Islamic
financing for house renovation in Pakistan
By
Muhammad Asghar Shahzad
1. Introduction
Every asset needs maintenance with the passage of time;
in the same way a house will need some maintenance and repairs as time passes.
Renovation does not involve construction of a new house but it involves
repairing or maintaining a house to its original condition. In Pakistan clients
normally apply for renovation finance if they want to add some facilities e.g.
fit a bath or repair floor etc. The financing limit and repayment period in a renovation
case is normally less as compared to construction or buying.
Normally people don’t have sufficient funds to fulfill
these requirements. In Pakistan Islamic banks provide finance for four
categories of house, construction of a new house, buying a house, balance
transfer and renovation.
This research will focus on Islamic house finance for
renovation purposes, and will also discuss whether the current practice is
suitable for financing or not, and alternative products will be discussed.
2. Concept of diminishing Musharakah in Islamic house financing
Diminishing Musharakah (Musharakah Mutanaqisa) is a combination of three
contracts which are: sharikah (Partnership), Ijarahh (Lease) and Bay
(Sale). [1]In
this contract the Islamic Financial Institution [IFI] and the customer
participate in the joint ownership of a property or equipment 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. The customer
purchases units from IFI until the customers become the sole owner of the
property.[2]
The customer pays rent to IFI for using resources of the IFI. As the customer
purchases units from the IFI his payable amount of rent decreases. Finally the
payable amount of rent becomes zero. This mode of financing is normally used by
the Islamic financial institutions of Pakistan for house financing.[3]
IFI’s provide financing for renovation through
diminishing musharakah. Under this contract the IFI purchases some portion of
the client’s house and leases back to the customer at an agreed rate of profit.
During the agreed period of financing the client purchases units of the IFI’s
share[4]and
pays the rent on the remaining units. Suppose a client needs financing for
renovation of their house from Meezan Bank Limited amounting to Rs. 500,000 for
ten years at 15%. The monthly payment schedule will be as follows.[5]
Table No. 1
Payment Sschedule through diminishing Musharakah
|
Months
|
Rent
|
Unit Price
|
Monthly Payment
|
Balance Unit Price
|
|
0
|
Renovation Period
|
500,000
|
||
|
1
|
6,250
|
500,000
|
||
|
2
|
6,250
|
6,250
|
500,000
|
|
|
3
|
6,250
|
6,250
|
500,000
|
|
|
4
|
6,250
|
6,250
|
500,000
|
|
|
5
|
6,250
|
6,250
|
500,000
|
|
|
6
|
6,250
|
6,250
|
500,000
|
|
|
7
|
6,250
|
6,250
|
500,000
|
|
|
8
|
6,250
|
6,250
|
500,000
|
|
|
9
|
6,250
|
6,250
|
500,000
|
|
|
10
|
6,250
|
6,250
|
500,000
|
|
|
11
|
6,250
|
6,250
|
500,000
|
|
|
12
|
6,250
|
6,250
|
500,000
|
|
|
13
|
6,250
|
6,250
|
500,000
|
|
|
14
|
6,250
|
6,250
|
500,000
|
|
|
15
|
6,250
|
6,250
|
500,000
|
|
|
-
|
-
|
-
|
-
|
-
|
|
116
|
298
|
4,762
|
5,060
|
19,048
|
|
117
|
238
|
4,762
|
5,000
|
14,286
|
|
118
|
179
|
4,762
|
4,940
|
9,524
|
|
119
|
119
|
4,762
|
4,881
|
4,762
|
|
120
|
60
|
4,762
|
4,821
|
0
|
|
Total Payable amount
|
425000
|
-
|
925000
|
-
|
4. The concept of MURABAHAH LIL-AMIRI
BI-AL-SHIRA
in Islamic house financing
Murabahah lil-amiri bi-al-shirais is, a term of Islamic
Law that refers to a particular kind of sale. Most of the Islamic banks and
financial institutions use this transaction as an Islamic mode
of financing.[6]
Murabahah lil-amiri bi-al-shira is a sale of goods at a price covering the purchase
price plus a profit margin agreed upon between the contracting parties. In this
type of sale the seller discloses the cost of commodity and profit on the sold
commodity.[7]
The legitimacy of the murabahah lil-amiri bi-al-shira contract is based
on the Quran, the Sunnah, the consensus of the Muslim jurists and the analogy (qiyas).
In the Qur'an, Allah says: "Allah has permitted trade and prohibited
Riba"[8].
The Prophet Muhammad (peace be upon him) says: "The best earning is
what man earns with his own hands and from a permissible trade".[9]According
to scholars there is a general principle of Islamic law that everything is
permissible as long as there is no violation of specific rules of Sharia’h.
Furthermore, the consensus of the Muslim jurists can be traced in classical
Islamic jurisprudence which shows their permission for murabahah lil-amiri
bi-al-shira contract. Its legitimacy is also proved by analogy, since the
Prophet (peace be upon him) has approved the tawliyah sale which is
similar to murabahah [10],
Islamic financial institutions also use this mode of finance for financing. In
Malaysia, Indonesia and Baronai Daru Salam IFI’s provide house financing on the
basis of murabahah lil-amiri bi-al-shira/ Bay
bithaman al ajil. According to the scholars, this contract is not suitable for
house financing because of the pricing issue: i.e. a contract of Murabahah
lil-amiri bi-al-shira (for house financing) is for long term financing and IFI cannot
charge an extra amount during the period of contract, as a result it becomes
costly for the customer. Through this scheme in Malaysia an Islamic financing facility is
provided for the purchase of a residential property on a deferred payment basis
which is based on the Shari’ah concept[11]. The
Islamic banking institution earns a profit by purchasing the asset and
subsequently sells it back to the customer at a marked-up price on a deferred
payment basis.
5. Murabahah lil-amiri bi-al-shira for
house renovation
This product can be used as a mode of financing for
house renovation. This mode of financing was introduced for financing house
renovation, by the House Building Finance Corporation Limited[12] in
2003 and named the “Shandar Ghar Scheme”. This product was based on Murabahah
lil-amiri bi-al-shira, even though there were many Shariah problems in the
practical application of this product. But this product was certainly very
simple and practical.
The Murabahah lil-amiri bi-al-shira can be use
in a very simple way e.g. a client wants to re-plaster his house and approaches
the IFI. The IFI purchases the required materials e.g. cement, paint etc. and
can sell these to the client on a deferred payment basis.
6. Comparison
between MURABAHAH LIL-AMIRI BI-AL-SHIRA and diminishing Musharakah for house
financing
For comparison we will discuss an example. Suppose an
IFI provides finance for renovation of a house through diminishing Musharakah
amounting to Rs. 500,000 for ten years at 15% and the same amount, period and
rate through murabahah lil-amiri bi-al-shira the total payments will be as
follows;
Table
No. 2 Comparison of Murabahah Lil-Amiri Bi-Al-Shira and diminishing
Musharkah
|
Months
|
Murabahah Lil-Amiri
Bi-Al-Shira
|
Diminishing Musharakah
|
|
1
|
4791.666667
|
6,250
|
|
2
|
4791.666667
|
6,250
|
|
3
|
4791.666667
|
6,250
|
|
4
|
4791.666667
|
6,250
|
|
5
|
4791.666667
|
6,250
|
|
6
|
4791.666667
|
6,250
|
|
7
|
4791.666667
|
6,250
|
|
8
|
4791.666667
|
6,250
|
|
9
|
4791.666667
|
6,250
|
|
10
|
4791.666667
|
6,250
|
|
11
|
4791.666667
|
6,250
|
|
12
|
4791.666667
|
6,250
|
|
13
|
4791.666667
|
6,250
|
|
14
|
4791.666667
|
6,250
|
|
15
|
4791.666667
|
6,250
|
|
116
|
4791.666667
|
5,060
|
|
117
|
4791.666667
|
5,000
|
|
118
|
4791.666667
|
4,940
|
|
119
|
4791.666667
|
4,881
|
|
120
|
4791.666667
|
4,821
|
|
Total Payment
|
575000
|
925,000
|
Figure
No. 1 Comparison of Murabahah Lil-Amiri Bi-Al-Shira and diminishing
Musharkah
Figure No. 1 illustrates that
if one financial institution provides financing for the renovation of a house
through Murabahah Lil-Amiri Bi-Al-Shira and another through Diminishing
Musharkah at same rate and amount, the
payable amount is different.
7. Conclusion
From this discussion we can conclude that both the
products are Shariah based. But Murabahah Lil-Amiri Bi-Al-Shira is
very simple, and practical as compared to diminishing Musharkah. The diminishing
Musharkah based product is very expensive as compared to Murabahah
Lil-Amiri Bi-Al-Shira as discussed in Table no. 2. The diminishing
Musharkah based product could be controversial among some scholars as it
involves lease back agreements.
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[1]Abdullah, Noor Mohammad Osmani & Md. Farukh. (July 2010).
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Practices of islamic Banks in Malysia. international Review of Business
Research Papers,, (pp. Vol: 6 272-282). P. 273
[2]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:
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[4] Share of Islamic financial
Institution which IFI purchased from customer.
[5] The payments through
Diminishing Musharakah calculated through these formulas. calculation of units=
and calculation of rent= 
and calculation of rent=
[6]Usmani, M.
M. (2000). Introduction to Islamic Finance. Karachi: IDARATUL MA'ARIF, KARACHI
PAKISTAN.P. 95
[7]Mansoori, D.
M. (2005). Islamic Law of Contracts and Business Transactions. Islamabad:
Shai'ah Academy, International Islamic University, P. 214
[8]Al-Qur'an, al-Baqarah: 275.
[9]Narrated by Hakim
[10]Tawliyah is a sale based on
cost price
[11] Murabahah lil-amiri
bi-al-shira is Shariah Compliant product but some scholars are against to use
this product for long term financing.
[12] The House Building Finance
Corporation was established in 1952 under an act of the Parliament of Pakistan.
The House Building Finance Corporation Limited is the oldest housing finance
institution in Pakistan. HBFCL is a Government designated financial
institution.
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