Case Study: Manzil Home Purchase Plans (IJARA) Bank Green offers a home purchase plan called Manzil whereby the customer identifies the property that he wants to buy and agrees the purchase price with the seller in the normal way: 1. The customer approaches Manzil for assistance and completes an application form. 2. Manzil buys the property in its name, after solicitors have confirmed that everything is in order. 3. Manzil then sells the property to the customer as detailed in an agreement titled 'Promise to Purchase'. The purchase price between Manzil and the customer is the same price as the original purchase price. 4. At the same time the customer enters into a lease with Manzil, which details his rights to occupy the property. 5. Once the property is purchased the customer makes monthly payments to Manzil. 6. Each monthly payment is calculated so that part is applied towards the purchase of the property from Manzil and part is applied as rent. 7. The payments are fixed every 12 months, April to April. At the beginning of April each year, Manzil reassesses the rent and payments are likely to vary. 8. The customer may purchase the property from Manzil, at any time, by paying the balance of the purchase price. Under the Manzil Ijara scheme, the property is registered in the bank's name, not just initially, but throughout the period of the lease. The tenant, or lessee, agrees at the outset to purchase the entire property eventually, but at the original price that the bank paid without any mark-up. The monthly payments by the client comprise three elements: The repayments of the funds that the bank has used to purchase the property. The rent on the property, which is the source of the bank's profit. The rent is reassessed annually to ensure that the bank is making a reasonable return and is adjusted downward to reflect payments already made. O An insurance rent to recover the cost of the insurance that the bank has to pay on the property. o O Over time the monthly payments may increase or reduce or both, depending on the size of the first repayment element that the client decides he can afford. Early repayment could be potentially unprofitable for the bank, unless it can obtain a higher return by reinvesting the funds. 1. What are the key principles underlying both conventional and Islamic home financing techniques? 2. What is the role of profit versus interest in conventional and Islamic home financing transactions? 3. Who retains the title to the property in each transaction? (conventional vs Islamic home financing) 4. Outline the key characteristics of Ijara Muntahiya bittamlik (leasing which ends with transfer of ownership) as a technique for home finance. How do the payment arrangements differ from those of a conventional mortgage? 5. Bank Green is also considered an ethical bank. Ethical banks pursue both social and environmental gains. Describe how Bank Green can achieve CSR objectives and social and environmental impact through the Manzil home purchase plan. 6. Bank Green wishes to support financial inclusion. Suggest and briefly describe one initiative through which the bank can support this objective. Case Study: Manzil Home Purchase Plans (IJARA) Bank Green offers a home purchase plan called Manzil whereby the customer identifies the property that he wants to buy and agrees the purchase price with the seller in the normal way: 1. The customer approaches Manzil for assistance and completes an application form. 2. Manzil buys the property in its name, after solicitors have confirmed that everything is in order. 3. Manzil then sells the property to the customer as detailed in an agreement titled 'Promise to Purchase'. The purchase price between Manzil and the customer is the same price as the original purchase price. 4. At the same time the customer enters into a lease with Manzil, which details his rights to occupy the property. 5. Once the property is purchased the customer makes monthly payments to Manzil. 6. Each monthly payment is calculated so that part is applied towards the purchase of the property from Manzil and part is applied as rent. 7. The payments are fixed every 12 months, April to April. At the beginning of April each year, Manzil reassesses the rent and payments are likely to vary. 8. The customer may purchase the property from Manzil, at any time, by paying the balance of the purchase price. Under the Manzil Ijara scheme, the property is registered in the bank's name, not just initially, but throughout the period of the lease. The tenant, or lessee, agrees at the outset to purchase the entire property eventually, but at the original price that the bank paid without any mark-up. The monthly payments by the client comprise three elements: The repayments of the funds that the bank has used to purchase the property. The rent on the property, which is the source of the bank's profit. The rent is reassessed annually to ensure that the bank is making a reasonable return and is adjusted downward to reflect payments already made. O An insurance rent to recover the cost of the insurance that the bank has to pay on the property. o O Over time the monthly payments may increase or reduce or both, depending on the size of the first repayment element that the client decides he can afford. Early repayment could be potentially unprofitable for the bank, unless it can obtain a higher return by reinvesting the funds. 1. What are the key principles underlying both conventional and Islamic home financing techniques? 2. What is the role of profit versus interest in conventional and Islamic home financing transactions? 3. Who retains the title to the property in each transaction? (conventional vs Islamic home financing) 4. Outline the key characteristics of Ijara Muntahiya bittamlik (leasing which ends with transfer of ownership) as a technique for home finance. How do the payment arrangements differ from those of a conventional mortgage? 5. Bank Green is also considered an ethical bank. Ethical banks pursue both social and environmental gains. Describe how Bank Green can achieve CSR objectives and social and environmental impact through the Manzil home purchase plan. 6. Bank Green wishes to support financial inclusion. Suggest and briefly describe one initiative through which the bank can support this objective