The provision of housing in Pakistan has not kept up with the fast-growing population, which is 207.8 million as per the census in 2017 — a drastic increase from 132.4m in 1998.

As per various estimates, annual housing demand is between 400,000 and 700,000 units. But only 100,000 to 350,000 formal housing units are constructed annually.

The total housing shortage is estimated to be 10m units, which can rise to 20m units by 2025 if the problem is not addressed immediately. The lack of adequate housing has been a major concern in larger cities where population growth has accelerated due to large-scale migration from rural areas.

Cities have witnessed unprecedented growth in the number of slums or katchi abadis, which are often devoid of basic infrastructure and sanitation facilities. Karachi, for instance, has been in housing crisis of late.

A report by the World Bank reveals that more than half of the population of Karachi is living in katchi abadis — as opposed to less than 20 per cent in the mid-1970s — with over 40pc of the city’s population not connected to the main water or sewerage network.

In the backdrop of this huge deficiency in the quantity and quality of housing, it is no surprise that the government is keen on making low-cost housing accessible through its Naya Pakistan Housing Programme (NPHP). The government aims to facilitate the provision of 5m housing units in the next five years under this programme.

Upon maturity of the sukuk in three years, the government will own both land and newly constructed houses. It can then sell the houses to people who have registered for the housing project

The total cost of the NPHP has been estimated at Rs15-17 trillion by the State Bank of Pakistan (SBP), which is way beyond what the government can allocate for housing in its annual budget. Thus, the programme necessitates external financing.

There is a clear case for the government to opt for Sharia-compliant modes of financing for the housing project. The lack of investment avenues currently available to Islamic banks in Pakistan has adversely affected the industry, resulting in excess liquidity and an inability to raise deposits at higher rates.

In addition, Islamic house financing is increasingly gaining popularity in Pakistan, having nearly doubled its housing market share to 40pc between 2013 and mid-2016. In fact, religious sentiments are arguably one of the reasons why housing mortgage never really took off in Pakistan. The country’s mortgage debt-to-GDP ratio is just 0.5pc.

SBP Governor Tariq Bajwa recently called on Islamic banks to help execute the NPHP. He went on to describe diminishing Musharakah as a viable mode for financing the project.

Musharakah refers to a partnership based on joint ownership in an enterprise or asset where the resulting profits and losses are shared between the partners. Under diminishing Musharakah, a partner sells their share to the other partner on a periodic basis until the latter becomes the sole owner of the property.

The diminishing Musharakah model can be adopted to help finance the NPHP through the issuance of Diminishing Musharakah (DM) Sukuk — the Islamic alternative to conventional bonds based on the ownership of underlying assets and the rewards associated with it.

To help execute the NPHP, the government can issue DM Sukuk, which can appropriately be termed the Pakistan Housing Sukuk, to Islamic banks. These Islamic bonds will represent undivided ownership of a portion of the government land on which the houses will be constructed.

The government and the Islamic banks will thus jointly own the land. The banks can then lease their share of the land to the government on an ijarah basis for a specified time, say, three years. Once in possession of both the land and the funds, the government can engage builders to construct low-cost housing units.

Over the next three years, the government should pay lease rentals to the banks for the use of their land under the sukuk agreement as well as repurchase the undivided units of land periodically from the banks.

Hence, upon maturity of the sukuk after three years, the government will own both the land and the newly constructed houses. It can then sell the houses to people who have registered for the NPHP.

They may be asked to make 20pc down payment while the remaining price may be payable in instalments over a period of 15 to 20 years.

Islamic finance thus provides a viable financing option for the NPHP through the issuance of Pakistan Housing Sukuk. This can prove to be a crucial step towards the endorsement of Sharia-compliant banking and finance in a country where financial inclusion in general, and house financing in particular, has remained very low.

The writers are students of Islamic finance at the Institute of Business Administration, Karachi

Published in Dawn, The Business and Finance Weekly, January 14th, 2019