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COUNTRY REPORT
Diminishing Musharakah: The Dilemma in Pakistan
By Liaquat H. Merchant and Faresa Jafarey Ahsan
Shariah compliant Islamic banking was introduced in Pakistan in
2003. The State Bank of Pakistan (SBP), the regulatory authority for
banks, introduced regulations which allow for conventional banks to
open Islamic banking branches and for banks to commence purely
Islamic banking operations in Pakistan. The documents used by
the banks to support Islamic banking transactions are based on
the directives of the SBP and on the advice of the Shariah board or
Shariah advisor of each bank.
In this article we have chosen the Diminishing Musharakah for
housing nance products to highlight the need to amend the civil
laws of Pakistan to support Shariah compliant banking transactions.
Diminishing Musharakah is being used by Islamic banks in Pakistan
to extend housing nance to customers. It is increasingly popular
amongst potential home owners who wish to use a Shariah compliant
product.
SBP’s Islamic Banking bulletin in its January-March 2009 edition reports
an increase of 4% in Diminishing Musharakah products which would
include both asset and home nance. Diminishing Musharakah had a
share of 32% in the Islamic nancing market as of March 2009.
The essential features of a Diminishing Musharakah as transacted in
Pakistan are:
1. Creating a joint ownership in the property (Shirkat-ul-milk).
2. Allowing the customer the use of joint Musharakah property on
the condition that the customer pays a rent to the bank on the
bank’s Musharakah share in the property.
3. The customer undertakes to purchase the Musharakah
share of the bank, which are described as Musharakah units,
according to a schedule of redemption.
4. The rental payable by the customer to the bank is adjusted
according to the Diminishing share of the bank in the
Musharakah property.
A basic legal issue involving the civil laws needs to be addressed in
light of the Shariah principles governing Diminishing Musharakah. That
concerns whether the transfer of property laws in Pakistan recognizes
a benecial ownership in immovable property.
According to the principles of Shariah, in a Diminishing Musharakah
home nance, the customer is the legal owner of the property and
the property is registered in the customer’s name. However, the bank
is treated as a “benecial owner” to the extent of the bank’s share in
the nancing.
However, the Transfer of Property Act 1882 does not expressly
recognize “benecial ownership”. A reader may well ask why the civil
laws and in particular the Transfer of Property Act have any impact on
a Shariah compliant product. The answer is that, whereas the product
is based on Shariah principles, it still relies on certain civil laws to
support particular segments of the transaction.
A transfer of the nanced property in favor of a customer takes place
under the Transfer of Property Act and whereas it would be tting to
record the interest of the bank as a benecial owner in the registration
records, this is not possible at present because, as stated earlier,
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the Act does not expressly recognize benecial ownership and the
established procedure records only legal ownership.
However, notwithstanding the fact that only legal ownership may be
ofcially recorded, it is pertinent that the Act recognizes “benami
ownership” and “ostensible ownership”. The expression “benami” is
derived from the Urdu language and in law it denotes transactions not
for the benet of the persons taking part in the transactions but for
the benet of a person or persons not mentioned or named in the
transaction. A “benamidar” is a person who acts for the actual owner
in a transaction.
The concept of a benami transaction or one person being a benamidar
of another is recognized under Section 5 of the Act. Ordinarily, when
two or more persons agree to acquire land jointly, the land, though
purchased in the name of one person, would belong to all of them if
the person who acquires the property in his own name acting honestly
intends to acquire it on behalf of all. In such a case he would be a
benamidar, while the others would be benami owners.
If, on the other hand, the person who purchased the property in his own
name with joint funds which were contributed on the understanding
that the property was to be joint, was not acting honestly at the time
when he actually made the purchase, he would not be benamidar
for the others but would be a trustee for the others to the extent of
their shares and a benecial interest to the extent of the shares would
belong to the others. There is thus a distinction between a benamidar
and a person who holds in trust.
In India and Pakistan the typical examples of such transactions
are if a husband purchased property in the name of his wife. Then,
unless otherwise explained, the purchase is presumed to be a benami
transaction by which the benecial interest in the property is with the
husband and the ostensible ownership is with the wife.
“Ostensible ownership” is another concept which is recognized by
Section 41 of the Act. This section provides that where an ostensible
owner, with the consent of the persons interested in the property,
transfers the same for consideration, the transferee shall acquire a good
title provided the transferee took reasonable care to ascertain that the
transferor had the power to make the transfer and acted in good faith.
The Transfer of Property Act, by recognizing benami transactions and
ostensible ownership, provides the scope for introducing the concept
of benecial ownership. This may be incorporated into the law by
providing for and recognizing benecial ownership and thus recording
the interest of the legal and the benecial owners respectively in the
registration records and the title documents to the property.
This would protect and secure the interest of the bank under a
Diminishing Musharakah and do away with the requirement for the
bank to obtain a mortgage on the property. It ought to be noted that
a mortgage on a nanced property is created pursuant to Section 58
of the Act and is based on the principles of English land law. The most
common forms of mortgages in Pakistan is by deposit of title deeds and
a registered mortgage. A mortgage creates a limited security interest
in the property in favor of a bank and secures its right to recover its
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11th September 2009
www.islamicnancenews.com
share in the Musharakah property if the customer defaults in any of
his or her obligations. The creation of a mortgage as security appears
to be inconsistent with the principle of joint ownership of a property as
enshrined in a Diminishing Musharakah arrangement.
The requirement of a mortgage may be done away with if the legal
and benecial interest in the property in the names of the bank and
the customer can be ofcially recorded. This may be supplemented
with a power in favor of a bank to assert its rights if the customer
defaults in any of his obligations. In order to reduce the costs of a
transaction which involves transfer of title to a bank and a customer
jointly, a bank’s Musharakah share should be exempted from property,
stamp duty and registration taxes.
By highlighting these legal issues we wish to emphasize the need to
amend the civil laws of Pakistan to give adequate support to Shariah
compliant nancial products used by the Islamic banks and Islamic
banking branches of conventional banks and provide some options
for possible amendments to laws which were framed for the Indian
subcontinent by the British based on the concepts of English law.
It is time for Pakistan’s lawmakers to acknowledge the profound
changes which have taken place in the banking and nance markets
COUNTRY REPORT
in the country following the introduction of Shariah compliant Islamic
banking and amend the laws to provide a solid basis for present and
future Islamic banking products.
Liaquat H. Merchant
Managing Partner
Faresa Jafarey Ahsan
Partner
LIAQUAT MERCHANT ASSOCIATES
4-C, 9th Commercial Lane, Zamzama Boulevard,
Phase V, Defence Housing Authority,
Karachi, Pakistan
Tel: +922-1583-5101
Fax: +922-1583-5109
www.liaquatmerchant.com
UNITED KINGDOM
Ashurst LLP, London
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11th September 2009