ing musharakah housing finance mohib

8/7/2019 ing Musharakah Housing Finance Mohib

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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

Types of Shirkah


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Shirkat-ul-Milk

It means joint ownership of two or more persons in

a particular property.

This kind of Shirkah may come into existence intwo different ways:

1. Optional Shirkat-ul-Milk (Ikhtiari)

If two or more person purchase an equipment, itwill be owned jointly by both of them and therelationship between them with regard to that

property is called Shirkat-ul-milk.

Here this relationship has come into existence attheir own option, as they themselves elected topurchase the equipment jointly.


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Shirkat-ul-Milk

2. Compulsory Shirkat-ul-Milk (Ghair Ikhtiari)

This comes into existence without any effort/action

taken by the parties.

For example, after the death of a person all hisheirs inherit his property, which comes into their

joint ownership as a natural consequence of the

death of that person


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Basic Structure


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CUSTOMER

The Bank enters into a Musharaka (Joint Ownership)

agreement with the customer and both of them pay their

respective shares to the seller of the asset.

Ownership of the asset is gradually transferred to the customer

upon payment of asset price.

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

The customer approaches the Bank with the request forHouse/Auto financing

BANK

Joint

Ownership

Musharaka

Gradual Transfer ofOwnership


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How to create this structureHow to create this structure

MUSHARAKAH AGREEMENT FORMUSHARAKAH AGREEMENT FORHOUSING FINANCEHOUSING FINANCE

UNDERTAKING FOR PURCHASE OFUNDERTAKING FOR PURCHASE OFMUSHARKAH PROPERTYMUSHARKAH PROPERTY

RENTAL AGREEMENTRENTAL AGREEMENT


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Basic ConditionsBasic Conditions

The agreement of joint purchase, leasing andThe agreement of joint purchase, leasing andundertaking to sell different units of the share ofundertaking to sell different units of the share ofthe financier should not be tiedthe financier should not be tied--up together inup together in

one single contract.one single contract. It will be preferable that the purchase ofIt will be preferable that the purchase of

different units of the client is effected on thedifferent units of the client is effected on thebasis of the market value of the house asbasis of the market value of the house as

prevalent on the date of purchase of the unit,prevalent on the date of purchase of the unit,but it is also permissible that a particular price isbut it is also permissible that a particular price isagreed in undertaking to purchase theagreed in undertaking to purchase theMusharakah units.Musharakah units.


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Basic ConditionsBasic Conditions

Ideally rent should also be chargedIdeally rent should also be chargedaccording to the market rate. Howeveraccording to the market rate. HoweverShariah allows that rent could be chargedShariah allows that rent could be charged

according to a well known Bench Markaccording to a well known Bench Marksuch as Kibor, Libor etc.such as Kibor, Libor etc.

Shariah requires that the rent should beShariah requires that the rent should be

fixed.fixed.A floating Bench Mark can also be usedA floating Bench Mark can also be used

with certain conditions.with certain conditions.


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Basic conditionsBasic conditions

Joint ownership created in this mannerJoint ownership created in this mannershould be real not fictitious which meansshould be real not fictitious which meansthat each cothat each co--owner should bear theowner should bear the RisksRisksand Rewardsand Rewardspertaining to his share inpertaining to his share inthe asset.the asset.

Ideally ownership related costs should beIdeally ownership related costs should be

shared such as Property Tax, Takaful costshared such as Property Tax, Takaful costetc.etc.


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Process flow of the TransactionProcess flow of the Transaction

Standard operating procedures of the Bank areStandard operating procedures of the Bank areShariah Compliant.Shariah Compliant.

Basic important Documents as per Shariah areBasic important Documents as per Shariah are

as follows:as follows: OFFER LETTEROFFER LETTER

MUSHARAKAH AGREEMENT FOR HOUSINGMUSHARAKAH AGREEMENT FOR HOUSINGFINANCEFINANCE

UNDERTAKING FOR PURCHASE OF MUSHARKAHUNDERTAKING FOR PURCHASE OF MUSHARKAHPROPERTYPROPERTY

RENTAL AGREEMENTRENTAL AGREEMENT


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Products (Processes and Cautions)Products (Processes and Cautions)

Mainly three different products are beingMainly three different products are beingoffered currently:offered currently:

Home BuyerHome Buyer Home BuilderHome Builder

Home RefinanceHome Refinance


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Home Buyer :Home Buyer :

The process involved is obvious.The process involved is obvious.

It should be clearly established that theIt should be clearly established that thecustomer himself is not the owner of thecustomer himself is not the owner of theproperty.property.

Schedule of Rental Agreement and that ofSchedule of Rental Agreement and that of

Undertaking for Purchase of MusharakahUndertaking for Purchase of Musharakahunits should be separately given to theunits should be separately given to thecustomer.customer.


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Home Builder :Home Builder :

Through the Musharakah agreement theThrough the Musharakah agreement the

Bank purchases a share in the propertyBank purchases a share in the propertyagainst the financing.against the financing.

Only rent would be charged for the firstOnly rent would be charged for the firstyear to avoid buy back.year to avoid buy back.

Proper utilisation of funds should beProper utilisation of funds should beascertained.ascertained.


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Home Builder :Home Builder :

Financing should not exceed the appraisedFinancing should not exceed the appraised

value of the property.value of the property.


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Home Refinance:Home Refinance:

First scenario (BTF from conventional)First scenario (BTF from conventional)

Through the Musharakah agreement theThrough the Musharakah agreement theBank purchases a share in the propertyBank purchases a share in the propertyagainst the financing.against the financing.

Only rent would be charged for the firstOnly rent would be charged for the firstyear to avoid buy back.year to avoid buy back.


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First scenario (BTF from conventional)First scenario (BTF from conventional)

Financing should not exceed 80% of theFinancing should not exceed 80% of theAppraised value of the property.Appraised value of the property.

In case of cash enhancement properIn case of cash enhancement proper

utilisation of the funds should beutilisation of the funds should beestablished.established.


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Second Scenario (BTF from Islamic)Second Scenario (BTF from Islamic)

Through Musharakah Agreement the BankThrough Musharakah Agreement the Bankwill purchase Islamic Banks Share.will purchase Islamic Banks Share.

Rental and Principle could be recoveredRental and Principle could be recoveredfrom day one.from day one.

However in case of cash enhancementHowever in case of cash enhancementonly rent would be charged from theonly rent would be charged from thecustomer.customer.


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Early Termination of MusharakahEarly Termination of Musharakah

Early termination through full pay off is notEarly termination through full pay off is notallowed before one year in followingallowed before one year in followingcases:cases:

Home BuilderHome Builder

Home Refinance (BTF from conventional)Home Refinance (BTF from conventional)

Home Refinance with cash enhancementHome Refinance with cash enhancement(BTF from conventional or Islamic).(BTF from conventional or Islamic).


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Early Termination of MusharakahEarly Termination of Musharakah

Prepayment charges can be taken fromPrepayment charges can be taken fromthe customer and would be treated as thethe customer and would be treated as theprofit of the Bank.profit of the Bank.

This should not be confused withThis should not be confused withprepayment penalty charges taken onprepayment penalty charges taken onConventional side.Conventional side.


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Partial Pay offPartial Pay off

Partial pay off or Balloon Payment is notPartial pay off or Balloon Payment is notallowed before one year in followingallowed before one year in followingcases:cases:

Home BuilderHome Builder

Home Refinance (BTF from conventional)Home Refinance (BTF from conventional)

Home Refinance with cash enhancementHome Refinance with cash enhancement(BTF from conventional or Islamic).(BTF from conventional or Islamic).


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Partial Pay offPartial Pay off

The Balloon payment is adjusted againstThe Balloon payment is adjusted againstthe principle amount which means thatthe principle amount which means thatthe customers ownership share wouldthe customers ownership share wouldincrease resulting in overall decrease inincrease resulting in overall decrease inRental amount.Rental amount.


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Treatment of Charity AmountTreatment of Charity Amount

Charity is different from penalty.Charity is different from penalty.

Ideally it should be recovered wheneverIdeally it should be recovered whenever

due and credited to Charity account.due and credited to Charity account.However due to system restraints it mayHowever due to system restraints it maybe recovered on quarterly or six monthlybe recovered on quarterly or six monthlybasis.basis.

The Bank cannot waive off Charity.The Bank cannot waive off Charity.


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Treatment of Musharakah in caseTreatment of Musharakah in case

of total lossof total loss

The Musharakah and Rental AgreementsThe Musharakah and Rental Agreementsand Undertaking for Purchase ofand Undertaking for Purchase ofMusharakah Property will standMusharakah Property will standterminated.terminated.

No Principle or Rent would be furtherNo Principle or Rent would be furtherrecovered from the customer.recovered from the customer.

The Bank will cover its loss throughThe Bank will cover its loss throughTakaful.Takaful.


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JAZAKALLAH