AlHuda Centre of Islamic Banking and Economics, www.alhudacibe.com,Presentaion by Alhuda CIBE ON MODARABA

1. Diminishing Musharakah By Mahmood Shafqat Senior Joint Director Islamic Banking Department State Bank of Pakistan June 02, 2008 The views expressed in this presentation are those of the author and do not necessarily represent State Bank of Pakistan

3. Diminishing Musharakah-Introduction

9. Basic Transaction Structure

13. Shariah Principles

16. Argument: In the case of promise to sell units of share by financier one might argue that if the promise to sale has been done before entering into actual sale This is practically putting a condition on the sale itself Answer: There is a difference between: Putting a condition on a sale and making a separate promise , without making it a condition. In case of condition, the sale will be valid only if the condition is fulfilled. Shariah Principles

17. Consideration Flexibility Available Diminishing Musharakah- Considerations Joint Joint Title Title Holder Profit Rate Fixed/Variable Prepayment Allowed Yes Refinance Available Yes Asset Risk Late Payments Control able

20. 1. Diminishing Musharakah Agreement – Islamic Housing Finance Agreement Purpose: This is the main agreement that establishes Bank’s share in the Musharakah Property. Components: - Both parties share - Musharakah Property detail 2. Monthly Payment Agreement (Rent Agreement) Purpose: This agreement is signed after Main Musharakah Agreement. Bank gives out its share to the customer via this agreement. Components: - Rent Schedule - Formula of calculation Legal Documentation

21. 3. Undertaking to Purchase Musharakah Units Purpose: This is an undertaking by the customer to purchase Bank’s Musharakah units. Components: - Normal Sale Price - Additional Unit Purchase Price 4. Undertaking to Sell Musharakah Units Purpose: This is an undertaking by the Bank to sell Bank’s Musharakah units from time to time. Components: - Normal Sale Price - Additional Unit Purchase Price Legal Documentation

26. An Illustration

27. Step 1: Application Form Submit the filled & signed application form & cheque for Processing Fee & External Agency cost Step 2: Required Documents Attach all the required document Step 3: Address Verification Bank will verify the Applicant Residential & Office Addresses and Addresses of the References submitted Step by Step Guide

28. Step 4: Income Estimation For Businessman / Self Employed Individuals Bank's External Consultant may determine customer’s monthly income. For Salaried Individuals Bank will verify the Income with customer’s employer Step 5: Legal opinion A legal opinion will be obtained on the property documents Step 6: Property Valuation Appointed Valuation Agency will evaluate the property to determine its market value. Step by Step Guide

29. Step 7: Credit Approval & Sanction Letter After customer have fulfilled all Credit requirement satisfactorily, bank will give a conditional Sanction letter Step 8: Account Opening Customer will be required to open an account in bank by submitting a filled account opening form Step 9: Signing of House Finance Agreement Customer sign Islamic House Finance Agreement and other legal documents. For Building/Renovation/Replacement of house Original Property documents will be handed over to the bank at this stage. Step by Step Guide

30. Step 10: Transfer of Property & Disbursement In Home Buyer Cases Bank's Sales officer & authorized lawyer will accompany customer & Seller of the property to the Registrar office for Property Transfer. Original Property documents will be handed over to the Lawyer who, after verification of the document, will handover the Pay Order to the Seller and will complete the legal formalities on Bank's behalf Step by Step Guide

33. How is the fundamental nature of the contract a co-ownership and not a loan? The nature of the contract is a co-ownership and not a loan because the transaction is not based on the lending and borrowing of money but on the joint ownership of an asset. Bank’s shares in the cost of asset being purchased, i.e. the house or in case of a replacement contract bank purchases a portion of the house from consumer and become a co-owner. Key FAQs at this point

34. What is the difference between the profit Bank charges and the interest charged in conventional mortgages? In conventional mortgages the interest charged is a mark-up on the money lent. The profit charged by Bank is the utilization payment for the consumer’s use of bank’s share throughout the life of the contract. The profit is predetermined based on market trends. Key FAQs

35. Ph: 021-9212509, Fax: 021-9212472 Email: [email_address] http://www.sbp.org.pk/departments/ibd.htm