Adoption of Shariah-compliant instruments in construction industry of Pakistan

ARTICLE: The Construction industry plays a vital role in uplifting and developing economic structure of a country. In Pakistan, construction industry is 2nd largest industry that promotes expansion of infrastructure activities, increasing consumer demand of housing and construction recovery. In Pakistan, construction sector and all related activities are considered as main source of development and economic growth that accounts for 2.5% of the total GDP of Pakistan. According to Economic survey of Pakistan 2018-19, the sector employs 8% of total labor force and is indirectly associated with 16% of the total employed labor force as more than 40 allied industries are directly related to the construction sector including steel, real estate sector, furniture, household, electronics etc.

Construction Industry is an Industry which involves turnover of billions of dollars annually in Pakistan. The current government also has very keen interest in this industry and is determined to reach its goal of 5 million houses to public private partnerships. However, one of the biggest bottlenecks for this industry is arrangements for financing. Thus it is important to figure out all the stages where financing is required in this industry, who are the stakeholders, and what kind of financing they require. In addition, this article will mainly revolve around linking these needs to the current product offerings of Islamic banks and how can these products be altered, or new products be launched to best fulfil the financing requirements of stakeholders in this industry. All in all, 2019 outlook for construction sector is positive as all the relief measures for builders and developers would give a significant boost to the multi-billion dollar industry. The rapid growth of Islamic finance in real-estate finance is quite exhilarating. As Pakistan is an Islamic republic, a very large number of firms opt for Shariah compliant modes of financing to avoid Riba based transactions.

Keeping in view the demand for Islamic financing, the construction industry is a lucrative option for builders and developers as well as Islamic financial institutions to invest and expand in to attain higher market share that will encourage Shariah-compliant instruments in real estate and construction sector. This will not only promote Shariah-compliant financing but also eliminate interest-based financing activities that will benefit consumers, banks and society as whole. As different modes of financing construction and housing activities are available in market, one of them includes Islamic finance which offers shariah compliant real-estate structuring through diminishing Musharakah or Istisna agreements that are widely used in construction industry in many Muslim countries for project financing.

Moreover, commodity Murabaha structure is primarily used to finance commercial property while the Ijarah lease structure is used to finance residential area property. In Pakistan, Islamic financing in construction industry needs practical steps/development to identify the potential of Islamic financial instruments for construction in real estate sector. It is immensely important to identify construction projects and invite Islamic financial institutions to mobilize funds that are required. The government and Islamic financial institutions need to work together on this crucial task that would boost economic growth.

A Shariah compliant construction contracts need to be implemented for expanding not only the construction sector but Islamic financing institution sectors as well. Different modes including Istisna (manufacturing contract), Sukuk need to be established for financing projects. Although most of the Islamic financial institutions including banks provide several schemes where builders/consumers are provided up to 80% financing of property construction, renovation or extension with up to 20 years financing tenor. However, the application of Shariah compliant instruments and contracts in construction industry need to be established with help of government.

Recently, Meezan bank Ltd and Eden Builders Ltd signed Rs 2billion Islamic financing mandate based that indicates potential growth. The innovative Islamic project is a great initiative based on Shariah compliant financing through Sukuk transaction. This project was largest Islamic mandate awarded in real estate sector of Pakistan. The phenomenal success of this project has helped create an invision for future prospects of Islamic financing in construction industry of Pakistan.

However, there is no specific product specialised to cater for the needs of SME Builders and Developers in the Market currently in Pakistan due to a lot of complications. But on individual basis, HBL Islamic did a setup of financing for a project in Naya Nazimabad. In that, the builder owned the land and had sub lease on his name, so bank opted for financing on that land through Musharka, thereby charging rent on that land. However, in that some problem occurred and things didn't materialize. Islamic modes of financing for construction financing can be used, similar financing can be done for builders through either diminishing Musharka or Istisna. In Istisna, the bank will order builder to construct property for it and will then appoint it as its agent to sell that property to end user. Such modes of Islamic financing will benefit both the builders/ real estate sector as well as help to promote economic growth in Pakistan.

Copyright Business Recorder, 2020