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Islamic Housing Finance

In Pakistan, most of the Islamic Banks use Diminishing Musharakah model for extending Housing Finance facility to the customers. “Musharkah” means “Sharing” and in the terminology of Islamic Fiqah, musharakah is basically a kind of partnership in which the partners join together with different contributions for the common objective of undertaking business and trade in accordance with the principles of Shari’ah. Musharakah is further divided into two kinds; Shirkat ul Milk and Shirkat ul Aqd.

Shirkat ul Milk: It means joint ownership of two or more persons in a particular property.

Shirkat ul Aqd: It means “a partnership effected by a mutual contract”.


Islamic Housing Finance is usually structured under the concept of Diminishing Musharakah in which joint ownership is created in a property on basis of Shirkat-ul-Milk between bank and customer under Musharakah Agreement. This agreement defines share of each party in the property. The bank divides its share into Musharakah Units and then rent out its share (units) to the customer under a Monthly Payment (Rent/Ijarah) Agreement.

The customer also undertakes to buy the units of bank’s share in the property over the tenure of the transaction and in this manner increases his share in the property and bank’s ownership reduces (diminishes). Eventually the customer becomes the owner of 100% share (units). The rent portion also reduces regularly to reflect customer’s growing share in the property.

The following is a process overview of this mode of application for Housing Finance:

a) The customer approaches Islamic Bank with the request for House financing.

b) The Islamic 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)

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

e) The customer pays rent for the use of the Bank’s share in the property and also purchases the Bank’s Musharakah units every month.

f) The rental amount is adjusted according to the bank’s share (units) remaining in the property.

g) Eventually customer becomes the owner of the property and bank’s ownership diminishes.

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