Islamic Loan Package

Islamic Loan Package

Malaysia is a country that is made up of multi-racial people and so, as a citizen here, we often reap benefits from this multicultural nation be it festive seasons, foods or even home loans. Seeing as how the Malay race makes up a huge portion of our population, banks do provide Islamic home loans although it has to be said that the term loan is being use loosely here.

Why the word loan is often not accurate to define this service is because Islamic loans are usually interest or profit free. In addition to that, it is not a loan as the service of this nature is usually a contract of “Buy and Sell’ or “Joint Partnership” agreements.

All in all, there are two types of Islamic financing in Malaysia. The first one, which is also the more popular one, is a subset of the Murabahah concept and is based on Bai Bithamin Ajil (BBA). While the other one is modelled after the Musyarakah Mutanaqisah (MM).

Murabahah vs BBA vs MM
Murabahah: It is cost + mark up. Services with financing tenure of less than a year (12 months) and where the money are paid in lump sum is usually under this category. Murabahah is also sometimes used to explain BBA Islamic home financing.
Bai Bithamin Ajil (BBA) : This consist of cost and profit mark up where it is paid over a deferred duration. What this means for home loans is that the bank will buy the property and will subsequently sell it to you at the price agreed by both parties and where the sum will be paid over X number of years. The price of the property sold to you will include the principal amount in addition to profit

Musyarakah Mutanaqisah (MM): MM, or otherwise known as Diminishing Mysyarakah (DM), is a partnership between the bank and its client to buy a property. How this works it that the bank will buy the property in question then rent it to you for a rental amount that is agreed by both.

This rental amount consists of principal repayment + profit component. As the year goes by, the bank will then slowly hand over its shareholding of the property. Example: This agreement might have started with a 80%-20% ownership between the bank and you respectively but after 15 years it will turn to a 50%-50% ownership.

Conclusion
In comparison of both BBA and MM, the latter offer a better protection to you if natural disasters were to damage your property for MM is based on a joint ownership agreement. This is however only on paper as no such legal cases have happened before to be set as model.

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