It is becoming increasingly difficult for people from low and middle income groups to build a house or to buy one because of rising inflation and the cost of building material.
Many conventional banks offer housing finance to consumers, but low-and middle-income groups are unable to avail of these financing facilities because of high interest rates that banks charge.
Under conventional mortgages, the interest charged on the money borrowed continues to bulge even after the property is damaged in case of an accident or death of the borrower. Conventional banks charge fixed interest rates on housing finance unlike Islamic banks.
However, Islamic banks and financial institutions have come as a ray of hope for the underprivileged section of society. But their limited scale of operations and their complicated financing procedures are impediments in the way of their reaching to the mass of the people. People tend to look at Islamic banks’ financing procedure as complicated because of their limited exposure to Islamic banking.
Under Islamic banking, one is to be in joint ownership of his/her property where the bank will provide a certain amount of financing. Once a person agrees to make monthly payment to a bank a part of that is for use in building a house and the other for equity share of the borrower. However, the total monthly payment is reduced regularly as the share of the borrower in the property grows.
When the person makes the full payment to which he had agreed, he becomes the sole owner of the property. Under Islamic banking, the ownership is obtained through a partnership initially. Later, the bank fully transfers the ownership to the client instead of simply lending the money. It is the major factor that makes Islamic housing finance Shariah compliant. Here the nature of the contract is co-ownership and not a loan because the transaction is not based on lending and borrowing of money but on joint ownership of the asset.
“Conventional housing finance or Islamic housing finance through banks are not for low-income groups as there is no gain for the common man under both kinds of housing finance,” said Hafeez-ur-Rahman Butt, chairman of the Association of Builders and Developers.
Most people from the middle-income groups buy apartments and houses through the House Building Finance Corporation, or by other means, not through conventional banking housing finance, he added. “Banks’ housing financing caters to only around three to four per cent of affluent section of our population,” Butt said.
The country needs 700,000 news houses every year, but only 300,000 are being built. One would ask what is the impact of conventional housing finance or of Islamic house financing in Pakistan considering the existing state of affairs.
The housing sector in Pakistan has registered a tremendous growth over the past five-six years and now contributes 17 per cent of GDP, which was negligible till a few years ago. Housing shortage is mainly in big cities of the country, said Munir Sultan, member sub-committee of the Karachi Chamber of Commerce and Industry on housing and construction.
“Pakistan needs project financing. Our financial institutions are not doing enough to cater to the housing needs of the country. There is no big difference between Islamic housing financing and conventional housing financing. No big investment has been made in Islamic banking in recent years. “Islamic banks must come to project financing in the housing sector as it will be beneficial for both consumers and banks,” said Munir Sultan.
People are not much aware of Islamic housing finance, so there is a need to disseminate information on the basics of the subject, he said.