POSTAL LIFE INSURANCE: A SHARIAH APPRAISAL

ABSTRACT:

     Postal Life insurance is one of the oldest insurance departments which came into existence in 1884 for the welfare of postal employees initially. This institution is a very different institution which is working under the Ministry of Finance, Government of Pakistan. All collected funds are invested by the Ministry for the development projects. Demand of Postal Life insurance is also an evidence of its importance. A huge number of People don't want to purchase policy of Postal Life Insurance due its non Shariah compliance. This paper will focus on the Shariah compliance of Life insurance introduced by Postal Life Insurance and alternative system will also be suggested.

Key Words: Postal Life Insurance, Importance, Shariah position and Alternative.

1.      INTRODUCTION:

     Mutual cooperation is the essence of man to man relationships since beginning of the human society. In modern ages society became more complex than ever before. To meet the needs of modern day needs man reshaped/came up with the concept of insurance as a substitute of the values of mutual cooperation.

     As compared to general insurance the ratio of micro insurance is low in Pakistan. In Pakistan there are only four public sector insurance companies. Among which Postal Life insurance is oldest one. Among the 59 registered insurance companies we find only one institution providing micro insurance to the general public.  In Pakistan postal Life insurance is working purely for the welfare of poor people. It was established in 1884. PLI is a sub department of Pakistan Post[2]. This department is working under the supervision of Ministry of Finance. Postal Life insurance is providing insurance facility on very low premium.

2.      POSTAL LIFE INSURANCE:

     Postal Life Insurance is a Government owned institution in Pakistan. Postal life insurance has played an important role in domestic saving and national development. Postal life insurance has also been contributing significantly towards capital formation in the country, thereby boosting the national economy. It has been playing a positive role in checking inflationary trend by mobilizing saving and placing huge funds at the disposal of the government for investment in various development schemes.

     Postal life insurance was established in 1884 for the welfare of postal employees initially. Now every Pakistani national can purchase PLI policy, as it is open to all members of the community. Postal life Insurance plays a very important role in mobilizing the community saving and channeling them for investment in schemes of national importance the small saving in the form of Life insurance premium collected regularly from many policy holders. Mostly the amount is put to work for policy holder’s amount to large seems. These sums of money and poured in to economic stream of the nation and thus flow to all parts of the country and into many forms of enterprises. As a result of these useful development schemes new industries come into being which not only helping in new avenues of employment but also tends to raise the earning capacity of our people and gradually lead to a higher standard of living. Consequently, more people get reasonable income. The cycle of the benevolent function of life insurance is complete when these people begin to save through life insurance and plough back their saving for future creative purpose. Thus postal life counteracts inflation and helps in stabilizing and building the national economy.

3.      LIFE INSURANCE POLICY IN PLI:

     Postal life insurance is offering different types of policies for the welfare of general public. One of them is life insurance (Three payment Plan Policy), which is very popular in public. In this policy Postal Life insurance pays amount in three installments. This policy can be taken for the period of 12, 15…30 years. First payment amounting 25% will be paid after completion of 1/3 period. Second payment amounting 25% will be paid after completion of 2/3 period and remaining 50% with bonus will be paid on maturity.[3] The client can get loan equal to the amount of premium collected after 2 years, e.g. client "A" purchases a life insurance policy from Postal Life insurance sum assured was 10,000 and his calculated premium was 100 per month and 1200 P.A and his duration of policy was 10 years. He will get 2500 (25% of 10000) after completion of about 3 years and 2500 (25% of 10000) after completion of 6 years (25% of 10000) and 5000 (50% of 10000) and bonus on maturity. There are some options for client to re invest and the amount which they get during the period of maturity. If they will reinvest they can get more benefits and bonus on invested amount.

4.      EFFICIENCY ANALYSIS OF POSTAL LIFE INSURANCE:

 * Rs. in Billions

Year	Number of Fresh Policies Issued	Sum Assured	Premium Income
2004-2005	28508	4448.154	185.925
2005-2006	30036	5079.9	207.481
2006-2007	29388	5124.658	210.2895
2007-2008	28606	5136.706	217.605
2008-2009	30968	5992.752	267.866
2009-2010	30643	6989.099	318.707

     





Demand of Postal Life Insurance is increasing day by day, but not according to its effectiveness. It is clear from following chart that number of policies issued by Postal Life Insurance is increasing (Annexure1-2-3). Sum assured and premium is also a substantiation of PLI's efficiency. (Insurance A. D., 2011) As its all funds are normally invested by Ministry of Finance 25 Billion are with Ministry of Finance

     A number of clients don't want to purchase policy of Postal Life Insurance due to some other issues which will be discuss later one of them is Non Shariah Compliance of Postal Life Insurance. If it is Shariah Compliant the poor people of Pakistan who don’t want to indulge in Interest can get benefit from Postal Life insurance.

5.      POSTAL LIFE INSURANCE IN THE EYES OF ISLAMIC LAW:

     According to the council of Islamic Ideology report on Islamic Insurance system Postal Life insurance is a mutual insurance on the basis of non profit and loss. Postal Life insurance has two characteristics which makes it different from other insurance business. First its operations are under the supervision of Government of Pakistan and secondly this is on mutual basis. In CII report they have mention that if an insurance company is working under the supervision of Government some prohibited elements may be acceptable. [4]

6.      SHARIAH ISSUES IN POSTAL LIFE INSURANCE:

In Insurance there are normally three elements which make it non Shariah Compliant Gharar, Qimar and Riba. All these elements are explained as follow.

GHARAR:

     Islamic law does not allow Gharar transactions in which the seller does not know what he has sold and the purchaser does not know what he has purchased. Prophet (SAAWS)[5] prohibits from Gharar contracts.  (Mansoori, 2009) In insurance Gharar exists in three forms that client doesn't know that how much he will pay, for how much period he will pay and how much we will get. It makes transaction invalid. (Usmani, 2008) For example a person purchases a life insurance policy for ten years he pays premium Rs. 100 every month. He will pay twelve hundred for a year. He will pay twelve thousand in ten years. The insurance company contracts that if insured will die the company will pay 10,000 to his family and if he will alive the company will pay twelve thousand and interest[6] after ten years it is called life insurance. As the insured can get his paid amount back the element of Qimar is missing but if the payment of deposited amount is on chance it may be called Qimar. We can say that the transaction is free from the element of Qimar but it consist the element of Gharar.

RIBA:

     Riba is strictly prohibited in Quran. Riba exists in insurance in three types, investing activities, and its two types Riba al Fadal and Riba al Nasia.

RIBA AL FADAL:

     This is a normal Question from insurance practitioners that how interest involves in insurance. Insurance companies invest in property and real estate, so how it is possible that Riba (Interest) can involve in insurance?

According to Hadith on the authority of Abu saeed khudri (RAA):

 “Who reported that the Prophet (SAAWS) Said, while exchanging Gold for Gold, Silver for Silver, Wheat for Wheat, Barley for Barley, Dates for Dates. And Salt for Salt, Do so on Mithlamm-bi-mithl (like for like and yadamm-bi-yad (hand to hand)/ on spot basis. Thus whoever gave more or demand more verily he dealt in Riba. Both the taker and giver are equal (Guilty) in this regard. ”

·      According to above hadith exchange of similar goods which are not equal is prohibited.

·      If we want to Exchange Similar goods we should exchange in equal quantity.

·      If the goods are not in similar type so it is up to buyer and seller, they can buy and sell.

Now we will discuss that what is the link between conventional Insurance and Riba Al Fadl? It is a sale contract (Aqd-e-Muawadaat) – there are two parties to this contract, The Insurer/Company and insured/policy-holder

There is consideration by way of PREMIUM and there is the subject matter of (insurance) contract. The type of contract that this sale agreement falls under is ‘contract of exchange’ where money (by premium) is exchanged for money (by way of claims) in case of loss. For instance, if I have insured my car has stolen, the insurance company will not buy for me a new car in its place; it will only pay me the market value for it in the same currency. Similarly, if a property is destroyed, the insurance company does not give me bricks and material for re-building it, it will pay me the “amount of loss”. Thus it is a sale contract where the same kind of species (currency) is exchanged in both the transactions.[7]

There are SIX kind of species that have been specifically mentioned by our Holy Prophet (may peace be upon him); in trading (is. effecting sale of) these, when there is also a time lag between the two transactions (like in case of payment of premium and receipt of claim), both the sides of the balance MUST be equal, otherwise an element of DIRECT RIBA is involved. Those six species are: Gold, Silver etc as mention in above hadith. In modern day currency has replaced exchange of Gold and Silver for trading.[8]

So when the policy holder faces loss he receives an amount above/Less than the paid amount. So this exchange of money which is unequal leads the transaction to Riba.

There is a question if the policy holder receives equal amount which he has paid to the company in the shape of Premium. It will be Riba or not?

Answer: It is very rare case and It will be also Riba we will not go to the amount but we will see to the contract in which the policy holder have involve.[9]

RIBA AN-NISIYAH:

Riba An-Nisiyah is the second element which involves in the conventional insurance contract and causes the prohibition of contract. Now we will see that how this type of Riba involves in insurance contract. Riba An-Nisiyah realized when delivery of one counter-value is delayed.[10] Jurists argue that in insurance contract the policy holder receives amount in the shape of compensation against the amount he has paid in the shape of Premium. So the exchange of Money them money which is similar item should be yadamm-bi-yad (hand to hand)/ on spot basis. But the policy holder receives on a specific time period or on happening of loss. So it will leads to Riba transaction

RIBA FROM INVESTING ACTIVITIES: As we have mentioned above that the conventional insurance involves basically two forms of Riba in Riba Al Fadl and Riba An-Nisiyah which is kind of  Riba Al Fadl and there is an other form which leads the insurance contract to Rabwi transaction. So in this form insurance company invests its money in securities and other interest bearing transactions. [11]

Premium is paid up-front on day one, whereas claims can occur even on the last day of the year. Till that time, the conventional insurers have that amount at their disposal which they invest and earn investment income thereon. As a matter of fact, the conventional insurance companies have huge funds at their disposal which they do invest in all forms and avenues of investment without consideration of interest or non-interest. This renders their entire investment as Haram/Prohibited.  

ELEMENT OF QIMAR / GAMBLING IN CONVENTIONAL INSURANCE:

Qimar is also prohibited in Islam like Riba and Gharar[12].There is also element of Qimar in conventional insurance. In the contracts of insurance the insured loses his premium if the event does not happen and in the other situation the company pays his several times more than what he has paid as premium. This clearly amounts to gambling as one party loses by more chance and the other gains undeservedly. [13] (Samdani D. E., Des 2007)  (Usmani, 2008) A scheme of Life Insurance in which policy holder 's entitlement for his principle premium is confirm in all situation is free from the elements of Qimar while/ and where the recovery of principle premium of is not confirm in part or as a whole the transaction is having Qimar.

7.      CONCLUSIONS AND RECOMMENDATIONS:

Postal Life insurance is one of the oldest insurance departments. As discussed above that a number of people don’t take interest in Postal life insurance due to its non Shariah compliance. In a conventional insurance normally there are three elements which make it non Shariah compliant Gharar, Riba and Qimar. But in life insurance only two elements makes it non Shariah compliant According to Council of Islamic Ideology in Government Level insurance companies Postal Life insurance is performing Shariah Compliant Business. Investment of Postal Life insurance directly goes to Ministry of Finance. Ministry of Finance invests that amount in Development projects. In Postal Life Insurance Bonuses are very high as compared to other government based insurance companies because, other companies pay high rate of commission to their agents and PLI having no agents. No Budget for Advertisement and No marketing staff. Staff having no time for clients because only one or two person is performing Postal services, saving bank services and postal insurance services that’s why they can’t give time to clients. There are not separate branches of Postal Life insurance.

REFERENCES:

1.      Al Quran

2.      AAOIFI. (2008). Shariah Standerds. Accounting and Auditing Standerds of Islamic Financial Institutions.

3.      CII. (1992). Islamic Insurance System. Islamabad: Council of Islamic Ideology Goverment of Pakistan.

4.      Insurance, P. P. (n.d.). Broushers. Postal Life Insurance . Islamabad, Pakistan: Pakistan Post Department of Postal Insurance G-8/4 Islamabad.

5.      IPS. (1997). Jadeed Iqtsadi Masail Shariat Ki nazar Main. Islamabad: Institute of Policy Studies.

6.      Mansoori, D. M. (2009). Islamic Law of Contracts and Business Transactions. Islamabad: Shariah Academy, International Islamic University, Islamabad.

7.      Post, P. (2005). A Brief Introduction:Postal Life Insurance Benefits & Advantages of Different Policies. Pakistan Post.

8.      Samdani, D. I. (2002). Takaful. Lahore: Adara Islamiyat.

9.      Samdani, D. M. (Jan 2007). Mali Muamlat Par Gharar Kay Asrat . Karachi: Adara Tul Muarif.

10.  Usmani, M. M. (2008). Islam aour Jadeed Muashi Masail. Lahore: Adara E Islamiyat.

11.  www.pakpost.gov.pk. (2011, 09 23). Retrieved 09 23, 2011, from Pakistan Post: http://www.pakpost.gov.pk/financial/pli.html,

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1M Phil scholar in Islamic Banking, School of Islamic Banking and Finance, International Islamic University Islamabad

[2] www.pakpost.gov.pk. (2011, 09 23). Retrieved 09 23, 2011, from Pakistan Post: http://www.pakpost.gov.pk/financial/pli.html,

[3] Post, P. (2005). A Brief Introduction:Postal Life Insurance Benefits & Advantages of Different Policies. Pakistan Post.

[4] CII. (1992). Islamic Insurance System. Islamabad: Council of Islamic Ideology Goverment of Pakistan.

[5] عن ابي هريرة   رضي الله تعالي عنه قال : نهي رسول الله صلي الله عليه وسلم عن بيع الحصاة وعن بيع الغرر

[6] Interest is unanimously prohibited

[7] Akhtar, Captain Jamil,

[8] Ibid

[9] Samdani, Dr.Ijaz Ahmed, Takaful, Adara Islamiyat, p.30

[10] Khan, Attique Zafar, Insurance form Islamic Prespective,p.7

[11] Ibid p.7

[12]  (المائدة:9)يا أيها الذين آمنوا إنما الخمر والميسر والأنصاب والأزلام رجس من عمل الشيطان فاجتنبوه لعلكم تفلحون

[13] Prof. Atiquzzafar Khan, Takaful , Objectives and Methodology, p#6

THE HOUSE BUILDING FINANCE CORPORATION LIMITED PAKISTAN: A SHARIA’H APPRAISAL OF GHAR AASAN FLEXI SCHEME

Abstract:

The main purpose of this paper is to examine the Sharia’h appraisal of House Building Finance Corporation Limited. The House Building Finance Corporation was established in 1952 under an act of the parliament to finance construction of house in the urban areas of Pakistan. In this research Ghar Aasan (Flexi) product of HBFCL will be examined in Sharia’h perspective and a comparison will be made with Islamic Banking (Meezan Bank Limited) and Conventional Bank UBL. This study also comprises the opinion of Shariah experts for the shariah compliance of Ghar Aasan (Flexi).

Key Words: Islamic House Financing, Sharia’h Appraisal of Ghar Aasan (Flexi), House Building Finance Corporation Limited Pakistan.

Introduction:

          The House Building Finance Corporation was established in 1952 under an act of the parliament[1] to finance construction of house in the urban areas of Pakistan. Its operations started from the city of Karachi and were later on extended to other cities and towns. The Objective of the House Building Finance Corporation was to facilitate the low income people of Pakistan. The House Building Finance Corporation Limited is the oldest housing finance institution in Pakistan. HBFCL is a Government designated financial institution and provides financing facilities for construction, reconstruction, renovation and purchase of house.[2]

          The House Building Finance Corporation was incorporated on July 25, 2007; the House Building Finance Corporation Limited is an unlisted public company. The Government of Pakistan (GOP) and the State Bank of Pakistan (SBP) jointly hold the capital of HBFCL with 62.50% and 37.50%, shares respectively. As of February 18, 2011 and pursuant to the provisions of section 39 of the Companies Ordinance, 1984, the name of House Building Finance Corporation has been changed to House Building Finance Company Limited.[3]

Role of HBFCL in Economic Development:

          As a matter of their mandate, HBFCL has focused on providing house financing for the housing needs of the lower and middle income socio-economic sectors. To date, HBFCL has financed over 450,000 Houses. Over the years they have developed and offered housing finance products based on the needs of the customers.  

          Presently, nearly 51% of HBFCL's customers are of the lower income demographic with loan amounts of less than Rs. 100,000. Nearly 93% of customers have loans below Rs. 500,000, and maintain a monthly income between Rs. 3,500 and Rs. 5,000. Understanding that a large portion of customer base can only afford to pay installments of Rs. 1,000 to Rs. 1,200 per month, HBFCL has actively developed products to accommodate this market to include repayment plans over a 15 to 20 year period.

          To date, HBFCL has financed around 456,256 units for Rs.47.82 billion, successful recoveries of Rs.64 billion (inclusive of markup) and has a housing portfolio of Rs.14.6 billion. At present the HBFCL is handling over 77,666 operative accounts with a work force comprising of 951 officers and support staff. The Company operates throughout Pakistan including Azad Kashmir and Northern areas.[4]

Islamization of HBFCL:

          Prior to 1977 the House Building Finance Corporation used to run its business on interest based means and methods. Later on the Government of Pakistan ordered to the Council of Islamic Ideology (CII) for preparing detailed scheme for establishing a Sharia’h compliant financial system in the country. The Council of Islamic Ideology submitted two reports on elimination of Riba. The first report recommended changes in the operations of non-bank financial intermediaries including House Building Finance Corporation Ltd. In compliance with recommendation of report, the House Building Finance Corporation started providing Islamic house financing on the basis of diminishing musharakah from 1^st July, 1979.[5]

Models of House Building Finance Corporation Limited:

          The House Building Finance Corporation Limited developed its Islamic House Finance products during 1979-1987. The first model of Islamic house financing was introduced and notified by the HBFCL was on PLS or income sharing basis. Later-on in 1988-1990 the next product of HBFCL for Islamic house financing i.e. “Simplified Scheme” introduced. This scheme was launched on the basis of income sharing. “New Simplified Scheme” was third product of HBFCL, which was introduced in 1990-2001. After the Supreme Court’s Judgment on Riba the HBFCL introduced in 2002-2008 a new product named Ghar Aasan on the basis of Diminishing Musharakah.[6] HBFCL introduced a product for financing contractors/builders in 2003 with the name Shandar Ghar. This product was on the basis of Murabahah lil-amiri bi-al-shira i.e. murabaha to the purchase orderer. The current product of the House Building finance corporation is Ghar Aasan (FLEXI). This product was introduced by HBFCL in late 2007.

Ghar Aasan Flexi Scheme:

          The House building Finance Corporation introduced a comprehensive scheme after Ghar Aasan in late 2007. This facility is based on diminishing Musharakah and is only being practiced for providing house financing in House Building Finance Corporation. Other schemes like Ghar Aasan, Shandar Ghar etc. have been closed by HBFCL.

This scheme offers the following categories to meet different needs of the customers, however here we will focus only on construction case:

• Construction of residential property
• Renovation of an existing residential property
• Purchase of a residential property

Primary Conditions of Ghar Aasan Flexi Scheme:

          In this scheme the HBFCL facilitates customer to construct a residential property on previously owned land by customer, or to add on current domestic property.  HBFCL assists up to 60% of total estimated cost of construction (Land cost + Cost of construction)[7]. HBFCL only facilitates for construction and the land must be bought from customer’s side.

Main Conditions/Characteristics of Ghar Aasan Flexi Scheme:

1.      Rental Rate KIBOR + Spread[8].

2.      Rental Fix for one year.

3.      Re pricing after every year.

4.      3% penalty on outstanding principal (In case of default)

5.      Pre-payment charges 3% (In case a customer wants to purchase units in advance.)

Documentation of this Scheme:

Islamic House Finance Agreement:

          This Agreement sets out the terms and conditions upon and subject to which the HBFCL and the customer agree to enter into a Musharakah. It is understood between the parties that regardless of the proportion of each party in the Musharakah, the entire Musharakahproperty will be occupied and used by the customer against payment of the monthly payment. Through this agreement the customer buys out the company’s share in the Musharakahfrom time to time.

Monthly Payment Agreement:

          This Agreement sets out the terms and conditions upon and subject to which the customer agrees to pay monthly rental of HBFCL’s share.

Understanding to Purchase Musharakah Units:

          In this agreement the customer applies for purchasing HBFCL’s shares. This agreement set out the terms and condition for purchasing of Musharakahunits.

Letter of Undertaking to Sell MusharakahUnits:

          The letter of undertaking to sell Musharakah units is generally taken by HBFCL from its customers by this undertaking the customer agree to purchase Musharakah units.

Penalty:

          The House Building Finance Corporation charges penalty for an initial period of two months on following rate on account of dishonoring of postdated cheque of debit advice.

1.      Per dishonored postdated cheque, a penalty of Rs. 500 will be imposed and charge for a maximum period of two months.

2.      In case of Non Materialization of debit advice, a penalty of Rs. 500 will be charged for an initial 2 months period.

3.      If the post dated cheques /debit advice are cleared within the same month, no penalty will be charged.

4.      If the customer remains in default even after two months, then penalty will be imposed according to investment slab as under.

Investment up to 500000	Rs. 500 P.M
500000-1500000	Rs.1000 P.M
1500000-2500000	Rs.1500 P.M
Above 2500000	Rs. 3000 P.M

Insurance:

          In the interest of the company and the customer, the HBFCL arranges life insurance[9], while is equivalent to the amount of the investment. The HBFCL resorts to practice due to unavailability of Takaful. The life of the customer is insured with the reputable insurance company on whose income the investment application is accepted by the company. The sum assured of the insurance policy is equal to the original amount of the investment disbursed by the company. The claim if any, received against the policy from the insurance company in excess of the outstanding balance of total dues shall be refunded to the legal heirs of the customers. The customer shall pay the insurance premium along with the monthly payment of rent and purchase price of Musharakah unit. The company shall also arranges property Takaful for a reputable Takaful company, against all relevant insurable risks such as loss, damage or destruction of Musharakah property.

          In the event of claim being lodged, the proceeds are shared between the company and the customer in accordance with their respective share in the Musharakah. All costs and expenses incurred in respect of the insurance of the Musharakah property are borne by the customer.

Procedure of Ghar Aasan Flexi Scheme:

          A customer applies for house financing in HBFCL and submits application with required Documents. HBFCL accepts application of customer after necessary process. The HBFCL gives approved amount in installments on following schedule during the agreed period of construction which is normally nine months. In this period the customer will construct house.

1st	30% of Approved Amount
2nd	30% of Approved Amount
3rd	30% of Approved Amount
4th	10% of Approved Amount

          After disbursement of facility the HBFCL will start charging amount of rent. As compare to Ghar Aasan (Previous Scheme) in which during construction period the HBFCL does not charge any amount. The HBFCL charges only amount of rent for the period of fifteen months[10]  (Annexure 3). After completion of moratorium period customer can purchase units of HBFCL’s share, the monthly payment will be changed and included the price of units.

Sharia’h Appraisal of Ghar Aasan Flexi Scheme:

Ghar Aasan Scheme has designed on the basis on diminishing musharakah.  Diminishing Musharakah (Musharakah Mutnaqsa) is the combination of three contracts which are Sharikah (Partnership), Ijarah (Lease) and Bay (Sale)[11].

In this contract Islamic financial institution and the customer participate in the joint ownership of a property on the basis of Sharikah tul Milk. The share of the financier is divided into a number of units and the customer purchases those units one by one periodically until he becomes the sole owner of the property.[12] The Customer pays the rent to Islamic financial institution for his part. As the Customer purchase units of the Islamic Financial institution his payable amount of rent decreases, finally the payable amount of rent remains zero. Same is the case in Ghar Aasan Scheme launched by HBFCL, Customer contributes land and HBFCL contributes in shape of financing (for construction of house) in Sharikah tul Milk. After the lockout period Customer pays rent of HBFCL’s share and will purchase one unit annually.

Sharia’h Scholars debate on the legitimacy of HBFCL’s Product:

Majority of ulama (Sharia’h Scholars) are of the opinion that the House Building Finance Corporation limited is not Sharia’h Compliant.

1.      House Building Finance Corporation Limited is working on interest based system. The HBFCL is financed by the Government of Pakistan and State Bank of Pakistan who lend money on interest and in return HBFCL lends money to their customers on interest.

Jabir RA said 'Allah's Messenger PBUH cursed the accepter of Interest, and its payer, and one who records it, and the two witnesses, and he said: They are all equal'. [13]
(Darul Ifta Noor Ul Irfan Muharram Al Haram 1427 A.H. , February 2006 )

2.       Even if the product of HBFCL is considered Sharia’h Compliant then the issue of check and balance is another concern. The Ulama raised the objection that there is no check and balance by the Sharia’h experts.

3.      The purchase and construction of property with the partnership of House Building Finance Corporation does not involve Riba (Interest). However there are few terms and Conditions exist which are not permitted in Sharia’h. (Daru Ifta Darul Uloom Karachi, Jamadi al Thani 1403 A.H.)

Islamic House Financing in Meezan Bank Limited:

          Meezan Bank Limited is the first scheduled bank in Pakistan, which has been licensed by the State Bank of Pakistan to operate as an Islamic commercial bank. Meezan Bank offers house financing through their product namely “Easy Home” on the basis of diminishing musharakah.

Sharia’h Compliance of Easy House Facility:

          As discussed above that Meezan Bank offers this facility on the basis of diminishing musharakah. In this contract MBL and the customer participates in the joint ownership of a property or equipment on the basis of Sharikah tul Milk. The share of the Meezan Bank Limited is divided into a number of units and the customer purchases those units one by one periodically. The customer purchases units of Islamic financial institution until the customer become the sole owner of the property.[14] The Customer pays the rent to Islamic financial institution for his part. As the customer purchases units of the Islamic Financial institution his payable amount of rent decreases, finally the payable amount of rent remains zero. Same is the case in Easy Home Scheme launched by Meezan Bank Limited. The Customer and MBL make a pool on the basis of Sharikah tul Milk. The customer pays rent of MBL’s share and purchases one unit annually.

          As mentioned in (Annexure 1) that the total cost of house is PRs.1, 000,000. The MBL has invested 600,000 on the basis of Sharikah tul Milk. The Meezan Bank charges rental for his share and customer purchases units of MBL until he becomes sole owner of that property.

Differences and Similarities between Meezan Bank Limited, House Building Finance Corporation Limited and United Bank Limited:

Table No: 1

DIFFERENCE	MEEZAN BANK LIMITED	HBFCL		UNITED BANK LIMITED
MODE OF FINANCING:	Diminishing Musharakah	Diminishing Musharakah		Interest Based
SHARIA’H AUDIT	Yes	No		N/A
SHARIA’H ADVISORY BOARD	Yes	No		N/A
LICENSE FROM SBP FOR ISLAMIC HOUSE FINANCING	Yes	No		N/A
MAX FACILITY AMOUNT:	40000000/-	7500000		300000000/-
DURATION	3-20 Years	3-20 Years		3-20 Years
RENTAL RATE:	KIBOR+3.5% Approximately	KIBOR+2.5% To 3.5%		KIBOR+3.5% To 4.5%
LIFE INSURANCE:	Compulsory	Compulsory		Compulsory
PROPERTY INSURANCE:	Optional	Optional		Optional
MORATORIUM PERIOD:	N/A	A period of 12 months as a moratorium period. In which HBFCL will charge only rental.		N/A
LATE PAYMENT CHARGES:	Rs.500 flat+20% p.a.	INVESTMENT	PENELTY		Rs.1000 per installment
		UP TO 500000	Rs.500
		500001-1500000	Rs. 1000
		1500001-2500000	Rs. 1500
		Above 2500000	Rs. 3000
USE OF LATE PAYMENT CHARGES:	Charitable Purpose	Income of HBFCL		Income of Bank

Conclusion:

                   The findings of this research conclude that the product (Ghar Aasan Flexi) of House Building Finance Corporation is based on diminishing musharakah (A Sharia’h compliant Mode for House Financing). There are some issues in GAS Flexi, some of them, but not exhaustive, as follow:

·         In Ghar Aasan Flexi product the late payment charges include in their income while it is considered as charitable fund in Islamic financial institutions.

·         There is no concept of Sharia’h supervisory board which may guide them about Sharia’h regulatory framework for a specific product. The corporation do not follow the rule and regulations which are the essential for the contract e.g. in murabahah lil-amiri bi-al-shira they provide the required amount to their customer, who purchases the goods and starts to use the goods. Then both the parties , the customer and the corporation sign the contract is being signed between HBFCL and customer which make no difference between conventional and Islamic product.

 Such issues can be resolve taking some steps which have been discussed in recommendations.

Recommendations:

Sharia’h Advisory Board & Sharia’h Audit:

          As discussed above that the House Building Finance Corporation finances through diminishing Musharakahbut there are a number of problems in application. The HBFCL must appoint a Sharia’h Advisor as State Bank has issued a circular for all Islamic Banking institutions on March 25, 2008. The HBFCL must appoint a Sharia’h advisor who will ensure that all products and services and related policies and agreements of HBFCL are in compliance with Sharia’h rules and principles. Before launching any new product and services the related procedure, rules and agreements shall be duly examined by the Sharia’h Advisor.

          The Sharia’h Advisor should also conduct Sharia’h audit on annual or by annual basis. In this regard the management of House Building Finance Corporation shall be responsible to provide him all information’s required. Sharia’h Advisor will thoroughly review operation of the House Building Finance Corporation’s products on periodic basis in coordination with officials responsible for Sharia’h compliance to ensure that all the products and services offered by the House Building Finance Corporation are Sharia’h compliant.

Deficiency of Islamic Orientation Regarding Islamic Finance:

          It has been observed that the management of HBFCL does not have sufficient knowledge regarding Islamic Finance. The Employees of House Building Finance Corporation do not know about Islamic finance products. The HBFCL is providing house financing on diminishing musharakah basis but the employees do not know what diminishing musharakah is. They cannot convince their customers about their product’s Sharia’h compliance. It is necessary for providing Sharia’h compliant products that the House Building Finance Corporation should arrange training programs for their employees on regular basis.

Takaful:

          The House Building Finance Corporation is using conventional life insurance but they should use Takful instead of conventional insurance.

BIBLIOGRAPHY:

AAOIFI. (1429H-2008). Accounting Standards. Manama: Accounting and Auditing Organization for Islamic Financial Institutions, P.O.Box 1176, Behrain.

AAOIFI. (1429H-2008). Shari's Standards. Manama: Accounting and Auditing Organization for Islamic Financial Institutions, P.O.Box 1176, Manama, Behrain.

Abdul-Rahman, D. Y. Islamic Home Financing in the United State. LARIBA and Mike Maguid Abdelaaty,.

Ali, H. Z. (2008). Dour E Hazir kay mali muamlat ka Shari Hukam. Lahore: Abu Huraira Academy.

Ali, H. Z. (2010). Maeeshat wa Tijarat kay Islami Ahkam. Lahore: Abu Huraira Academy.

Al-Shalhoob, D. S. (2008). Home Financing in Islamic Law, A study of some products from housing financing and applicable to Islamic Law. Kuala lumpur. King Fahd University of Petroleum and minerals, Saudi Arabia.

Ayub, M. (2002). Islamic Banking and Finance theory and Practice. Karachi: State Bank of Pakistan.

Chaudhry, Z. H. (1952). House Building Finance Corporation Act,. Lahore: Ch. Abdul Sattar at G.F. Printing Press,.

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Hanif & Hjazi . (Inc. 2010). Islamic Housing Finance: A Critical Analysis and Comparison with Conventional Mortgage. EuroJournals Publishing, , ISSN: 1450-2889 Issue 6 (2010).

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HBFC. (n.d.). Existing Customers. Retrieved June 10, 2011, from House Building Finance Company Limited Pakistan: http://www.hbfc.com.pk

HBFC. (n.d.). Introduction. Retrieved October 26, 2011, from House Building Finance Corporation: http://www.hbfc.com.pk/company_profile.html

HBFC. (2001-2002). Mannuals of House Building Finance Corporation. Karachi: House Building Finance Corporation, .

HBFC. Master Circular - Ghar Aasan & Shandar Ghar Schemes. Karachi: House Building Finance Corporation Ver. 1.0, Pages18-35.

HBFC. (n.d.). New Customers. Retrieved June 11, 2011, from House Building Finance Company Limited: http://www.hbfc.com.pk

Khan, K. M. (2011, 01 03). House Building Finance Corporation. (M. A. Shahzad, Interviewer)

Kiyani, s. (2010). house financing in pakistan & united kingdom from shariah perspective. Islamabad: International Islamic University, .

Limited, H. B. (1987). Simplified Scheme. Karachi: HBFCL.

Mansoori, D. M. (2005). Islamic Law of Contracts and Business Transactions. Islamabad: Shai'ah Academy, International Islamic University,.

Mansoori, D. M. (2009). Islamic Law of Contracts and Business Transactions. Islamabad: Shariah Academy, International Islamic University, Islamabad.

Mehmood, A. (2002). Islamization of Economy in Pakistan, Past Present and Future. Islamic Studies 41:4 , 675-704.

Muhmood, A. T.-M. (2007). Bay Bithaman Ajil (BBA) in house Binancing As implemented by Malasian Financial insitutions: A critical Analysis of its procedures and application from the fiqh point of view. International Islamic University, Malaysia.

OIC, F. A. (n.d.). Fatawa. Retrieved Oct 21, 2011, from ISRA: http://www.isra.my/fatwas/topics/commercial-banking/financing/musharakah/item/324-al-musharakah-al-mutanaqisah-and-its-shari%E2%80%99ah-rules-resolution-no-136-15/2-2004-by-the-international-council-of-fiqh-academy.html#startOfPageId324

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Shoukat, M. I. (2010, 07 25). Ghar Aasan. (M. A. Shahzad, Interviewer)

Usmani, M. M. (1996). Fiqhi Muqalat (Research Papers in Islamic Law). Karachi: Maiman Islamic Publishers.

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Usmani, M. M. (2005). Islam aour Jadeed Maeeshat O Tijarat (Urdu). Karachi: Maktba Muarif Ul Quran.

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[1]Chaudhry, Z.H. (2004), “House Building Finance Corporation Act 1995”,Nadeem Law Book house, Lahore, p.5

[2]HBFCL. (n.d.). Introduction. Retrieved October 26, 2011, from House Building Finance Corporation: http://www.HBFCL.com.pk/company_profile.html

[3] Ibid

[4]HBFCL. (n.d.). Introduction. Retrieved October 26, 2011, from House Building Finance Corporation: http://www.HBFCL.com.pk/company_profile.html

[5]Hassanuzzam, D. S. (1995). Islamisation of the Financial System in Pakistan. In I. o. Insurance, Encyclopaedia of Islamic Banking & Insurance (pp. 231-245). London: Institute of Islamic Banking & Insurance.- Usmani, M. M. (2005). Islam aour Jadeed Maeeshat O TIjaraht (Urdu). Karachi: Maktba Muarif Ul Quran. P. 156 - CII. (1978-79). Annual Report. Islamabad: Council of Islamic Ideology,P. 260-229

[6]HBFCL. (2001-2002). Mannuals of House Building Finance Corporation. Karachi: House Building Finance Corporation, . - Khan, K. M. (2011, 01 03). House Building Finance Corporation. (M. A. Shahzad, Interviewer) - Khan, K. M. (2011, 01 03). House Building Finance Corporation. (M. A. Shahzad, Interviewer)

[7]HBFCL. (n.d.). New Customers. Retrieved June 11, 2011, from House Building Finance Company Limited: http://www.HBFCL.com.pk

[8] Spread amount is different for Government employees and Business man. For Government Employee the rate is 3.25% and for Business man the rate is 3.5%.

[9] The House Building Finance Corporation is using conventional life insurance now days. They will switch to Islamic Insurance  soon (G.M. HBFCL ZONAL OFFICE ISLAMABAD)

[10] This period is called moratorium period.

[11]Abdullah, Noor Mohammad Osmani & Md. Farukh. (July 2010). MusharakahMutnaqisah House Financing: A review of Literatures & Practices of islamic Banks in Malysia. international Review of Business Research Papers,, (pp. Vol: 6 272-282). P. 273

[12]Usmani, M. M. (2000). Introduction to Islamic Finance. Karachi: IDARATUL MA'ARIF, KARACHI PAKISTAN, P. 82, - OIC, F. A. (n.d.). Fatawa. Retrieved Oct 21, 2011, from ISRA: ttp://www.isra.my/fatwas/topics/commercial-banking/financing/musharakah/item/324-al-musharakah-al-mutanaqisah-and-its-shari%E2%80%99ah-rules-resolution-no-136-15/2-2004-by-the-international-council-of-fiqh-academy.html#startOfPageId324, Usmani, D. M. (2002). MeezanBank's Guide to Islamic Banking. Karachi: DARUL-ISHAAT URDU BAZAR KARACHI-I PAKISTAN., P. 115, - Usmani, D. M. (2005). Shirkat O Muzarbat Asre Hazar Main (Urdu). Karachi: Idaratul Ma'arif.,p. 415 - Usmani, M. M. (1996). Fiqhi Muqalat (Research Papers in Islamic Law). Karachi: Maiman Islamic Publishers, P. 231 - Ayub, M. (2002). Islamic Banking and Finance theory and Practice. Karachi: State Bank of Pakistan, P. 75

[13] Muslim: Book 10:Hadith.3881

[14]Usmani, M. M. (2000). Introduction to Islamic Finance. Karachi: IDARATUL MA'ARIF, KARACHI PAKISTAN, P. 82, - OIC, F. A. (n.d.). Fatawa. Retrieved Oct 21, 2011, from ISRA: ttp://www.isra.my/fatwas/topics/commercial-banking/financing/musharakah/item/324-al-musharakah-al-mutanaqisah-and-its-shari%E2%80%99ah-rules-resolution-no-136-15/2-2004-by-the-international-council-of-fiqh-academy.html#startOfPageId324, Usmani, D. M. (2002). MeezanBank's Guide to Islamic Banking. Karachi: DARUL-ISHAAT URDU BAZAR KARACHI-I PAKISTAN., P. 115, - Usmani, D. M. (2005). Shirkat O Muzarbat Asre Hazar Main (Urdu). Karachi: Idaratul Ma'arif.,p. 415 - Usmani, M. M. (1996). Fiqhi Muqalat (Research Papers in Islamic Law). Karachi: Maiman Islamic Publishers, P. 231 - Ayub, M. (2002). Islamic Banking and Finance theory and Practice. Karachi: State Bank of Pakistan, P. 75