The Islamic banking industry has taken a leap over conventional banking industry in terms of value in housing finance for the first time in history. The industry as a whole exhibited an impressive performance to achieve this mark.
According to the State Bank of Pakistan (SBP), the Islamic banking industry’s share in value stood at Rs. 54.49 billion for housing finance by the end of September 2019.
On the other hand, the share of conventional or interest-based house financing in terms of value stood at Rs.34.64 billion by the end of September 2019.
Islamic Banking Industry constitutes of 5 full-fledged banks and 17 windows of Islamic banking by conventional banks. There are 20 conventional banks and 10 DFIs operating in the country. The majority of these institutions offer financing facilities for housing.
In recent months, Islamic Banking Industry (IBI) has gotten the edge over the conventional banks in which financing to almost all sectors (including corporate and manufacturing) has reduced to a record minimal level mainly due to the prevailing high-interest rates.
Till July 2019, the difference between the two banking modes was very close. IBI’s house financing portfolio stood at Rs. 40 billion whereas conventional banks maintained its portfolio value at Rs. 46 billion.
Ali Ahmed Siddiqui , Director Center of Excellence for Islamic Finance, IBA, said, a large section of the customers have preferred Islamic banks and Islamic banking windows over conventional banks since its inception in early 2000 on the faith factor.
Interestingly, the beneficiary customers of the Islamic banking Industry are slightly less than the interest-based banking industry. The number of Islamic banking customers stood at 8,346 as against of 8,563 of conventional banks excluding their Islamic banking windows. Conventional banks were ahead in terms of customer base because a significant number of customers availed this product having no alternate choice of Sharia-based financing for the purpose of house acquisition.
Housing finance is the main product of Islamic banks since its inception but it gained momentum from 2014. Habib Bank Limited and Standard Chartered Bank, offered this facility to the customers only through their Islamic banking windows.
Islamic banks do house financing on the basis of Diminishing Musharakah and Ijarah Financing. The Diminishing Musharakah transaction is based on Shirkat-ul-Milk where you and the bank participate in the ownership of a property.
In Ijarah Financing, the share of the bank is then leased to you on the basis of Ijarah and is divided into a number of units. It is then agreed that you will buy the units of the bank periodically, thereby increasing your own share till all the units of the Bank are purchased by you which will make you the sole owner of the property.
Role of the Banking Industry in Housing Finance
The role of banking industry, Islamic banks, and conventional banks, for meeting the basic need of the public for housing ownership is very limited considering the deficit of 10 million housing units in the country.
The banks contribute less than 1 percent of the overall demand of housing units, which also include a section of customers who utilize the facility for the purpose of investment in real estate.
Uncontrolled property prices, higher interest rates, complicated procedures, and bribe culture have hampered this business area for the bank and these factors also make it difficult for a common man to get financing facilities from banks for the genuine need for housing ownership for his family.
Now, higher tax rates introduced recently by Federal Board of Revenue (FBR) on the account of wealth and property taxes have also added a burden on the system.
The overall housing finance portfolio increased to Rs. 103.6 billion by the end of third quarter 2019. The ban on non-filers on purchasing property (above Rs. 5 million) kept this segment suppressed during the year.
The consistent interest rate hikes during the year significantly raised the installment amount for potential borrowers, many of whom stand disqualified due to the breach of the maximum required debt-burden ratio.
Conventional banks witnessed a slowdown in this area whereas Islamic Banks are active in this business.
Besides, Development Finance Institutions (DFIs) have also provided financing of Rs. 14.42 billion. Its number of customers is more than double of conventional and Islamic banks because these institutions provide financing facility of up to Rs. 1 million for the renovation and construction of houses.
The incumbent government is set to develop 5 million housing units under Naya Pakistan Housing Scheme. The government is also working to streamline procedures of property transactions through a single window authority, which is highly recommended by banks and the association of builders and developers.
Ali Ahmed Siddiqui added the increasing acceptance of Sharia-based financing mode is evidence for public preference for Islamic banks, which could help the government shore up its housing schemes in the future.