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Holistic Business Solution For Enterprises Under Islamic Business Financing

Does Islamic Banking scheme provide Shariah compliant products and services to meet the financial needs of the business entrepreneurs? The answer is “YES”. The scheme does offer a variety of Islamic financing products to business entrepreneurs.

The more popular Islamic Financing products are highlighted below with their advantages and disadvantages as compared to conventional products.


Term/Equipment Financing-i

The purchase of commercial/business properties and equipment financing can be financed using Term Financing-i facility, a Shariah-financing product based on the principle of BBA. There are two (2) methods of financing profit rates charged by financiers (a) constant rate of return or commonly known as fixed monthly rest and (b) hybrid fixed sale price with variable monthly profit rate with a capped ceiling rate. The latter rate is currently using the conventional base-lending rate (BLR) as benchmark.  The first method provides effective management of cash flow while the latter allows flexibility.


Cashline Facility -i

Cashline facility-i is an Islamic overdraft facility that can either be structured using the principle of BBA or Murabahah (cost plus financing). For this product, the financing period is normally fixed i.e. from 3-5 years, which means, the overdraft financing rate shall remain fixed until expiry of the financing period. Thereafter, the financier can re-price the financing but must be with the concurrence of the customer. This product can also be structured using a master facility agreement where the financier can re-price it annually. When re-pricing, the customer will be required to re-sign another purchase and sale agreement where the legal cost, if any, is normally absorbed by the financier.

Unlike conventional overdraft facility, there is no commitment fee imposed on the utilized portion of the facility. This is because under the BBA or Murabahah concept, the facility is deemed as fully disbursed but the fund is placed in a Marginal deposit and the customer can draw or pay back anytime during the agreed financing period.  If a temporary overdraft is granted, it is normally based on Al-Qhadhul Hassan basis i.e. benevolent loan, which is free from interest. For conventional overdraft product, the financier normally charges a temporary overdraft interest, which is higher than the normal interest rate applicable for the overdraft facility. Another advantage of cashline facility-i over the conventional overdraft is that, for cashline facility-I, the profit calculation is on non-compounding basis.


Islamic Trade Finance-i (ITF)

For those who wish to conduct their import and export business using Shariah based financing products, ITF facilities are the perfect choice but the purpose must be on “halal” based products and services.

The ITF facilities currently being offered by financiers are:,

Letter of Credit-i
Trust Receipt-i
Letter of Guarantee-i
Shipping Gaurantee-i
Accepted Bill-i
Export/Local LC Advising/Confirmation/Transfer-i
Export Credit Refinancing-i
Export /Local LC Negotiation-i
Export/Local LC Discounting-i
Export/Local Collection Bill Purchase-i
Export/Local Collection Bill Discounting-i
Working Capital Financing-i


For instance in Islamic Accepted Bill (AB-i), there is no imposition of acceptance commission and it is based on buying and selling rather than at a discount prevailing in the conventional Bankers Acceptance. Thus, customer will get the full invoice value. Unlike conventional trade finance products, ITF are being priced on fixed rate basis, thus, importers and exporters alike are protected against volatility in interest rate, which is prevailing under conventional trade finance products.

ITF also provides alternative financing for small and medium enterprises that could not have access to Acceptance Bills-i or Bankers Acceptance in the case of conventional, by providing Working Capital Financing-i for invoice financing with similar conditions and pricing imposed to Acceptance Bills.


Remittances

As an alternative to conventional banking, Islamic Banking also provides similar remittance package. However the transactions are processed through Foreign Correspondent Banks / Agents with Islamic Accounts / Funds.

 

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