restricts customers to make balloon payments during the initial 2-3 years. Some bank allows balloon payments only 2 to 3 times in a year.

DIMINISHING MUSHARAKAH FAQS6. EARLY PAYMENTS PROFIT / PANELTY ON BALOON PAYMENTS


The property is re-valuated at the time of unit purchase to determine its current market price. If the market price remains the same than no additional payment is taken from customer and the additional musharakah units are sold at face value. However, if the price of the property increases, for example 20% or 30%, the bank increases the unit price by minimal amount say 3% or 5%. This additional amount is the true profit of the bank for selling the musharakah units from the bank’s share in the property.

The conventional banks charges penalty over the amount of balloon payment irrespective of the fact that value of property is appreciated or not.


Is this profit rate variable or fixed? The profit rate used for Housing Finance is a combination of

fixed and floating rates. The rentals for Musharakah property are calculated using a fixed rate applicable for the first year. These rentals are recalculated annually for the next 12 months at the first anniversary, using a floating rate formula based on the average of 12-month KIBOR (Karachi Inter Bank Offer Rate) announced before the start of each calendar quarter.


As you say that the rate may vary with KIBOR, approximately how much can it vary?

As the rentals are calculated using KIBOR (Karachi Inter-bank Offer Rate) as a benchmark the rate may vary.

DIMINISHING MUSHARAKAH FAQSDoes Islamic Banks allows its customers to sell the

property during the tenure of transaction?

If a customer wants to sell the property he can do so after purchasing the remaining Bank's share in the property. The option of financing transfer to a new owner is not available. However, bank can judge the new owner independently as per their policy for providing housing facility.

CONCLUSION The conclusion is that scholar agreed that it is the

best to implement diminishing musharakah partnership for house financing can be leased out to agreed rental.

Joint ownership of house is accepted by all school of Islamic jurisprudence since the financier sells its shares to customer.

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