To use the term Islamic home loan would not be entirely correct as loans involve the calculation of interest. Malaysia is one of the most popular Islamic banking destinations across the world today due to the effort to promote this platform since the Islamic Banking Act came into force. That said, what makes Islamic finance and banking such an attractive option and why?
What is it about?
It is essential to first understand how Islamic financing works. Based on the Syariah laws and principles, it prohibits the concept of money lending (based on interest) and investing money in businesses. Such Islamic-based economics has been proven over generations to be stable and efficient. Besides Islamic finance, the conventional banking platforms would usually charge interest through loans and gain profit. In Islamic finance, profit is made through the sale of commodities which is the most basic form of any business. That is to say, if you want to buy a car, the bank will first buy the car and then mark it up before selling it back to you.
In other words, profits are pre-determined before financing takes place.
Islamic property financing in Malaysia
The underlying principle here is that the bank will buy the property and then sell it to you for a profit. The arrangement is that the buyer can use installments to pay for the property. Most banks use the reverse Murabahah or Tawarruq model for property financing where the transaction of commodities is where the bank gets their financing funds from.
Why you should (and should not) use Islamic home financing
Islamic banking follows 2 main types of banking fundamentals namely MM or Musharakah Mutanaqisah and BBA or Bai’Bithaman Ajil. The former is based on some form of the partnership while the latter is more like a rent-to-buy concept. You would want to get into Islamic banking because you get to enjoy:
Scheduled and fixed repayment amount. It makes budgeting easier and more efficient.
- Lower stamp duty fees.
- A lower penalty fee if you pay off the property within the lock-in period.
This simply means that if you want to have a fixed and more certain payback system, Islamic finance will do well for you.
On the other hand, Islamic finance might not be your option since every bank has its own way of calculating the payment. In this way, it could mean that you could be subject to some form of uncertainty.