6th Global Housing Finance Conference “Housing4All” World Bank Washington DC, USA May 28-29, 2014
Sharia-Compliant Housing Finance: A Challenge of Financial Inclusion
“There is no legal and practical mechanism to which all countries related with Islamic finance are subject”. - Turkish Deputy Prime Minister Ali Babacan
“The brilliant recent growth and globalization of Islamic finance has led the total size of the global Islamic financial assets to increase to USD 1.5 trillion. Many countries, mainly Bahrain, Indonesia and Malaysia have a large Islamic finance sector while others such as Luxembourg and England are making determined steps to improve these financing instruments” - The World Bank President Dr. Jim Yong Kim Press conference on the occasion of World Bank’s first Representation Office on Islamic Finance launched at Tutkey’s Borsa Istanbul Premises 2
• It is expected that the volume of Islamic banking assets will exceed the milestone of USD 2 trillion in 2014-15. • This significant increase is driven by rising demand from Islamic investors as well as the growing Muslim population with increased financial needs. • Housing finance presents tremendous growth opportunity for Islamic lenders, given the considerable housing deficits in many Islamic countries. • The objective of this session is to discuss recent initiatives in product development as well as the options and challenges for funding shariacompliant housing finance portfolio.
Faith Based (Sharia-Compliant) Housing Finance) 3
This presentation has four sections: • • • •
Housing Scenario and Challenges in the Muslim World Financing Modes under Sharia Long Term Funding Instruments in an Islamic System Issues to be addressed
Contents
Housing Scenario and Challenges in the Muslim World
• • • • • • •
The Muslim world represents 1 of 4 humans on the planet. Nearly the same share in number of countries. Represents 1 of 2 poor on the planet. An acute challenge of widening demand/supply gap and rising housing backlog … leading to Social Unrest. Most of the housing backlog and short supply is in low-income segment of the population. Population growth and urbanization are further compounding the existing huge backlog. Rising costs (land, construction, construction materials) are making housing unaffordable for the poor.
Housing is a ‘Numbers’ game – The Muslim World is no exception!
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•
• • • • • • •
IDB study suggests housing needs of the Muslim World at 8 mn units, nearly all in Low-Income Segment. The estimate needs further analysis and breakdown - MENA 3.2 mn; - Asia 2.7 mn; and - Africa/others 2.3 mn. Shortage: Egypt 1.5 mn, Iraq 1.0 mn, Morocco 0.6 mn, Saudi Arabia 0.4 mn Significant oversupply in upscale or luxury housing only, while low income segments/ communities remain neglected Urban population likely to rise from 1/4th to 1/3rd of total Rapid urbanization a major issue for low income housing Need for new housing of 8 mn due to population growth is based on 5-5.5/HH and population growth at 2.5% Urbanization and population growth further increases the year-on-year housing needs in major metropolitans Supply is 30-40% of new demand for housing
Housing Supply Challenge – The figures speak
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ME Countries: Recent civil uprising in some countries have brought to surface the social issue of low-income affordable housing
•
Nearly all countries in the region have allocated huge fund and have initiated plans and projects to address it
•
Most of these programs are based on State Subsidy, and thus would not be viable and sustainable in the long run.
•
Indonesia, over the years have developed and implemented a very comprehensive program of State Subsidized Pro-Poor Housing.
•
Africa has a unique challenge of Low-Income housing, with challenges of Affordability, HMF, major Slums etc.
•
In many African Countries, largely Muslim population is a candidate for Sharia-Compatible Housing Finance
•
Asia, having Muslim countries like Pakistan, Afghanistan, Indonesia, Malaysia, where in most of Muslin courtiers in Asia are faced with challenge of low-income affordable housing shortage and answers have no match with the solutions,
Muslim World facing bigger challenges
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• • • • • • • •
As most of housing shortage is in low income segment, low income segments/communities need empowerment through housing finance. Nearly 1/5th of population in the Muslim World is a candidate for HMF. Need for Faith- Sharia-Compliant Financing Models. Challenges of Rapid Urbanization and growth of low-income communities. Institutional Housing Finance is either non-existent or in infancy stages in most of the Muslim World (Afghanistan and some African Countries). Slightly advanced in some others (Malaysia, Turkey, Egypt, Morocco, Indonesia, Pakistan and Saudi Arabia). Regulatory Framework needs strengthening. Additional challenges include: -
Role and responsibilities of Specialized Housing Finance Institutions (HFIs) and Commercial Banks (CBs). Long Term Liquidity Facility Institutions and Instruments.
Housing Finance Challenges in Muslim World
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• • • • •
•
World population is expected to reach between 7.9 to 10.9 billion by 2050. By 2030, nearly 60% of the worlds population will be urban, and nearly ½ will comprise of urban poor living in poor habitat and in slums. Urban growth rates highest in the developing world, absorbing an average of 5 mn new urban residents/month. Responsible for 95% of world’s urban population growth. Factors contributing to urban migration are: greater economic growth, rising income levels, employment opportunities, immigrant workers, occupational shift from agriculture to manufacturing and services, and changing attitudes towards consumption and life style. Changing family culture and shrinking household size.
Housing Microfinance and Urban Poor
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• • • • • • •
One out of two poor in the Muslim World is poor, and are candidates of Housing Microfinance Need for Sharia-Compliant Housing finance is deeper on low-income segments While poverty is widespread, access to financial services is rather limited. Afghanistan, with more than 90% of the population being candidate of Microfinance, supply is limited and practically none as Sharia-Complaint. Indonesia, Afghanistan, Bangladesh, Sudan, Pakistan are among the major candidates, apart from most of African countries. A very limited Islamic microfinance products are offered in most of OIC countries. Current base of Islamic microfinance clients is very limited (1.28 Mn)*, representing about 0.1 % of the total population of the OIC countries.
Housing Microfinance and Urban Poor
*Source: A Market-Based Financing Model for Islamic Housing Microfinance Market, by Zamir Iqbal and Friedemann Roy.
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The number of financial service providers which offer Islamic microfinance products is quite small. The number is estimated at 255, the majority of which are concentrated in East Asia and Pacific (64 % of all providers) and Middle East and North Africa including Sudan (28 %). The slow growth of Islamic Microfinance is attributed to a number of reasons, including the following: i.
Islamic MF Programs are provided by small institutions (NGOs, village or rural banks) with limited outreach and ii. Limited access to funding at reasonable cost.
Housing Microfinance and Urban Poor Cont’d
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From: A Market-Based Financing Model for Islamic Housing Microfinance Market, by Zamir Iqbal and Friedemann Roy
Difference between Islamic and Conventional MF
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Financing Modes Under Sharia
• Murabaha • Ijarah • Istisna • Diminishing Musharakah (Mostly used in banks for Islamic Housing Finance)
Islamic Housing Finance - Core Structures
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Diminishing Musharakah is kind of Shirkat-ul-Milk.
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It involves taking share in the ownership of a specific asset and then gradually transferring complete ownership to the other partner.
•
This concept works as declining ownership of the bank. Three components
Joint ownership of the Bank and customer Customer as a lessee uses the share of the bank Redemption of the share of the Bank by the customer
Concept and Application of Diminishing Musharakah 16
General Process Flow for Diminishing Musharakah Transaction a) The customer approaches Bank with the request for House financing b) Bank enters into a Musharakah (Joint Ownership) agreement with the customer and both the parties provide their investments to be utilized for the purposes of purchasing a property from the seller of the asset. (This Musharakah is based on the principle of Shirkat-ul-Milk, (joint ownership) c) The Bank’s share is divided into ownership units and is given to the customer on rent via monthly payment agreement (Ijarah agreement) d) The Customer promises to purchase Bank’s share (units) over the tenure of transaction with the help of Undertaking to Purchase
Concept and Application of Diminishing Musharakah - i 17
Cont…. e) Every month customer pays rent for the use of the Bank’s share in the property. f) The customer also purchases the Bank’s Musharakah units every month via a separate offer & acceptance every month. g) The rental amount is adjusted according to the bank’s share (units) remaining in the property. h) Eventually customer becomes the owner of the property and bank’s ownership ends.
Concept and Application of Diminishing Musharakah - ii 18
Musharakah Agreement: This is the main agreement that establishes the share of bank and customer in the musharakah property. Components: - Both parties share - Musharakah Property detail Monthly Payment Agreement (Rent Agreement): This agreement is signed after the Musharakah Agreement. Bank gives out its share on rent to the customer via this agreement. Components: - Rent Schedule - Formula of calculation of rent
Documentation of Diminishing Musharakah Transaction - i
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Undertaking to Purchase Musharakah Units: This is an undertaking by the customer to purchase Bank’s Musharakah units from time to time. Components: - Normal Sale Price - Additional Unit Purchase Price Undertaking to Sell Musharakah Units: This is an undertaking by the bank to sell Bank’s Musharakah units to the customer. Components: - Normal Sale Price - Additional Unit Purchase Price
Documentation of Diminishing Musharakah Transaction - ii
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Easy Home - Home Buyer House Cost Price Customer Share Bank Share Profit Rate Tenure in Years
1,000,000 300,000 30% 700,000 70% 12.69% 5
Total Units Unit Sale Price Monthly Rent/Unit
60 11,667 123.38
Calulation Based on the Schedule as f Months
0 1 2 3 4 5
Rent
Unit Price
7,403 7,279 7,156 7,032 6,909
56 57 58 59 60
Monthly Payment
11,667 11,667 11,667 11,667 11,667
354 283 213 142 71 129,625
ILLUSTRATION
Balance Unit Price
19,069 18,946 18,822 18,699 18,576
10,000 10,000 10,000 10,000 10,000 600,000
700,000 688,333 676,667 665,000 653,333 641,667
Balance Units
60 59 58 57 56 55
10,354 10,283 10,213 10,142 10,071 729,625
40,000 30,000 20,000 10,000 0
4 3 2 1 -
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Murabaha Model:
Payment
House
Financier
Seller Payment
Mortgage
Title
Consumer 1.
Consumer selects house and applies to financier.
2.
Financier approves consumer and house.
3.
Financier buys house and obtains title.
4.
Financier leases house to consumer for monthly rent.
5.
Consumer promises to buy house and financier promises to sell house.
6.
Consumer contributes to account to buy out the lease.
7.
Upon lease buyout, consumer takes title.
•
Ijarah provides the flexibility of early payments and rentals may be changed based on mutual consent.
•
Monthly rentals are based on investment and return targets.
•
Important for the leasing and selling contracts to be transacted separately.
security
Murabaha Mode of Finance
deposit,
tenure,
and
financier’s
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Ijarah Model: Istisna’a Model:
Payment
House
Financier Title
Builder Construction Draw Payment
Seller 1.
Consumer selects site and contractors, and then applies to financier.
2.
Financier approves consumer credit, contractors, plans and permits.
3.
Financier buys site and engages contractors, then funds draws.
4.
At completion, financier either leases house to consumer for monthly rent, or sells outright.
• Upon completion, there may be an outright cash sale, a Murabaha sale, an Ijarah process or a Musharakah. • The consumer will, through one of the above exit routes, pay a premium over and above the Bank’s basis in the property in order to take title.
Ijara Mode of Finance
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Mortgage Refinance Entities: • Cagamas Malaysia • Jordan Mortgage Refinance Co.(JMRC) • Egyptian Mortgage Refinance Co. (EMRC) • Jordan Mortgage Refinance Co. (JMRC) • Pakistan Mortgage Refinance Co. Under Formation (PMRC) Liquidity Instruments: • Islamic REITS (iREITS) • Securitization/Mortgage Backed Sukuk (MBS)
Long Term Liquidity Institutions and Instruments
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Long Term Funding Instruments in an Islamic System
• REIT - “An investment vehicle that invests or proposes to invest at least 50% of its total assets in real estate. An investment in real estate may be by way of direct ownership or a shareholding in a single-purpose company whose principal assets comprise real estate” Note: Real estate means physical land and those human- made items which are attached to the land. (Source: SC Guidelines on REITs 2005) • Islamic REIT - “In general, an Islamic REIT is a collective investment scheme in real estate, in which the tenant(s) operates permissible activities according to the Shariah”. (Source: SC Guidelines for Islamic REITs)
REIT: Definitions From Malaysian Guidelines on REITS 26
Malaysian iREITS: • As of Nov 2013 there are a total 4 iREITS issued in Malaysia, out of the total 17 REITS issued. • Total market capitalization of Malaysian iREITS is RM 14.4 Bn, and makes 42% of total REITS market • iREITS in Malaysia generated a return of 13.4% during 2011-13 • • • •
Al-Aqar: Malaysia launched the First iREIT in the World, in Nov. 2006, size $ 138Mn Hadharah: Malaysia launched Second iREIT in Feb. 2007, size $ 136 Mn. AXIS: Malaysia launched Third iREIT in Dec. 2008, size $ 79 mn KLCC REIT: Malaysia launched Fourth iREIT in May 2013, size $ 650 mn
Kuwait iREITS: •
Al Mahreb Tower REIT: Kuwait launched its first iREIT in 2007, Market capitalization in 2013 $ 100 mn
Bahrain iREIT: •
Inovest REIT: Bahrain launched its first iREIT in 2009, size $ 80 mn
UAE iREIT: •
Emirates REIT: UAE launched its first iREIT in 2010, size $ 200 mn
Singapore iREIT: •
Singapore launched Sabana REIT in 2010, size $ 1.2 Bn
iREITs issued since 2005
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• • •
• • •
Dar-ul-Arkan of Saudi Arabia raised funding through MBS in 2006, and had redeemed it in 2009. Dubai Financial Market (DFM) has issued new Standards for Structuring Sukuks. HBFC of Pakistan raised PRs 1.5 Bn in 2007 through MBS for a 7 year Sukuk, to be reissued twice with 6 years interval and re-pricing, so as to get 20 years long term funding. Cagamas, the pioneer long-term liquidity institution of Malaysia has been raising liquidity through Residential-MBS(RMBS) Dubai’s Tamweel targeted $ 235 mn through MBS in 2012, which was later shelved for market reasons. International Islamic Rating Agency (IIRA), and International Islamic Financial Markets (IIFM) are playing an active role in rating and promotion of iREITS.
Mortgage Backed Securitization (MBS)
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• Benchmarking of Returns ( Conventional vs Sharia-Compliant Instruments) • Sharia-complaint Housing Microfinance: Issues of Business Models and Financial Inclusion • Public Awareness on Islamic Mortgages • Product Diversification and Market Penetration • Standardization in Vocabulary, Financing Instruments, Pricing Formulas etc • Formal Education and Certification Programs • Emphasis on Sharia-Audit vs Sharia Supervision • Legal and Regulatory Framework
Issues to be addressed
Issues we know, Answers we need Zaigham M. Rizvi
[email protected] Secretary General: Asia-Pacific Union for Housing FinanceAPUHF (www.apuhf.info) Housing Consultant World Bank, UNHABITAT, CMHC-Canada Senior Advisor Housing ShoreBank Int’l (Encludes) USA Ex- Advisor Housing, central bank of Pakistan A presentation by Mr. Zaigham Mahmood Rizvi at “6th Global Housing Finance Conference” at World Bank, Washington, to being held on May 28-29, 2014. The information has been compiled by Mr. Rizvi from self study and from different sources. He is grateful to all those serving this noble cause in some form or the other.
