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Islamic banks playing prime role in extending house finance

Published on 21st Nov, Edition 47, 2016


Pakistan’s housing crisis is well known reality as the country requires about ten million homes. Migration from rural areas to urban areas has resulted in an urban growth, which has been about three times faster. Pakistan’s urban population stands at 75 million or 39 percent of total population while experts believe that it will (population) rise to 114 million by 2025.

The lack of funding is the biggest obstacle that prevents new homes from being built. Pakistani banks have always shown unwillingness to provide funding and mortgages in the past. It is now seen that the Islamic banks are active in extending housing finance. Pakistanis mostly trust the Islamic banking institution over the conventional banking to fulfill their need for housing finance. Islamic banks remained the largest players with 36 percent share in gross outstanding.

Islamic banks have become apparently as lead financiers of housing projects at a time when conventional banks wrestle to raise deposits for long-term maturity leading to low lending levels.

The House Building Finance Corporation (HBFC), which has been a major financier for the housing, was far behind as its average loan size was Rs1.7 million, an amount insufficient for even a small flat.

The recent upswing in land prices and cost of building has created a difficult situation for lenders, and the lending limits of banks, particularly that of the HBFC, look insufficient.

HBFCL remained the largest shareholder, in terms of gross outstanding, with 24 percent as the outstanding loans of HBFCL were Rs15.46 billion at the end of first half of this calendar year. However, based on category, Islamic banks remained the largest players with 38 percent share in gross outstanding.

Increasing trend

Overall Islamic and private banks are major contributors to gross outstanding of housing finance during the year. The share of private banks and Islamic Banks (IBs) in the gross outstanding stood at 30 percent and 38 percent, respectively as on June 30, 2016.

Fourteen Islamic Banking Divisions (IBDs) and five IBs have 12 percent and 88 percent share, respectively in housing finance portfolio of Islamic Banking Industry.

As on June 30, 2016, Islamic banks reported Rs25.07 billion outstanding house finance followed by private banks at Rs19.79 billion, public sector banks at Rs5.13 billion and others (foreign banks and other DFIs excluding HBFCL) with Rs0.25 billion.

Islamic Banking Industry has maintained the increasing trend throughout the year and Islamic banks showed an increase of 16 percent to reach Rs25.07 billion by the end of June 2016 up from Rs24.48 billion in December 2016.

The gross outstanding housing finance of Islamic Banking Industry (five Islamic banks (IBs) and 14 Islamic Banking Divisions (IBDs) of conventional banks) stood at Rs28.38 billion as on June 30.

According to SBP, number of borrowers decreased from 70,080 to 68,275 since June 2015 largely due to decrease in NPL borrowers. Moreover, 10.60 percent of total outstanding borrowers were female and 66.62 percent had primary source of income as salary.

Housing finance is gradually growing and the gross outstanding of all banks and DFIs surged to Rs65.70 billion as of June 30, 2016.

According to State Bank of Pakistan (SBP) at present, 24 (Islamic and conventional) banks, House Building Finance Company Limited (HBFCL) and one microfinance bank are catering to the housing finance needs and the current data confirms that primary housing finance market in Pakistan is gradually growing which is a very positive sign for the economy.

For the quarter ended March 2016 the State Bank’s latest housing finance review shows that Islamic banking industry has taken the leadership. The average of their loans is much higher than other institutions.

During the quarter ended March 2016, gross financing crossed the sixty-billion mark and stood at Rs62.96 billion, compared to Rs60.80 billion in the previous quarter, showing an increase of Rs2.16 billion or 3.55 percent over the preceding quarter. Over the year, housing finance portfolio showed a growth of 15.44 percent.

HBFCL remained the largest shareholder, in terms of gross outstanding, with the share of 24 percent.

Housing finance review indicates that the gross outstanding financing of Islamic banks stood at Rs22.64 billion in the first quarter of 2016 compared to Rs16.2 billion.

Private banks followed with Rs18.84 billion, and the outstanding loans of HBFCL were Rs15.11 billion. This is up by 15.60 percent over last year.

Banks/DFIs reflect loans over Rs5 million, while the inclination of HBFCL falls towards smaller loan size of under Rs1 million.

The shares of private banks, Islamic banks and HBFCL in the gross outstanding was 30 percent, 36 percent and 24 percent, respectively as on March 31, 2016.

The non performing loans of the housing sector as a percentage of total outstanding loans fell by some 5 percent and come up to Rs12.63 billion as on March 31, 2016, compared to Rs13.28 billion as on December 31, 2015.

Despite the drastic growth in housing finance by Islamic banks, NPLs for Islamic Banking Industry (IBI) posted a decrease of 9.4 percent or Rs170 million over the previous quarter.

Islamic banks lent Rs3.44 billion for the housing sector during the quarter under review out of the total home loans of Rs5.35 billion.

The State Bank’s report showed that average maturity of lending to the housing sector was 12.5 years — 14 years in case of private banks, 10.7 years for Islamic banks.

The weighted average interest rate was the highest for Islamic banks at 11 per cent compared to 8.8 percent of the private banks.

HBFCL’s percentage share of NPLs in its total outstanding has declined significantly by 10 percentage points over the year.

The number of overall active borrowers, however, have decreased from 70,368 to 67,625 since March 2015; a decline of 3.89 percent over the year.

For Islamic banks, there was a reduction in every category. 10.27 percent of total outstanding borrowers were female, and 57.72 percent had a primary source of income as salary.

Pakistan is still witnessing by inadequate long-term finance and is moving at a very slow pace. The size of housing sector as per industry estimates is more than a trillion rupees.

The current amount of lending by banks and other financial institutions is very little.

The government needed to intervene as the housing gap has been rising. The housing gap could be more than five million units as suggested by some reports.

In Pakistan there are many banks which provide Islamic home financing at an ease.


Few of the important ten banks which provide home financing in Pakistan are as follows:

1- Dubai Islamic Bank

The bank uses Musharaka-cum-Ijara model to enter into the agreement with the clients and help the client to fulfill his or her dream. This financing is wholly in fully Shariah-compliant manner and this financing is not only for the newly built home.

2. Habib Bank Limited

HBL provides funding to those who are willing to purchase a new house or renovate the existing house. There are some conditions in order to get the loan.

HBL Islamic Banking (HBL-IB) is the nation’s second largest Islamic banking facility provider with a deposit growth of over Rs100 billion in the last three years of operations.

In addition, HBL-IB has the largest foot print with over 530 outlets, nation-wide. This is a testament of the HBL’s dedication to serve customers with innovative products and services. Shariah-compliant services are also certified by the State Bank of Pakistan and are tailor-made to suit the needs of a varied clientele base.

3. Meezan Bank

Meezan Bank provides Islamic house investment, which is known as Easy Home. Easy Home is a Shariah-compliant home financing facility. This is one of the most reliable facilities provided by Meezan Bank. This facility is provided according to Shariah-compliant manner therefore it is preferred by many of the customers.

With Easy Home one participates with Meezan Bank in joint ownership of your property, where the Bank will provide a certain amount of financing. One agrees to a monthly payment to the bank of which one component is for use of the home, and another for equity share. In fact, the total monthly payment is reduced regularly as your share in the property grows. When one has made the full investment, which has been agreed upon, one becomes the sole owner with a free and clear title to the property.

4. Bank Alfalah

Bank Alfalah Bank in Pakistan provides the home investment facilities. With Falah’s Musharaka Home Finance one can easily make dreams true. The main benefits and the features include that this loan is based on Shariah-compliant principles.

The tenure is from 3 to 20 years, this is a flexible repayment with no extra charges or early payments. There is not a hard and fast procedure and there is minimal documentations and processing fee. One of the most important things is that there are no hidden charges taken from the customer.

5. Summit Bank

Summit Bank has made thing easy by providing the home funding. This opportunity provided by the Bank has fulfilled following needs of customers.

It has helped customer to buy a home, to build a home, in order to get your home renovated, to purchase land and to do its contraction, and it has facilitated in home debt consolidation.

Summit Bank has introduced its Riba-free banking services with the aim to convert the whole bank into a full-fledged Islamic bank.

The Bank has established its Shariah Board consisting of eminent Shariah scholars to provide its customers with Shariah compliant products and services to fulfill their financial needs and to supervise the Bank’s transitional phase of conversion.

Currently, Summit Bank is offering the Shariah-compliant products and services to serve corporate, commercial and SME entities, and individual consumers. Summit Bank provides globally recognized modes of Shariah compliant solutions.

6. Fasyal Bank

Faysal Bank also provides also provides its services, in order to facilitate its customers in making homes. It provides variety of leasing options, which could suit your needs, many of different options include, the period for the repayment of loan is consisted of 1 to 20 years, and repayments can be made on monthly basis. It provides whether one is building a home, renovating it or you remodel it.

Barkat Home Finance is based on Diminishing Musharkah, where one participate with Barkat Islamic Banking in the joint ownership of property, where the bank provides a certain amount of financing. One agrees to a monthly payment to the bank of which one component is rent for the use of the property and the other is for to increase ownership in the home. Once one has made the full payment, which has been agreed upon, become the sole owner with a free and clear title to the property.

7. United Bank Limited

Like many other commercial banks UBL also provides facilities so that you can get a home of your dream. It provides loan whether you want to purchase a new home, build a home, or you want to renovate it. In order to be eligible for the loan one must of age between 23 to 65 years of age, and has a monthly income of fifty thousand only.

8. Bank Islami

It provides loan for your home on the easiest conditions, which is known as MUSKUN home financing, whether you want to purchase a new home, to build a new home or whether you want to renovate existing one. It has a quick processing, and it provides a total value of 50 million as loan.

9. National Bank Of Pakistan

The National Bank of Pakistan (NBP) has its best facility, which is named as NBP Saibaan, it provides up to a total amount of 35 million and the total financing period is 3 to 20 years, and it provides loan for the home purchase, home construction, home renovation, purchase of land and home construction.

NBP is proud to expand its range of products and services by including Shariah-compliant banking products, available through dedicated Islamic banking branches. Each Islamic banking branch is fully equipped to cover all aspects of Islamic financial transactions. Valuing your adherence to your faith, NBP now provides a premium choice for you in meeting your financial needs, free of Riba.


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