Understanding Islamic Finance - Doha Academy of Tertiary Studies

Participatory Modes: Shirkah and its Variants 341Box 12.4: Construction of a House on a Customer’s Land orRenovation of a HouseConstruction of a house on land owned by the customer would involve purchase/saleand lease-back. Suppose the plot of land is worth one million dirhams and the customerneeds 800 000 Drs from the Islamic bank. The bank would purchase a partof the land from the customer (say 8 units of 100 000 Drs each out of a total often units) to form a joint ownership on the basis of Shirkatulmilk. The customerwould undertake that he would pay rent on the bank’s part of ownership and wouldperiodically purchase the share of the bank according to a pre-agreed schedule ofprice.With the proceeds of the land (800 000 Drs that could be provided in four equalinstalments), the client would construct the house; when the house was complete andhabitable, the bank would lease its part of ownership to the client at the agreed rental.Up to one year, the client would pay only the rent on the bank’s part of the house.Accordingly, the rent would not decrease during that period.One year after the disbursement of the last instalment, the bank would start sellingits units of ownership to the client as per the undertaking of the customer; rentwould decrease with every rental paid, and ultimately the title of the house wouldtransfer to the client. The period of one year has been suggested by the Sharī´ahscholars for sale of units by the bank to avoid buy-back (Bai‘ al ‘Inah), which isprohibited.Renovation of a house owned by the customer would also involve purchase/saleand lease-back. The client would sell, say, four units of his ownership to the bank tocreate a joint ownership. With the proceeds of the sale, the client would renovate thehouse or make alterations to it. The bank would start taking rent from the first monthafter disbursement of the first tranche because the customer is already living in thehouse. The process of the units’ sale back to the client would start one year after thedisbursement of the last tranche.Box 12.5: Hypothetical Case Study on Housing Finance ThroughDiminishing Musharakah (Partnership by Ownership)Calculation of the monthly payment plan for home purchase:Cost of house: Drs or Ryls 1. 0 MmBank financing: 80 %Tenure: 10 yearsRental (return rate equivalent to) : 7 % p.a. (of investment)Purpose: home purchase from the market