{"id":8420,"date":"2024-07-15T16:25:26","date_gmt":"2024-07-15T08:25:26","guid":{"rendered":"http:\/\/www.imoney.my\/articles\/?p=8420"},"modified":"2024-07-15T18:35:43","modified_gmt":"2024-07-15T10:35:43","slug":"islamic-property-financing","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/islamic-property-financing","title":{"rendered":"What Are The Advantages Of Taking Islamic Property Financing?"},"content":{"rendered":"

Islamic banking and financing, particularly Islamic property financing, in Malaysia is considered one of the most renowned and established in the world. Islamic banking which follows 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.<\/p>\n

The new law and the institution of a new bank paved the way for the continuous development of Islamic banking and finance in Malaysia.<\/p>\n

<\/span>How does Islamic financing work?<\/span><\/h2>\n

In a nutshell, Islamic banking is a system that follows Islamic Laws (Shariah) principles and Islamic-based economics. Islamic principles dictate that money lending (interest-based) as well as investing in businesses that are considered haram (unlawful) are prohibited.<\/p>\n

Conventional financing profits by charging interest on the loan, meaning that borrowers will end up paying back more than they borrow.<\/p>\n

Islamic financing is instead based on making a profit through the sale of commodities. Basically, the buyer asks the bank to buy the exact item that they want financed, which is then sold to them at an additional markup.<\/p>\n

The buyer is then asked to pay for the item in instalments or through a \u201crent-to-own\u201d scheme. All this is known as the principle of Murabahah and is basically the concept of providing financing to consumers based on pre-determined profits rather than dealing with interest.<\/p>\n

<\/span>How does that apply to property financing?<\/span><\/h2>\n

Under Islamic property financing, banks are required to buy an asset (i.e. property) from the seller and sell it back to the buyer (you) with profit. The buyer will be allowed to pay for the property in instalments.<\/p>\n

In Malaysia, banks tend to prefer the reverse Murabahah or Tawarruq method for financing property. For this case, the bank financing funds come from the transaction of commodities.<\/p>\n

This means the buyer requests for funds to buy the property. The bank then purchases commodities for the buyer with a value equal to the financing amount and sells it to the buyer at a profit. The bank then arranges to be repaid in instalments.<\/p>\n

At the same time, the buyer arranges for the bank to sell the commodities to a third party for the value of the financing amount. The proceeds of this sale are then transferred to the buyer to purchase the property.<\/p>\n

Technically, it works in a similar fashion to a conventional home loan where the customer pays 10% down payment (customer\u2019s equity) and the bank will finance the balance of 90% (bank\u2019s equity).<\/p>\n

For more information on the difference between Islamic and conventional financing, see Types of home loans in Malaysia<\/a>.<\/p>\n

<\/span>What are the advantages?<\/span><\/h2>\n

Essentially, Islamic banks follow two types of Islamic banking principles \u2013 Bai\u2019 Bithaman Ajil (BBA) and Musharakah Mutanaqisah (MM).<\/p>\n

Bai\u2019 Bithaman Ajil (BBA)<\/h4>\n

BBA is based on the Murabahah concept previously discussed and is the most popular option for home buyers looking for financing.<\/p>\n

MM is a partnership formed between the bank and the customer in order to buy the property.<\/p>\n

Under the MM partnership, the both the customer and the bank have an equitable interest in the property. It is then up to the customer (i.e. you) to buy over the bank’s share of the property through instalments.<\/p>\n

Musharakah Mutanaqisah (MM)<\/h4>\n

MM is a newer option and we will primarily\u00a0look at\u00a0advantages as well as drawbacks of this partnership.<\/p>\n

Advantages of Islamic property financing<\/h4>\n

Other than providing greater social and moral responsibility and fairness, Islamic property financing offers quite a few advantages, such as:<\/p>\n