money & banking project
TRANSCRIPT
Personal Loan Products of Conventional & Islamic Banks: A Comparative Analysis
Group Members: Salman Tahir Zain Bukhari Noman Ilyas
Submitted To: Dr. Amir Rafique
[BSAF-4]
*** Contact Details in Appendix A
ContentsIntroduction.................................................................................................................................................................................. 2
The Case of Islamic Banks.......................................................................................................................................................3
Banks................................................................................................................................................................................................ 3
Personal Loan Products...........................................................................................................................................................4
Standard Chartered Bank...................................................................................................................................................4
Silk Bank.................................................................................................................................................................................... 5
Habib Bank Limited.............................................................................................................................................................. 6
Consumer Finance Products (Islamic Banks)................................................................................................................7
Meezan Bank............................................................................................................................................................................8
Bank Islami Limited..............................................................................................................................................................9
Dubai Islamic Bank Pakistan Limited.........................................................................................................................10
Limitations.................................................................................................................................................................................. 11
Conclusion................................................................................................................................................................................... 12
References................................................................................................................................................................................... 13
Appendix A..................................................................................................................................................................................14
Appendix B.................................................................................................................................................................................. 14
IntroductionPersonal Loan: A loan that is issued and supported only by the borrower's creditworthiness, rather than by a type of collateral. An unsecured loan is one that is obtained without the use of property as collateral for the loan. Borrowers generally must have high credit ratings to be approved for an unsecured loan.
Because an unsecured loan is not guaranteed by any type of property, these loans are bigger risks for lenders and, as such, typically have higher interest rates than secured loans (such as a mortgage). Although the interest rates are higher, the rates may still be lower than those of credit cards. Unlike mortgage loans, the interest on an unsecured loan is not tax deductible.
An unsecured loan may be a good option for individuals who do not have enough equity in their homes to be approved for a home equity loan. An unsecured loan may have a fixed interest rate and be due at the end of a specified term, or it can exist as a revolving line of credit with a variable interest rate.
[Source: Investopedia]
The Case of Islamic BanksAs a matter of fact, Islamic Banks do not offer Personal Loans. Instead they offer alternatives to cater the needs of individuals who require finances for personal needs. The Manager of Blue Area Branch (Islamabad) confirmed this and answered our one of the most frequently answered question (according to him):
He said, “We or any other Islamic Bank do not provide any personal Loans or running finance facility as loans/karz cannot be used to earn a profit and we do not work on the basis of interest (riba). We are, however, working on a few financing products as an alternate, which comes under consumer finance products; education for example. The main aim is to cater to areas for which individuals often seek personal loans.” ***
***Contact details in Appendix A
BanksWe chose banks which have a broader consumer base or which are of an international repute. Therefore, our choices included multinational Conventional and Islamic banks, as well as, local Conventional and Islamic Banks. This idea was coined by one of our team members so as to get a wider picture of the feasibility of Personal Loan Products. Nonetheless, our choices were also
influenced by reports of State Bank of Pakistan, Bloomberg, epapers like Tribune and friends and acquaintances who guided us to choose those banks which have an established Personal Loan giving history.
Thus, for conventional Banks we chose:
Whereas, for Islamic Banks our choices were:
Personal Loan Products:
Standard Chartered Bank
Standard Chartered Bank offers personal loans to salaried people only. They are further categorized into people who receive their salaries in Standard Chartered Account and those who receive their salaries through other means. Even these two categories have further simplifications with those who have a salary of over PKR 50,000 and those below it. People who have salaries below PKR 50,000 have to pay a higher interest rate per annum and if they are non-standard chartered customers their interest rates will be even higher.All This can be summarized in the table below:
A Standard Chartered Personal Loan Ranges from PKR 30,000 to PKR 2 Million depending on a customer’s eligibility, income and repayment capacity. The loan can be repaid over a period of 12 to 60 months. A processing fee will be charged on the loan amount as follows:
Up to 100k – 1500100 - 250k – 2500250k+ - 1% of loan amount
***Contact details in Appendix A
A loan can be pre-paid with 10% loan amount penalty if prepaid paid with 12 months and 5% if after it. A loan will be disbursed within 15 working days post receipt of the all required documents.
A Silk Bank loan takes 10 days to disburse
For repaying the loan a standard tool EMI is used. EMI stands for Equal Monthly
Installments. This installment comprises both principal and interest components. Nonetheless, a customer has to open an account for availing and servicing the loan.
Lastly, a special feature of SCB Personal Loan is that it can be availed and even serviced
online!
Silk BankUnlike Standard Chartered Bank, Silk Bank offers Personal Loans to a wide variety of people.
They include:
Salaried IndividualsSelf-Employed BusinessmenSelf Employed ProfessionalsForeign Nationals with approved company guarantee
Individuals can get any loan amount ranging from PKR. 50,000 to PKR. 2 million depending on their income level and overall debt burden ratio.
The minimum Loan amount of SCB is PKR 30,000
The mark-up rate is composed of 12 months KIBOR and a pre-defined spread. The KIBOR* will change every year however the spread will remain fixed over the tenor of the loan. A processing fee of Rs 2,500 or 1% of loan amount (whichever is higher) is charged subject to approval. The maximum cap on processing fee is Rs 5,000/-. In addition to this, 16% FED will also be charged on the processing fee. Late payment charges up to PKR. 1,000 per missed installment will be applicable on the individual who misses the deadline of loan repayment installment. Silkbank Personal Loan can be used for meeting any needs except for subscription in an Initial Public Offering (IPO). An individual can also transfer his/her outstanding loans at other banks to Silkbank and can even get cash top-up with same monthly installment.
Lastly, a loan can be pre-paid with 10% loan amount penalty if prepaid paid with 12 months and 7% if paid in the 2nd year, and 5% in paid after it. Not to forget, a loan will be disbursed within 10 working days post receipt of the all required documents.
SCB prepaid loan penalty is 5% in the second year, and i.e. of Silk Bank’s in the 3rd
HBL (Habib Bank Limited)
Habib Bank Limited specializes in providing a vast portfolio of consumer bank products. Although their management at various branches of Islamabad refused to admit that HBL provides Personal Loans. Fortunately, a private contact* in Peshawar helped us and sent us Schedule of bank charges. In addition, the details on their corporate website further strengthened our cause.
HBL provides personal loans from PKR 20,000 to PKR 2 million. In addition, free life insurance is provided to the customer so if a customer passes away his remaining loan is paid by the insurance company.
The eligibility for HBL personal loan is that a customer should fall under one of the following categories:
Top-up Customers: Provided to customers with a good repayment history.
Salary Transfer Customers: Provided to individuals with more than PKR 12,000 salary being transferred to an HBL account
The loan can be repaid in 12, 24, 36, 48 or 60 months. Moreover, there is a top-up facility, meaning existing HBL Personal Loan customers can apply for a new loan of the
***Contact details in Appendix A
same amount or more after a 12 month time period. Moreover, the interest rate varies according to the category of customer that an individual falls under, with a maximum of up to 30% per annum and once the loan is approved, the interest rate will remain unchanged throughout the tenor of an individual’s loan.
There are no hidden costs involved. All charges are clearly mentioned in the Schedule of Bank Charges. An excerpt from it is shown on the next page:
*Refer to foot note.
Consumer Finance Products (Islamic Banks) As a matter of fact, Islamic Banks do not provide Personal Loan Products. Some of their alternatives for Consumer Finance Products are:
Murabaha: This is similar to a financial lease. The seller (Islamic bank) agrees to buy a commodity for an individual and then sells it at a profit-cost plus sales, in short.
Ijara: This is similar to leasing. This is a contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The rentals as well as the
purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.
[Definition: Wikipedia]
These and other consumer financing products for houses, auto-mobiles, laptops etc. are provided by the following banks in Pakistan:
Meezan Bank Limited Dubai Islamic Bank Pakistan Ltd. Bank Islami Pakistan Ltd. Burj Bank Al Baraka Bank
Meezan Bank Limited Meezan Easy Home is provided on a diminishing Musharaka* basis.
*Below is a brief introduction of Diminishing Musharaka:
The types of products in this consumer financing facility are:
Easy Buyer Easy Builder Easy Renovate Easy Replace
The basis for pricing is KIBOR(90 days average of 12-month KIBOR)
***Contact details in Appendix A
The minimum financing limit in case of buyer, builder, replacement Rs.300,000. In case of renovation Rs.150,000. Whereas the maximum financing limit in case of buyer, builder, replacement is Rs.40 million, and in case of renovation is Rs.1 million
The minimum and maximum tenor for repayment of Easy Home Musharaka for buyer, builder, and replacement is 3 and 20 years, respectively. And that of renovation is 2 and 7 years, respectively.
This consumer finance is for salaried individuals, self-employed professionals, business individuals.
Bank Islami Pakistan
Bank Islami Provides Muskun Housing Finance on a Diminishing Musharaka & Ijarah basis. The basis for pricing is KIBOR based.
The minimum financing limit is PKR 200,000 and the maximum is PKR 50 Million. In addition, the minimum tenor of this consumer financing instrument is 2 years and the maximum is 20 years.
Moreover the following are further specifications of this instrument:
The security/collateral required for Muskan Home Financing is equitable/ registered mortgage on property.
Last but not the least, financing limit is upto 80% of the property value.
Dubai Islamic Bank Pakistan Limited Dubai Islamic Home finance is on the underlying Islamic mode of Musharaka and Ijarah and the basis for financing is floating rate based on KIBOR. The minimum financing limit is Rs.0.50 million for home purchase, home renovation, and purchase of undivided share of property mortgaged at other bank. Whereas, the maximum financing limit is Rs.30 million for purchase of undivided share of property mortgaged at other bank.
While the minimum and maximum tenors are 3 and 20 years, respectively.
Lastly, the security collateral required is residential property located in the bank's approved list of areas.
Limitations Our project was aimed at collecting first hand primary data, based on a survey based study model. Nonetheless, we faced many hindrances as most banks were reluctant to provide us information while in other cases the provided data was insufficient to arrive at a situation. Therefore, we searched for secondary sources of data too. Alas the problem still prevailed, nevertheless, we tried our best to conclude our analysis in a meaningful manner.
Information is the basis for decision making, is a classic principle of money and banking. We kept this in mind from the start of our research but had the banks been a little more cooperative our research would have been totally survey based.
***Contact details in Appendix A
Conclusion The Personal Loan Products of Conventional Banks and the Consumer Finance Products (House Finance) are similar because of the competitive environment in Pakistan. Nonetheless, in conventional banks:
Standard Chartered have the competitive edge over Silk Bank and Habib Bank that their Personal Loans can be availed and even serviced online.
Habib Banks takes the upper hand in providing personal loans starting from PKR 20,000, followed by Standard Chartered PKR 30,000
Silk Bank however specializes in providing quick personal loans. Their loans take 10 days to disburse, whereas SCB’s and Habib Bank’s take 15 and 20 days respectively.
Also, SCB has a low penalty on prepayment of a personal loan. 10% for 1st year by all banks and 5% in the 2nd year by SCB, while 7% and 8% by Silk Bank and Habib Bank, respectively.
On the other hand, the distinctive features of House Finance Products of each of the three Islamic Banks can be summarized in the table below:
References
Personal Loans Definition [online]. (2014). Available from: <http://www.investopedia.com/terms/u/unsecuredloan.asp>. [Accessed 05/05/2014].
***Contact details in Appendix A
List of Banks in Pakistan [online]. (2014). Available from: <http://en.wikipedia.org/wiki/List_of_banks_in_Pakistan>. [Accessed 05/05/2014].
Islamic Banking Department State Bank of Pakistan [online]. (2014). Available from: <http://www.sbp.org.pk/ibd/Handbook-IBD.pdf>. [Accessed 05/05/2014].
Meezan Bank Easy Loan [online]. (2014). Available from: <http://www.meezanbank.com/easyhome.aspx>. [Accessed 05/05/2014].
Schedule of Bank Charges of HBL [online]. (2014). Available from: <http://www.hbl.com/downloads/pdf/public-documents/schedule-of-bank-charges.pdf>. [Accessed 05/05/2014].
Rafique, Amir, 2014, Lecture 11: Instruments of Islamic Banking & finance, SZABIST Islamabad
Appendix AThe report was successfully completed with gratitude to the following people for their positive contribution and assistance to the team members:
Murtaza Mubbashir (Hub Manager)
Cell No. 0333-5369202 E-mail:[email protected]
Jammil-Uz-Zaman (Senior Manager HBL Regional Headquarters Peshawar) Contact no. 03329282973
Muhammad Yousaf (Team Leader, Lahore) Contact no. 03335233471 [email protected]
Naila Sheraz (Preferred Relationship Manager, Preferred Banking) Contact no. +92512654481 [email protected]
Appendix BThe following documents are attached to this report:
Standard Chartered PL brochure Silk Bank Personal Loans FAQS HBL Schedule for Bank Charges Dubai Islamic Bank brochure of Home Finance Bank Islami Brochure of Maskan Housing Finance
***Contact details in Appendix A