Naya Pak Housing Scheme: Govt considering Sharia compliant mortgage system

ISLAMABAD: The PTI government is seriously considering the option of introducing a Sharia compliant financial and banking model for its all-important Naya Pakistan Housing Project.

Prime Minister Imran Khan has been advised by different people that he should avoid interest/riba-based conventional mortgage system for the housing scheme as it is strictly prohibited in Islam and is considered a major sin.

According to a source, even a federal minister is said to have told Imran Khan that while claiming to be following the great model of State of Madina, introducing interest/riba-based housing project would be great sin and a huge mistake.

Adviser to Prime Minister on media Iftikhar Durrani, when approached, confirmed to The News that Sharia compliant Islamic mortgage option is being discussed and considered for the Naya Pakistan Housing Project. He disclosed that for the poor and downtrodden, the government is considering Islamic Akhuwat model, which is practiced in Pakistan by a private organisation and does not involve any interest. Durrani said that the consideration is to finance almost one million houses under Akhuwat model.

Under this model, a private organisation provides interest-free housing loan to provide financing facility for renovation of houses, construction of rooms, roofs, walls, etc. These loans are given to those poor families who occupy piece of land or house up to five marlas and their family size increases up to or above eight individuals.

Durrani said that for Kachi Abadis’ housings, the Naya Pakistan Housing Scheme will also provide interest-free solution. For lower middle and middle class, the mortgage-based housing scheme will be launched. It is not yet clear that the entire Naya Pakistan Housing Scheme will be based on Sharia compliant mortgage system or will be a mix of conventional and Islamic mortgage.

In conventional mortgage system, the purchaser borrows money from a lender which is then repaid with interest. However, Sharia compliant Islamic mortgage alternatives are based upon the Islamic finance principles of a co-ownership (Musharaka) and leasing (Ijara).

Musharakah is a joint enterprise or partnership structure in Islamic finance in which partners share in the profits and losses of an enterprise. Since Islamic law Sharia does not permit the concept of interest in lending, Musharakah allows for the financier of a project or company to achieve a return in the form of a portion of the actual profits earned according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses should they occur, also on a pro rata basis.

An Ijara contract is a contract of exchange which is popular due to its similarity to a conventional lease. Ijara contracts are used in Islamic Banking, Project finance as well as in Sukuk. In an Ijara contract one party purchases and leases out the equipment required by the client for a rental fee. The duration of the rental and the fee are agreed in advance and ownership of the asset remains with the lessor.

An example of an Ijara contract is an Islamic Bank purchasing a house for a customer, and adding management costs. The customer then pays a rental fee until the total cost has been paid off, at which point the ownership of the asset is transferred to the customer.