Islamic Banking System

Islamic banking
Interest is prohibited as it leads to injustices (zulm) and Islam is against all forms of injustices and exploitations and pleads an economic system, which aims at securing extensive socio-economic justice. There could be no denying of the fact that under the interest-based system of banking or in a system not strictly based on the principles and spirit of Shariah, depositors as well as borrowers are exploited in one form or the other. It is however, significant to note that, as in the case of conventional banking, the depositors are being exploited most under the system and practices enforced by banks and financial institutions operating world-wide under the banner of Islamic banking. Islamic banking made its debut over a quarter a century ago. At present 200 Islamic banks and financial institutions, operating in 27 Muslim and 16 non-Muslim countries, are managing a portfolio of about $200 billion. It is now the time to pose the following questions:

ORGANIZATIONAL STRUCTURE OF ISLAMIC BANK

What is the difference between Islamic banking and Conventional banking?

The main difference between Islamic and conventional banking is that Islamic teaching says that money itself has no intrinsic value, and forbids people from profiting by lending it, without accepting a level of risk in other words, interest (known as "riba") cannot be charged. To make money from money is prohibited wealth can only be generated through legitimate trade and investment. Any gains relating to this trading are shared between the person providing the capital and the person providing the expertise. At Islamic Banks generate all our profit through Shariah compliant trading and investment activities. We then share the profits with our customers at a pre-agreed ratio. In order to share profits you must hold one of our savings or investment account

Governance structures
These structures are depicted in Figure 2 which sketches the conceptual framework of corporate governance for Islamic bank. Central to such a framework is the Shariah Supervisory Board (SSB) and the internal controls which support it. The SSB is vital for two reasons. First, those who deal with an Islamic bank require assurance that it is transacting with Islamic law. Should the SSB report that the management of the bank has violated the Shariah, it would quickly lose the confidence of the majority of its investors and clients. Second, some Islamic scholars argue that strict adherence to Islamic religious principles will act as a counter to the incentive problems outlined above. The argument is that the Islamic moral code will prevent Muslims from behaving in ways which are ethically unsound, so minimizing the transaction costs arising from incentive issues. In effect, Islamic religious ideology acts as its own incentive mechanism to reduce the inefficiency that arises from asymmetric information and moral hazard. Such matters are obviously basic to the successful 4

operation of Islamic modes of finance, and they are assessed in the next section when I examine Principles of Islamic Banking.

Principles of Islamic banking

An Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the Shariah in all of its actions and deeds. The original meaning of the Arabic word Shariah was 'the way to the source of life' and it is now used to refer to legal system in keeping with the code of behavior called for by the Holly Qur'an (Koran). Four rules govern investment behavior:

the absence of interest-based (riba) transactions; the avoidance of economic activities involving speculation (Ghirar); the introduction of an Islamic tax, Zakat;

The discouragement of the production of goods and services which contradict the value pattern of Islamic (haram) In the following part I explain these four elements give Islamic banking its distinctive religious identity.

True Modes of Financing An Islamic bank is a financial institution which identifies itself with the spirit of Shariah, as laid down by the Holy Qur'an and Sunnah, as regards its objectives, principles, practices and operations. An Islamic bank does not normally lend money except interest-free loans which are termed as Qard Hasanah (Benevolent Loans) while loans on service charge, not exceeding the actual administrative cost of such loans, have also been permitted by Muslim Scholars. To replace interest, the ideal mode of financing under the Islamic banking system is "Financing on Profit & Loss Sharing" (PLS) basis. Qard Hasanah is for the benefit of the individuals and the society at large. To safe-guard the interest of depositors/investors, these types of loans, as a matter of policy, do not constitute a significant source of financing by Islamic banks. However, if in any country, the Islamic System of Zakat is established and the Islamic State treasury starts functioning, the requirements of Qard Hasanah would primarily be met by the treasury.

The bulk of financing by Islamic banks has to be equity oriented. In this mode of financing, the losses are shared by the financier along with the entrepreneur in the ratio of their respective capitals. The profits are, however, shared in an agreed ratio. The rates of returns are thus replaced by ratios. While designing an alternate to interest-based system, it was realized that large scale resorting to PLS system of Islamic banking could pose serious risks and hazards to Islamic banks due to wide-spread tendency to adopt un-ethical accounting practices to conceal true profits, high rate of illiteracy and host of other reasons.

Mudarbah Mudarbah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib".

DIMINISHING MUSHARAKAH

According to this concept, a financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share till all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be. At the same time the share of financier is further divided in eight equal units, each unit representing 10% ownership of the house. The client promises to the financier that he will purchase one unit after three months. Accordingly, after the first term of three months he purchases one unit of the share of the financier by paying 1/10th of the price of the house. It reduces the share of the financier from 80% to 70%. Hence, the rent payable to the financier is also reduced to that extent. At the end of the second term, he purchases another unit increasing his share in the property to 40% and reducing the share of the financier to 60% and consequentially reducing the rent to that proportion. This process goes on in the same fashion until after the end of two years,

the client purchases the whole share of the financier reducing the share of the financier to 'zero' and increasing his own share to 100%

Difference between mudarbah and Musharakah

(1) The investment in Musharakah comes from all the partners, while in mudarbah; investment is the sole responsibility of rabb-ul-mal. (2) In Musharakah, all the partners can participate in the management of the business and can work for it, while in mudarbah; the rabb-ul-mal has no right to participate in the management which is carried out by the mudarib only. (3) In Musharakah all the partners share the loss to the extent of the ratio of their investment while in mudarbah the loss, if any, is suffered by the rabb-ul-mal only, because the mudarib does not invest anything. His loss is restricted to the fact that his labor has gone in vain and his work has not brought any fruit to him. However, this principle is subject to a condition that the mudarib has worked with due diligence which is normally required for the business of that type. If he has worked with negligence or has committed dishonesty, he shall be liable for the loss caused by his negligence or misconduct. (4) The liability of the partners in Musharakah is normally unlimited. Therefore, if the liabilities of the business exceed its assets and the business goes in liquidation, all the exceeding liabilities shall be borne pro rata by all the partners. However, if all the partners have agreed that no partner shall incur any debt during the course of business, then the exceeding liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition. Contrary to this is the case of mudarbah. Here the liability of rabb-ul-mal is limited to his investment, unless he has permitted the mudarib to incur debts on his behalf. (5) In Musharakah, as soon as the partners mix up their capital in a joint pool, all the assets of the Musharakah become jointly owned by all of them according to the proportion of their respective investment. Therefore, each one of them can benefit from

the appreciation in the value of the assets, even if profit has not accrued through sales. The case of mudarbah is different. Here all the goods purchased by the mudarib are solely owned by the rabb-ul-mal, and the mudarib can earn his share in the profit only in case he sells the goods profitably. Therefore, he is not entitled to claim his share in the assets themselves, even if their value has increased.

Islamic banks really adopt true method of Islamic finance or not

I) Whether banks operating under the banner of Islamic banking have succeeded in the elimination of injustices of the interest-based system as ordained by Holy Qur'an (2:279)? ii) Whether banks operating under the banner of Islamic banking have contributed to the attainment of socio-economic justice in line with the objectives of Islamic economic system? iii) Whether banks operating under the banner of Islamic banking are, for all practical purposes, not following the bench marks of interest-based system under Murabahah, Bai-Mu'ajjal or the like modes of financing? iv) Whether the net result in modes referred to at (iii) above really differs much from the interest-based loaning? v) Whether by adopting the modes referred to at (iii) above, banks assume any responsibility for the operational losses of the party availing finances from them? vi) Whether sharing in the operational losses are not the essence of Islamic system of banking? vi) Whether large scale financing on a perpetual basis, on modes approved for "Sale transactions", can continue to be made for an indefinite period by Islamic banks which are not trading houses but are financial institutions?

While attempting to firm up views in respect of above questions, it must be kept in view that Islamisation of banking system is a part of overall Islamic value system and is not merely refraining from interest-based transactions. The objective of Islamic banking system is to make a positive contribution to the fulfillment of socio-economic objectives of the society in all spheres, including trade, industry & agriculture etc.

Rightly Observation of Mulana Muhammad Taqi: a) Islamic banks are using the instrument of Mudarbah and Ijarh within the framework of the conventional benchmarks like Libor etc. where the net result does not differ much from interest-based transactions.

b) By not even gradually enhancing the financing on PLS basis, the basic philosophy of Islamic banking seems to be totally neglected by the Islamic banks.

c) The Shariah Scholars have allowed the use of fixed return financing techniques i.e. Mudarbah & leasing etc only in those spheres where Musharakah can not work. d) When the common people realize that the net result in the transaction of the Islamic banks is the same as was in the transactions of conventional banks, they become sceptical towards the function of Islamic banks. It therefore, becomes very difficult to argue for the case of Islamic banking before the common people, especially before the non- Muslims who feel that it is nothing but a matter of twisting documents only.

"Islam says in clear terms that the lender is not justified in earning a fixed rate of profit, irrespective of the operational results of the business." It therefore, appears that, in most cases, the fixed returns charged by banks on transactions which are financial in nature are not permissible simply by providing them a cover of Mudarbah or the like modes which are in fact transactions of sale. It was over two decades ago that The Council of Islamic Ideology, Pakistan observed:

... ideally the real alternatives to interest under an Islamic economic system are profit / loss-sharing and Qard-Hasan." While referring to other modes of financing such as, Hire Purchase & Leasing etc. the Council observed: "It is, therefore, imperative that the use of these methods should be kept to the minimum extent that may be unavoidably necessary under the given conditions and that their use as general techniques of financing must never be allowed."

The Council of Islamic Ideology Report Cautioned:

"It would not be advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back door for dealing on the basis of interest." "The basis of this technique, though not prohibited according to Hanafi and Hanbali Schools of Fiqh and that too in exceptional circumstances, its wide spread use is not permissible as mark-up does not differ in essence from the interest system."

The Council however, observed: "It is unfortunate that this warning was disregarded and the mark up system was made the pivot of the new arrangements."

The Federal Shariah Court, Pakistan observation

In its Judgment dated November 14, 1991 also referred to the following observations of the Council: The fact of the matter is that "mark-up" is a crude trading practice which has been permitted by certain religious scholars under specified conditions. Its permissibility is questioned by other scholars. In any case, it is a device, which is relevant in the contract of transactions between a seller and buyer of goods. Banks are not trading organizations. They are essentially financial institutions which mobilize funds from the general public and make them available to productive undertakings."

10

Hasan- uz- zaman says: The ghost of interest is haunting banks to calculate a fixed rate percent per annum in many modes of financing including Murabahah (Bai-Muajjal, Mark-up) etc. The spirit behind all these contracts seems to make a sure earning comparable with prevalent rate of interest and as far as possible, avoid losses which otherwise could occur." He adds that "they (Second line techniques), have failed to do away with undesirable aspects of interest thereby they have retained what an Islamic bank should eliminate."

Financing on PLS Basis

In the Islamic banking system, the concept is that of ratios in which profits and losses are shared instead of fixed, pre-determined interest and mark-up / profit rates. The issue of possible injustice due to inflation and recession, in money lending transactions, was settled by Islam over 1400 years ago, as PLS system absorbs the impact of inflation as regards the sharing of operational results are concerned. A glaring example is that of partnership where there is no dispute between partners due to high inflation or other-wise. A comparison of the salient features of the financing on PLS Basis and the second line fixed return techniques are given below:-

MODEL ISLAMIC BANK

It is important to appreciate that the requisites for total implementation and success of Islamic banking in a country, include re-shaping the society, re-structuring of the economic system and re-framing of the laws according to the dictates of Islam. The most important and difficult task however, is the reformation of society which has to be undertaken as an on-going process. We therefore, need to change our priorities and at least as much emphasis should be laid on improving the ethics, honesty and values of the society as is being done for expansion of riba-free banking". This will then create a conducive environment for more and more financing under profit and loss sharing system of Islamic banking. Mirakhor observes, "Perhaps the most challenging issue facing the implementation of an Islamic financial system is the development of risk-bearing instruments that can provide the investors with a sufficient degree of liquidity, security and profitability to encourage their holding". Islamic banks also face a challenge of developing innovative services and products for utilizing these funds effectively and efficiently for financing under PLS system.

11

In view of the position explained here-in-above and considering the real difficulties in presently adopting the PLS system of Islamic banking for bulk of the financing for trade, industry and agriculture, it is felt that the need of the hour is to establish Model Islamic banks in all GCC countries as also in other Islamic countries where a large number of interest-free banks have been operating for a number of years.

Qualities of modern Islamic bank

a) The Proposed Model Bank would be a commercial bank. While the objective of the Bank would be to earn profit, it would identify itself with the Shariah as regards objectives, principles, practices and operations. The Proposed Bank would undertake all normal banking business as is done by interest-based banks but the Provisions of Shariah would be kept in view at all times. b) The proposed Model Bank would accept deposits/investments on PLS basis (other than demand deposits) and would also allow financing only on this basis. The operations of the Bank will be supervised from Shariah point of view by a board of religious scholars. c) The proposed Bank would develop risk-bearing but competitive products for deposits / investments wherein depositors / investors are given reasonable assurance of higher returns as also of safety of their funds. This Bank would also

Develop innovative but competitive products for financing which are not only compatible with Shariah but also cater to the needs of traders and industrialists etc., in the modern complex world which is ever - changing. The sponsor directors of the Proposed Model Bank should be Muslim Scholars, Jurists, chartered accountants, economists, bankers and investors. All these persons should be men of integrity and of highest reputation. They should also have unshakeable faith and commitment in the Islamic banking system and should have good knowledge of its principles, products and procedures. d) These persons would take up the challenging assignment for the pleasure of Allah and for proving that Islamic banking in its totality is not only workable but would In shaAllah also pay rich dividends in material terms to all those who deal with or work for the Bank. e) It is sincerely believed that the proposal of Model Islamic Bank is not only feasible but is the need of the hour. The successful operational results of this

12

Bank would also motivate the existing Islamic banks to enhance their share of financing on PLS basisis

Whats the difference between a conventional mortgage and an Islamic home-buying facility?
There are several key differences. With a conventional mortgage, you borrow money to buy a house and then pay the money back over a number of years. You are charged interest on the money you borrow, which contravenes Sharis Principles. With our Islamic home-buying facility we, Islamic Bank share with you in purchasing the property and you then pay rent on our share of the property. Over time you will be able to purchase our share and reduce your rentals.

13

Car Finance Islamic Bank Vs Conventional Bank

Car finance through Islamic banks and commercial banks

Car finance through Islamic financing:

14

Diminishing Musharakah is commonly used for House financing Car Financing Fixed Assets financing Project Financing

Profit margin said by Islamic banks 14%

Financing limits of Islamic banks Rs300000/- -------- Rs 1600000/-

Islamic Banks Car Ijarah is a car rental agreement, under which the Bank purchases the car and rents it out to the customer for a period of 3 to 5 years, agreed at the time of the contract. Upon completion of the lease period the customer gets ownership of the car against his initial security deposit. In which mode Islamic bank finance? Islamic banks finance through Car Ijarah is Pakistans first "Interest Free" car financing based on the Islamic financing mode of Ijarah (Islamic leasing). This product is ideal for individuals looking for car financing while avoiding an interest-based transaction. It means no interest or riba and riba is haram in Islam.

Installments payments of Mezan bank s.no vehicle Cost Security deposit Total monthly rent Initial payment

15

Rs 3years 4 years 9390 12356 25284 23923 11540 36320 5years 8406 11061 22634 21416 10330 32514 53750 70100 141350 133850 65600 202175

1 2 3 4 5 6

Mehran vx cng Alto vx cng Liana 1.6 Corolla xli 1.3 Daihatsu cuore cx Honda civic vtec mt

345000 454000 929000 879000 424000 1334500

15 15 15 15 15 15

51750 68100 139350 131850 63600 200175

11294 14862 30412 28775 13880 43687

Initial payment = security deposit +processing charges Monthly rent for 5 years = 8406* 60 months = 504360 Actual price of Mehran (vx cng) Rs 345000 total payment in 5years Rs 504360 =159360 is that amount which is given extra

Used Car Selection Criteria 1. The second hand car selected should be from its first owner. 2. The vehicle should not be older than 5 years. 3. The minimum security deposit for a vehicle up to 2 years of age is 20%, while minimum security deposit for a vehicle over 2 years of age is 30%. 4. At the time of termination of the Ijarah agreement, the vehicle should not be more than 8 years old. This means that if a car is 5 years old, the Car Ijarah tenure is not more than 3 years and if its 4 years old, the tenure may be set for a maximum 4 year term. 5. This facility is for locally manufactured cars of Suzuki, Toyota, Honda & the new model of Santro only.

16

6. Second hand vehicles selected should not be worth more than Rs. 1 million and less than Rs. 250,000/-. Meezan Bank will have the vehicle valued by an independent valuation company accordingly

Individuals/Self-Employed Professionals/Businessmen 1 2 3 4 5 6 7 Copy of NIC Two recent passport sized photographs Recent Utility Bill (Electric/Gas/Water) received at the residential address Last Six Month Bank Statements Last Six Month Bank Statement of Business (for Businessmen) Certified/Original copy of Recent Pay slips (for Salaried Individuals) Copy of Rent Agreement (if applicable)

Rights & liabilities of Owner v/s User Under Ijarah, all ownership-related risks lie with the Bank while all usage related risks lie with the user, thus making the Lessor the true owner of the asset and making the income generated through the contract permissible (Halal) for the Bank.

Continuation of lease rentals in case of total loss or theft of vehicle Under the Islamic system, rent is consideration for usage of the leased asset, and if the asset has been stolen or destroyed, the concept of rental becomes void. As such, in the above-mentioned eventualities, Islamic bank does not charge the lease rental. Takaful instead of Insurance (where available) Ijarah Agreement clearly states that Meezan bank will use conventional Insurance only as long as Takaful, which is Islamic product for insurance is not available. As soon as Takaful becomes available in Pakistan, Meezan Bank will convert to Takaful 17

and discontinue using conventional Insurance. Currently MBL is insuring its vehicle through Takaful in Karachi and as soon as Takaful is available in other cities we will switch to Takaful.

Permissibility for Penalty of Late Payment of Rent under Islamic Shariah In most contemporary financial leases, an extra monetary amount is charged, in their income, if the rent is not paid on time. This extra amount is the considered as Riba and is Haram. Under Ijarah, the Lessee may be asked to undertake, that if he fails to pay rent on its due date, he will pay certain amount to a charity, which will be administered through the Islamic Bank. For this purpose the bank maintains a charity fund where such amounts may be credited and disbursed for charitable purposes.

Questions on Islamic car financing Shariah said that Q: Insurance is a cost related to ownership of the assets, and therefore should be borne by the Lessor? But Islamic banks in Pakistan take insurance from lessee with rental income Shariah said that Q: The Lessor banks cannot increase the rent unilaterally? But banks in Pakistan can change the or increase the rent any time. Shariah said that Q: Lessor (banks) expenses relating to the corpus of the asset i.e. insurance, accidental repairs etc. will be borne by the lessor? But Islamic banks cannot fulfill the conditions Shariah said that

18

Q: Two contracts into one contract is not permissible in Shariah therefore, the bank cannot have the agreement of hire and purchase into one agreement, only the bank can undertake/promise to purchase the leased asset ? But an Islamic bank uses two contracts at a time which is haram in Islam

Commercial banking car finance

Low installment & flexibility

In our fixed plan, you are offered a variety of affordable rates and installment plans, suiting your needs.

Pays (pays as you select)

19

The graph below indicates the increasing trend of monthly For the first time in Pakistan, UBL Drive allows you to choose from different repayment options to suit your present & future expected cash flows:

Pays-up
you can design your own repayment plan with installments increasing every year, starting with low installments to suit your cash flows. The graph below indicates the increasing trend of monthly installments you will be paying over the life of the loan.

Pays-down
Step down allows you to pay higher at the beginning with your installment reducing in subsequent years. Your total payment during the duration of the loan remains very affordable. The graph below indicates the declining trend of monthly installments you will be paying over the life of the loan.

20

Table schedule for Suzuki Mehran:

s. no
1 2 3 4 5 total

Installments
8368 8309 8250 8192 7307

years
1 2 3 4 5

Month wise
8368*12=100416 8309*12=99708 8250*12=99000 8192*12=98304 7307*12=87684 Rs 485112/-

21

Actual price of Mehran (vx cng) Rs 345000 total payment in 5years Rs 485112=140112 is that amount which is given extra

Comparison

22

Mezan bank Islamic car finance profit margin 14%

Ubl car financing mark up 14% conventional insurance but better than Islamic bank insurance

conventional insurance not Islamic and burden of payment on the customer financing limit 300000- 1600000 non flexible payments

financing limit 3000001600000 flexible payment of installment Free car tracking device

No car tracking device In the case of loss or theft Mezan bank do not charge rent of the car processing charge of Rs. 5,000 will apply down payment of just 15 % , 20% 30% Extra payment Rs 159360/-

UBL charge the amount

processing charge of Rs. 4,000 will apply Down payment of just 10%. Extra payment Rs140112/-

23

Home Finance
24

Islamic Vs Conventional

Commercial banking home finance Ghar Aasan Scheme

The Management of HBFC has taken bold steps in helping its customers obtain affordable quality housing to fulfill their individual needs and expectations. We are now committed to play a prominent role as a socially responsible and commercially sustainable house financing institution of the country. 25

The Ghar Aasan Scheme will support you in purchase or construction of house .The salient features of the scheme is as following: Financing support up to Rs.75, 00,000/ is accessible to be provided to all prospective customers subject to the customers eligibility & location of the project. The loan can be repaid over a maximum repayment period of 20 years in affordable installments depending on the customers age, repayment ability and the share the rental income. The overall cost in acquiring housing under the scheme is much more attractive as compared other financing institutions. Shariah compliant scheme. Hassle free investment & repayment facility.

Eligibility Criteria A g e Applicants between 18 to 60 years of age are eligible for this scheme in order to authenticate confirmed clearance of the investment liability (relax able up to 65 years on case to case basis). If the customer is not in a position to clear the investment liability within 60 years of age, he can provide guarantee of person or persons having inheritable right in his property who could take repayment of investment liability within the above age limit, in deserving case, guarantee(s) of brother(s), sister(s) or their adult children i.e. sons / daughters in Law etc. are also acceptable. Race, Caste, Creed: All Muslim or non-Muslim citizens of Pakistan, Azad Kashmir, Northern Areas

Income: The customer should be employed / self-employed and have sufficient repayment capacity to meet the investment obligations;

Proof of income: Salary Certificate, Affidavit, Tax Return Property:

26

The customer should already possess ownership of the residential plot upon which house is intended to be constructed OR Addition of floors/ additional rooms to the house are intended to be made.

Location

Rural Area

In all Urban Areas including District Head Quarters, Tehsil & Small Towns

Urban Areas of SUK / LAR / SWL SKP / BWP / GRT /

Urban

Areas

Urban Areas of HYD QTA / PSH

of HYD QTA / PSH

Urban Areas of KAR / LHR / MTN / ISL / RWP / FSBD

Rs Investment Limit 100,000

Rs. 1,000,000 7.5%

Rs. 1,500,000/ 7.5%

Rs 25000000 10%

Rs. 5,000,000 12.5%

Rs. 7,500,000 12.5%

Appreciation 2.5% or interest rate Rent or risk premium 5%

5%

5%

5%

5%

5%

25% increase in rental rate after every three years. Insurance Premium @ 0.50 paisa per thousand per month. (Lump Sum Profit rate will be applied with applicable appreciation rate if partner wants to close the account within two years from the execution of deed of assignment & partnership.

27

Interest rate (Karachi inter banks rate + risk premium) 10% + 7.5%

Loan schedule for home construction

Investment Insurance Monthly installment Duration Months Interest rate Effective interest rate:
m

2000000 10000 24950 10 years 120 14.97%

(1 +I/m) -1 = 14.97% 24950*120 =2994000 2000000 = Rs 994000 is that amount which is given to the bank + original amount

DELAYS - FINES AND PENALTIES: Fine of 4% per month or part thereof on the amount overdue will be levied on all payments delayed beyond the grace period of 10 clear days. Allotment will be cancelled in case of non payment of 4 installments in a row. The decision for cancellation will however rest with the Authority.

28

Standard Chartered Islamic Home

With Standard Chartered Islamic Home Finance you can buy a home and make it your own in compliance with Shariah principles. Standard Chartered Islamic Home Finance solution is based on the concept of Diminishing Musharakah.

How it works
- Under the concept of Diminishing Musharakah mode of financing, you and SCB enter into a joint ownership of property. - Standard Chartered may provide the larger share of the purchase price of the property. - As part of the Agreement, Standard Chartered will allow usage of the property to you for a maximum period of up to 20 years, and you agree to make monthly payments and rent for the use of the property. - You also make regular schedule investments in the participation to increase your share in the property. Thus, with each payment your ownership in the property grows thereby, increasing your share of the property. - Once you have purchased the complete share, you become the free and clear title owner of the property.

Key feature
Financing available up to 80% of appraised value Flexible and easy payment options Clubbing of family incomes

Eligibility
Age: 25-65 (or retirement age) Minimum net income of Rs. 20,000 per month At least one-year prior work experience for salaried individuals and 2 years for self employed individuals.

29

Home financing, legal and other documentation

Income documents
Salaried individuals (Approved companies) Last salary slip and 3 months bank statement Self- employed individuals/ employees of non-approved companies 6 months bank statement or Latest tax document

Rent pricing options

Insurance Property Insurance is mandatory.

Loan schedule for home construction

Investment By bank By customer Tenors Profit margins Monthly installment Months

2000000 1800000 200000 20years 14% 23000 120

30

23000*120 months =2760000-2000000 = Rs 760000/-actual payment made to the is that amount which is given to the bank + original amount

Comparison

Islamic bank Amount paid to the bank Rs 2760000/-

Commercial bank Amount paid to the bank Rs 2994000/-

Profit margins 14% (fixed)

Profit margein14.97%(changing with the period of time)

31

Plenty Rs 550

Plenty 4% on the payment

Rent payment is fixed

Rent payment changes after three years

20-65year age for 20 years loan

35 years age for 20 years

Insurance payment paid by customer

Insurance payment paid by customer

No increase in rent

25% increase in rent after three years

Conclusion:

32

At the end of complete study of Islamic banks and commercial banks in Pakistan we come at those points that Islamic banks are working well but there are some draw backs of Islamic banks that they are not completely following the Shariah principle of Islamic mode of financing. The objective of Islamic banking system is to make a positive contribution to the fulfillment of socio-economic objectives of the society in all spheres, including trade, industry & agriculture etc. In Mudarbah and Musharakah their is need of following the Islamic principle Islamic banks(Mezan bank) is not flexible in car finance on Musharakah basis financing .But commercial bank like UBL show flexible car finance program although they are following interest base banking system but they are flexible. Islamic banks are flexible in the home finance they collect fixed rent from the customer and there is no change in their rent through out the tenor. In commercial banks they are not flexible and they collect the amount from the customer and if customer is unable to pay his debt due to any problem like earth quake or natural disorder customer is responsible for the payment of debt and customer has unlimited liability to pay his debt.

33