Islamic personal financing in Malaysia is based on the concept of Bai’ Al-‘Inah. It is a concept which involves selling on a deferred payment basis. A seller (bank) will sell to a buyer (client) in cash. The seller will later buy back the transaction on a deferred payment basis, where the price is higher than the buying back an asset by a seller (bank) cash price. It can also be applied when a seller sells to a buyer on a deferred basis. A seller will later buy back the transaction on a cash basis at a price which is lower than the deferred price, thus the transaction amounts to a loan. In personal financing, the asset involved in the Bai’Al-‘Inah concept of buying and selling would be the cash.
Other Shariah concepts used by Islamic banks is the Shariah principle of Murabahah via Tawarruq for personal financing. By definition, Murabahah is a type of sale where the commodity is sold for cash or at a deferred price. Tawarruq refers to purchasing an asset with a deferred price, and then selling it to a third party to obtain cash.
Islamic banks will then charge customers an amount known as a ‘profit rate’ (essentially an interest rate) for providing them with a personal financing facility. This is because charging interest is not allowed in Islamic banking. Islamic banking uses the term profit rate rather than interest rate because of the way the financing is structured. Therefore, unlike personal loans offered by conventional banks, which have interest rates, Islamic banks will offer personal financing with a profit rate that will be defined in the personal financing contract.
|Islamic Personal Financing||Conventional Personal Loan|
|Refer as personal financing||Refer as personal loan|
|Based on the concept of seller and buyer||Based on the concept of borrower and lender|
|Bank must bear some risk to earn returns||Customers bear all risk of the loan|
|Compound charge is prohibited||Compound charging is allowed and practised|
|Profit rate is charged||Interest fee is charged|
|Governed and regulated by Bank Negara Malaysia and Shariah Committee||Governed and regulated by Bank Negara Malaysia only|
|The bank cannot cancel the contract at their sole discretion||The bank can cancel the contract at their sole discretion|
Islamic personal financing or Islamic loans are easily recognized based on the name of the loan. All loans ending with the ‘i’ suffix are considered as Islamic loans even without the word Islamic itself. For example, Al-Rajhi Personal Financing-i. However, there might be certain cases where Islamic bank may not affix an ‘i’ to their loan products, since it is generally understood that any Islamic institutions would be providing shariah-compliant financing products.
- Lower late payment charges
The late charges are lower than what is charged by conventional loans. This is because compounding interest is prohibited by Shariah, which is why the late charges will be lower. The late payment charges for Islamic Banking in Malaysia is based on the Ta’widh concept, and is subject to the maximum rate of 1% per annum.
- Fixed repayment amount
Another benefit is the amount to be paid by the customer is fixed for the entire period at the beginning of the term. This means it does not increase even if the financing term is subsequently increased.
Yes, both Muslims and non-Muslims can use the benefits and features of Islamic banking products and services.
Applicants will have to be