Home financing facility under the principles of Islamic Jurisprudence is available from almost all Islamic banks in most parts of the country, both for houses and apartments. The facility is also available in the Islamic branches of conventional commercial banks and is offered under different names for a house or apartment’s purchase, construction, renovation and asset transfer facility. Some banks have their own considerations and preferences for the type of applicants and geographical locations.
Home finance is offered purely for residential and self-occupancy purposes and funds approved under this facility cannot be utilized for consumption or commercial purposes. Some banks finance both the land (plot) and construction while others finance construction on land already owned by the applicant. In case of home purchase or renovation, the property must already be a constructed house or apartment.
Islamic home financing is mostly based on the principle of “Diminishing Musharakah” and “Ijarah”. Under this agreement, the bank and the client become partners or joint owners in the property by contributing certain agreed proportions of the total cost. Share of the bank is leased to the client on the basis of Ijarah and the client pays regular rentals for the same. At maturity of an agreed lease period bank at its discretion sells its ownership share in the property to the client at a specified or pre-agreed price.
Home financing is a lengthy process both for the bank and the client, and most banks prequalify an applicant before starting the actual process. Documents for prequalification may include a copy of computerized national identity card (CNIC), salary slip or a proof of income, six months of bank statement and title documents of the land or plot.
The following is a general description of Islamic home financing:
Financing Eligibility:
All Pakistani resident nationals having a valid national identity card; being of a specific age, having a clean eCIB or DataCheck report, employed, self-employed and business owners are eligible for the facility. Some banks also finance Non-Resident Pakistanis under the specific requirements.
eCIB & DataCheck are confidential electronic consumer information bureau and other agencies reports showing the amount and status of finance if one has availed from a financial institution.
Financing Types:
Islamic home finance is normally available for the flowing purposes.
• Home / apartment purchase i.e. a completed residential property
• Construction of a house which in some cases also includes land / plot purchase
• Home / apartment Renovation
• Replacement or Asset Transfer Facility from another bank
Financing Limit:
The extent of home finance depends on a number of factors such as the bank’s policy for the minimum and maximum limits, client’s requirements and their financial capacity, and the type of clientele such as employed, self-employed and business persons. It ranges from as low as to Rs. 300,000 to a maximum of Rs. 175 Million in some cases.
Financing Tenure:
Tenure or period of home finance may be dependent on diverse factors including the bank policy, amount of finance, purpose like purchase, construction or renovation, financial strength and age of the applicant etc. Currently it ranges from 3 years at least to 25 years at most. Both the amount and tenure of Islamic home finance are fixed within approved limits of a bank in consultation with the applicant.
Profit Rate:
Profit rate on home finance is mostly at a variable rate which is set semiannually or annually. It is mostly linked with KIBOR (Karachi Interbank Offered Rate) and varies from bank to bank and type of applicant. Profit rate is usually the base rate (KIBOR) in addition to a certain predefined percentage points or margin. Some banks also offer fixed profit rate home finance facility.
Bank Investment Ratio:
Bank investment ratio is the proportion of finance or investment by the Islamic bank to the total cost on the property. It varies from bank to bank depending on a number of factors like a bank’s internal policy, client’s willingness and ability to contribute funds and type of home finance facility. The ratio varies from 60% to 70%.
Income requirement:
Income requirement of the applicant may also depends on a number of factors like the amount of finance, type of applicants such as salaried, self-employed or a business person and purpose of finance like construction, renovation or asset transfer facility etc. If an applicant does not meet the minimum income requirement, they may also include the income of a co-applicant. Some banks considers co applicant like spouse, parents and/or adult children who have a verifiable source of income and are willing to becomes co applicant for home financing.
Age requirement:
It also varies but starts from 25 years as the minimum age to 65 years as the maximum at maturity of financing.
Payment of Rentals:
Rentals by the client are paid mostly monthly over the counter through cash or cheque in a dedicated account. The client needs to pay/deposit the rental amount in their account any time during the month but not later than the specified date. For the purpose of direct deduction from the account, the client provides the bank with direct debit instructions from their accounts.
Essential Documents:
Home financing is a lengthy process both for the bank and the applicant, and most banks prequalify an applicant before starting the actual process. Documents required may include as follows;
- Copy of CNIC/NICOP of applicant and co-applicant
- Passport size photographs in some cases
- Tax Returns asked by some banks
- Copy of utility bill/s
- Professional degree etc. in case of self-employed professionals
- Latest salary slip/s and or salary certificate in case of salaried persons
- Proof of occupation or business
- Bank statement also be asked for 6 to 12 months
Finance Burden Ratio
For the purpose of home finance it is considered as the total monthly payments of an applicant including the rental as a percentage of his/her total monthly income. It varies from bank to bank keeping in mind the type of its clientele. Some banks consider co applicants’ income to be clubbed with the principal income for the purpose of meeting this requirement.
Takaful:
Personal and/or property Takaful is introduced as a risk management tool which may be mandatory or complimentary or a combination of both.
To reduce the impact of loss to life or property, Takaful under Islamic banking is an alternative to the conventional insurance. The client pays particular amount of money as contribution (known as the premium) partly to risk fund (the participants’ special account) using the concept of tabbaru’ (donation) and partly to another party (known as Takaful company) with a mutual agreement that, the kafiil (Takaful company) is under a legal responsibility to provide for the applicant a financial protection against unexpected loss, should it happen within the agreed period.