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A brief review of conventional and Islamic home financing in Pakistan

GROWTH TRENDS AND FUTURE PROSPECTS OF ISLAMIC HOME FINANCING

After the steps taken by State Bank of Pakistan (SBP) to promote housing finance in Pakistan and interest taken by banks to engage in home financing, the housing finance sector is growing. It is important to note that share of Islamic banking in Pakistan’s banking industry is more than 10 percent, however, in case of mortgage financing the share of Islamic product is over 20 percent. Today, Islamic Banking is available through 6 full-fledged Islamic banks and 16 conventional banks having Islamic banking branches. Islamic banks are currently able to offer at least 75 percent of the product range available in contemporary conventional banking.

DIFFERENCES BETWEEN ISLAMIC & CONVENTIONAL MORTGAGE FINANCE

The principle differences between Islamic and conventional housing finance is that the former is equity based and the latter is debt based. In an Islamic mortgage situation both the bank and the client share ownership [equity] and therefore share the risk of equity ownership. In conventional banking, the client owns all the equity and the banks loan to the client is secured on the value of the property.

The mortgage market in Pakistan—less than 1% of GDP—still lags behind neighboring countries—India’s is 7% of GDP. Analysts are hopeful that as the home loan market progresses further this will act as a fill up to the real estate sector.

STANDARD CHARTERED BANK

Standard Chartered Bank is trying to make things easier for home buyers. Their latest home loan is based on a ‘Diminishing Musharaka’ structure where both the customer and bank share the ownership of the house. They will loan a customer up to 75 percent of the selling price and can offer 20 years of financing. Each customer is entitled to at least PKR 3 million up to a maximum of PKR 30 million for a home purchase.If one lives in Karachi, Lahore, Islamabad or Rawalpindi, he/she may apply for a mortgage and can purchase their dream home within a month’s time.

MCB BANK LIMITED

Owning a home is a dream for many. MCB Bank aims to help their customers fulfill this lifelong ambition and turn their dream into reality. Purchasing a home is no straight forward task and requires considerable expertise and research to make an informed decision. For this purpose, MCB maintains an especially-skilled team of consumer banking professionals across Pakistan, who assists their valued customers not just with home financing, but also with guidance respect to the strategic selection of their future home/plots. MCB Home Loans have the capability to offer financing solutions for the purchase of a home as well as for a plot and construction thereon.

ISSUES AND CHALLENGES FACED BY THE ISLAMIC HOUSING FINANCE SECTOR
  1. Taxation issues
  2. Capacity building
  3. Asset liability matching
  4. Issue of legal titles

Growth in mortgage finance will have a positive impact on the economic growth in Pakistan, as this will lead to increase in employment opportunities for semi-skilled workers and industries associated with housing sectors like cement, steel, wood, paint and textiles, which will be positively impacted, leading to real economic growth and asset creation, thus achieving the objectives of Islamic economic system.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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