Islamic banking. If you have no idea what it is and have never considered it as your financing option, then you are missing out. More and more people are choosing it over conventional banking. This includes non-Muslims in not only Malaysia, but from all over the world.
According to a 2017 report by Bank Negara, Islamic financing in this country now accounts for 34.9 per cent of total loans and financing. Compare that, if you will, to the 5.3 per cent market share it enjoyed in 2000.
Islamic banking is a system that follows Islamic Laws (Shariah) principles and Islamic-based economics. Among the elements which are prohibited are money lending (interest-based) as well as investing in businesses that are considered haram (unlawful). Other reasons for its rise in popularity include:
- Fairness and protection from high risks
- Safe from crisis
- Fixed and clear fees
- Lower penalties
Islamic property financing in Malaysia
In Malaysia, there are several products under Islamic property financing. The popular ones include:
- Ijarah wa Iqtina — a financier leases a property for an agreed rental fee. One of the parties buys or sells the property at the end of the lease period.
- Murabahah — commonly referred to as a ‘trade with a mark-up’. A financier purchases the property required by the home buyer. It is then sold to the home buyer at a cost that includes a disclosed profit margin. Payment is usually in instalments.
- Diminishing Musharakah – a financier and his home buyer participate in the joint ownership of a property. The share of the financier is divided into several units. An agreement is made where the home buyer will purchase the units of the share of the financier, one by one periodically, until he becomes the sole owner of the property.
For this particular article, we will be focusing on the latter of those products – the Diminishing Musharakah.
How does Diminishing Musharakah work?
As mentioned earlier, this type of financing involves a partnership between the bank (financier) and the home buyer. The number of shares may vary but let’s take an example where the bank contributes 90% of the property purchase price while the home buyer contributes the remaining 10%.
The home buyer makes the promise to purchase the bank’s share and purchases the units at different stages. The bank will sell its share to the home buyer through monthly purchase instalments over a period of up to 20 years, for example. After receiving agreed rental payments, the bank also leases out its share to the home for the use of the property with the option to buy it.
Periodically, the home buyer purchases a pre-agreed percentage of the bank’s share in the property. This increases the home buyer’s ownership in the property and reducing the bank’s share by a similar amount. The rental paid on the bank’s share is adjusted according to the bank’s diminishing share. The transaction then ends with the transfer of ultimate ownership of the entire property to the home buyer upon successful completion of the lease term.
Advantages of Diminishing Musharakah
Other than the normal benefits of Islamic financing mentioned earlier in the article, this type of financing provides the following:
- Fixed monthly repayment to help customers balance their monthly budget
- Cost of stamp duty lower by 20%. Stamp duty is also waived for the redeemed amount when refinancing from a conventional loan to an Islamic home finance.
- Penalty fee for property disposal within the lock-in period can be potentially lower than conventional financing.
- Uses Base Financing Rate (BFR) as compared to Base Lending Rate (BLR) which used by conventional financing. This allows banks to adjust based on prevailing market conditions.
So, there you have it. If you are in the market to purchase a property, you should definitely consider Islamic financing and the Diminishing Musharakah.
Truly halal banking
Other than mortgages, there comes a time when we would want to consider applying for a personal loan. The reasons could be for business, travel, marriage, home renovation, etc. That’s where Islamic finance comes into the picture. It has several advantages over conventional financing such as:
- Fairness and protection from high risks
- Safe from crisis
- Fixed and clear fees
- Lower penalties
- Takaful coverage
To get the best Islamic financing offers in Malaysia, head on over to AsSidq.com. It is your one-stop platform for Islamic financial products. They help match you with the best shariah-compliant financial offers from their banking and financial partners, based on your requirements and needs. The service is provided free, simple to use, and you will be matched instantly. Apply now and get approved in no time!