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Islamic Property Financing – The Better Option?

Apart from the stiff competition amongst financial institutions to provide financing for the purchase of properties, there is also a tussle between them to offer either conventional loans or Islamic financing to consumers. Although new in the market, the latter is progressively becoming significant as evidenced by the encouraging growth registered since the last few years. With more and more people beginning to understand its value proposition, there is a strong possibility that the growth of Islamic property financing may even surpass that of conventional in the near future.
 
“Why is Islamic property financing a better option?” - one may ask.
 
To answer the above question, one needs to look at what Islamic property financing, which is designed based on the concept of “Bai Bithaman Ajil” or Deferred Payment Sale, has to offer. Islamic property financing product normally subscribes to a fixed rate mechanism, which provides certainty, clarity and predictability in its transactions - the cornerstones of fairness and equity. Some of the financial institutions have even moved one step ahead by offering a hybrid product combining the features of a traditional Islamic home financing with conventional mortgage loan that gives the best of both worlds – a fixed and flexible rate. The mechanism of this product is comparable to that of the conventional housing loan but customers will be protected against any future rise in interest rates by imposing a fixed ceiling rate.
 
Some of the major benefits of property financing are listed here under:

1. Transparency i.e. no hidden costs:

The financial institution’s profit is documented in the Property Sale Agreement and is fixed. Under a conventional loan, the interest amount payable will vary depending on interest rates movements. Given that property financing is usually for long tenors, there is a strong possibility of interest rates hovering higher in subsequent years than that at the time the contract was executed.
No compounding of profit. Unpaid profit will not form part of the new principal.
In cases of default, the financial institution cannot demand more than the amount registered under the agreed Selling Price
Waiver of stamp duty for refinancing of accounts.


2. Fixed profit rate that protects against a volatile interest rate environment, hence, incorporating own hedging instrument against interest rates risk. For the hybrid property product, customers will enjoy prevailing profit rate and at the same time will not be charged higher than the ceiling rate during an interest rate crisis.


3. The fixed profit rate mechanism also assists in one’s cash flow planning.


4. A rebate will be given for rate differentials between the ceiling rate and prevailing rate for the hybrid product, which inadvertently reduces the selling price. A special rebate is also given for early settlement.
 
Once such value propositions are fully understood and appreciated, we are optimistic that Islamic property financing will carve its way into the hearts of consumers and in the process, provide a better option to them.

 

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