بِسْمِ اللَّهِ الرَّحْمَنِ الرَّحِيم
(Dengan Nama Allah Yang Maha Pemurah Lagi Maha Penyayang)
How well do you know about Islamic financing
Islamic banking that has given additional options to Malaysian loan borrowers to choose their loan options for home financing purpose. Islamic banking and financing in Malaysia is considered one of the most renowned and established in the world. The Islamic banking follows the Shariah laws has been in operation since the enactment of the Islamic Banking Act in 1983 and the establishment of Bank Islam Malaysia Berhad on the same year. The new law and the institution of a new bank paved the way for the development of Islamic banking and finance in Malaysia. The Islamic Financial Services Board, similarly to Board of Valuers, Appraisers, Estate Agents & Property Managers Malaysia (BOVEA), has also helped in setting new standards that promotes and enhances the soundness and stability of the Islamic financial services that will paved the way for continuous development of Islamic banking and finance in Malaysia.
Using the Islamic Laws (Syariah) principles and Islamic-based economics, it dictates the money lending (interest-based) as well as investing in businesses that are considered haram (unlawful) are prohibited. The basic principal of Islamic finance is that it lies in providing financing to consumers based on pre-determined profits instead of handling with interest. Islamic banks usually have higher social and moral responsibilities ensuring that financing principles are fair to all consumers out there. This method of property financing requires you to buy an asset from the seller and selling it back to the buyer with profit, of course. This allows the buyer to pay for the property through periodically installments, similar to conventional home loan.
There are couple of advantages to get Islamic financing for your property. But before we get there, Islamic banks follow two types of Islamic banking principles - Bai’ Bithaman Ajil (BBA) and Musharakah Mutanaqisah (MM). While BBA is based on the Murabahah concept and MM is for partnership towards the formation between bank and customer in order to buy the property. Here are the list of advantages when you engage Islamic bank for financing.
Advantages when you engage Islamic bank for financing1. In order to help customers balance their monthly budget, their repayment is fixed on monthly basis.
2. Stamp duty cost is lowered by 20%. The initiative was originally implemented in Budget 2007, the 20% stamp duty discount for Islamic loan agreement documents is still in force as part of the government’s effort in promoting Islamic financing. Plus, stamp duty is waived for the redeemed amount when refinancing from a conventional loan to an Islamic home finance.
3. Islamic banks financing has higher potential to lowered penalty fee for property disposal within the lock-in-period. Generally, a typical conventional loan penalty fee for early settlement (prepayment) is a set of percentage, whereas the Islamic bank will charge based on the bank’s prevailing cost of funds. But, the fee differs from one Islamic bank to another.
4. While most conventional loans are based on Base Lending Rate, Islamic loans are based on Base Financing Rate (BFR) which the bank can adjust based on prevailing conditions but not more than the ceiling rate, which is also the maximum profit an Islamic finance provider able to earn.
So far, it sounds like Islamic banks have strong advantages than the conventional ones. Yet, there are still some weaker points in Islamic property financing.
Weaker points in Islamic property financing.1. The floating rate penalty charge could be less desirable during the high interest rate regime.
2. Though the concept of Islamic banking is trustable and sound but the calculation method is different from each bank. Due to the restriction in procedure, a degree of uncertainty exists for both bank and consumer.
3. Although there’s flexibility in alteration but altering the terms in financing is more troublesome than you can ever imagine. However, if the customer chose to alter the terms of financing, a new Sale and Buy-back agreement is needed to be create and sign. Meanwhile, for conventional loan method, it would only require the amendment to be stamped which incurs less cost.
Today, Bank Negara statistics showed a total assets of Malaysia’s Islamic Banking system (IBS) which stood at RM610.52 billion by June 2017. Malaysia has topped in market share of Asia’s Islamic AUM with the percentage of 85.2% (assets under management) followed by Pakistan , 7.2% and Indonesia, 5.7% This is because of the Islamic finance development and changes that have become more vibrant with diverse set of industry players which included legal, accounting, technology, commodity trading platforms and rating companies.