islamic housing financing and conventional housing loan by banks

BWFS 2053 ISLAMIC FINANCING MANAGEMENT 1

1.0 INTRODUCTION

House is defined as a building for human habitation, especially a person that is lived in by a

family or small group of people. For having our own house, we need money whether to buy, rent or

build it. This made it possible for veterans borrow money for the purchase or building of a home. For

many decades, people purchase a house by apply for a conventional house loan from a bank, credit

union or other private financial institution to obtain money.

In this assignment our group will discuss and analyse a conventional housing loan and

islamic house financing. Our group will take the Hong Leong Islamic Bank and Hong Leong Bank

Bhd as an example. Then we will compare the differences between Islamic Financing and

Conventional Loan also discusses issues relating to this topics.

We may think housing loans have been around for hundreds of years. But, actually it was

only in the 1930s, that housing loans actually got their start. Banks didn't forge ahead with this new

idea. However, insurance companies did. Insurance companies daring did this not because interest of

making money through fees and interest charges, but hopes of get the ownership of properties if

borrowers failed to pay back the loan.

Loans not guaranteed or insured by these agencies are known as conventional loans. These

loans are using Fannie Mae guidelines. Fannie Mae, or Federal National Mortgage Association, is a

corporation created by the federal government that buys and sells conventional loans. It sets the

maximum loan amount and requirements for borrowers.

Nowadays, many country exchanges their structure of financial institution by add an Islamic

home financing as one of tool to obtain money to purchase a house for example at Malaysia. There

are two types of Islamic house financing in Malaysia.

Firstly, Islamic financing are benevolent loans that are interest or profit free. Secondly,

contracts are technically not fianancing, but “Buy and Sell” or “Joint Partnership” agreements. The

most common form is based on Bai Bithamin Ajil (BBA), which is itself a subset of the Murabahah

concept. Less popular are facilities based on Musyarakah Mutanaqisah (MM). Malaysia has one of

the most advanced Islamic Finance industries in the world.

Since its initial introduction, Islamic financing products have evolved and matured to be

comparable to and just as competitive as other conventional loan packages. But there are some key


differences. For example, conventional housing loans have interest, which is not allowed in shariah

principal, whereas Islamic house financing does not have interest.


2.0 ABOUT THE COMPANY

Hong Leong Islamic Bank Berhad is fully owned subsidiary of Hong Leong Bank Berhad

which is member of the Hong Leong Group. Hong Leong Group is a leading conglomerate based in

Malaysia with diversified business in banking and financial service, manufacturing and distribution,

property development and investments, hospitality and leisure, and principle investment with present

in north and Southeast Asia, Western Europe and the UK, North America and Oceania.

Hong Leong Bank Berhad is a member of the Hong Leong Group Malaysia that listed in

company on Bursa Malaysia. These banks were headquartered in Malaysia and have been in the

financial services industry since 1968 through Hong Leong Finance Berhad and since 1982 through

Dao Heng Bank Ltd. in Hong Kong. Dao Heng Bank Ltd. has since been sold to another banking

institution.

This bank starts beginning in 1905 in Kuching, Sarawak under the name of Kwong Lee

Mortgage and Remittance Company and later in 1934, incorporated as Kwong Lee Bank Ltd.. In

1989, it was renamed MUI Bank, operating in 35 branches. On January 1994, the Group acquired

MUI Bank through Hong Leong Credit Berhad.

Next, in 2004, the finance company business of Hong Leong Finance Berhad was acquired

by Hong Leong Bank. In 2011, Hong Leong Bank completed the merger with EON Bank Group.

Today, Hong Leong Bank has over 300 Branches.

Hong Leong Islamic Bank Berhad (HLISB) is a fully owned subsidiary of Hong Leong Bank

Berhad (HLB) which is a member of the Hong Leong Group Malaysia. Which is beginning as the

Islamic Banking arm of HLB, the division was incorporated as a separate entity on 28 March 2005.

HLISB is a dedicated brand offering a comprehensive range of innovative solutions covering

areas like structured finance, capital market, Business Banking, personal financial services,

bancatakaful and wealth management. The Bank is ready towards reaching out to the needs of

customers seeking an alternative to conventional banking.

For the year ended 30 June 2004, the advances and financing of HLB's Islamic Banking

Division (IBD) grew almost 20%, while deposits from customers increased by around 3% during the


same period. Following the transfer of IBD's business to HLISB, the latter will continue to tap on

HLB's infrastructure and strength in networking whilst developing its own business niche in fee-

based income and investment banking products.

Strategically, HLISB is focusing on provision of solutions on a holistic approach basis

encapsulating the tenets and principles of the Syariah law. Innovative solutions encompassing areas

in structured finance, capital market, equity joint venture financing, leasing for home purchases and

wealth management are amongst the repertoire of HLISB's offerings.

With over 180 HLB branches nationwide also operating as HLISB branches, Islamic banking

products and services will be easily accessible to Malaysian consumers to meet their multi-faceted

needs.


3.0 COMPARISON BETWEEN ISLAMIC BANK HOUSING FINANCING AND

CONVENTIONAL BANK HOUSING LOAN

For the comparison between Islamic bank housing financing and the conventional

bank housing loan, we had choose the Hong Leong Bank Berhad and the Hong Leong

Islamic Bank Berhad for distinguish this both types of the bank, their benefits and also the

differences that had appeared among them.

For information, the foundation of Islamic bank is based on the Islamic faith and

must stay within the limit of Islamic law or the Shariah in all of its actions and deeds.

Islamic law consider a loan to be given or taken, free of charge, to meet any contingency.

Thus, in Islamic banking, the creditors should not take any advantage of the borrower. When

money is lent out on the basis of interest, more often that it leads to the injustice.

The first Islamic principle, underlying for such kind of transactions, is “ deal not

unjustly and ye shall not be dealt with unjustly” (Quran,Chapter 2: 279 ) which explain why

Islamic commercial banking in an Islamic framework is not based on the debtor- creditor

relationship.

Meanwhile, contrary to the conventional bank which is essentially based on the

debtor- creditor relationship between the depositors and the bank on one hand, and between

the borrowers and the bank on other. Interest is considered to be the price of credit,

reflecting the opportunity cost of money.

As we know, the housing loan or the mortgage loan is the more secured form of

financing for both Islamic bank and the conventional bank. Under the conventional system,

housing loan is provided for interest, meanwhile, Islamic financial system facility is provided

through diminishing the Musharaka.

Under the diminishing of Musharaka, the house is purchased jointly by the Islamic

financial institutions and the customers. Then, the Islamic financial institutions rents out its

share in property to customer for an agreed amount of rent. Share of financier is divided in


units of small denominations. Customer pays the installments to Islamic financial institutions

consists of rental and plus purchase price of a units.

The Islamic housing loan actually based on the Musyarakah Mutanaqisah and Bai

Bithaman Ajil. Bai Bithaman Ajil or the deferred payments works on a selling price that is

fixed rate which is provides certainty, clarity and predictability in its transactions, while

Musyarakah Mutanaqisah may have a fixed price element built as a maximum cap but

overall the total amount depends on the reference rate tied to the product which is BLR or

the BFR.

To be clearly, actually there is a little difference between the both account and the

conventional account in terms of calculations. The major difference is that, for Bai Bithaman

Ajil, and also for most other Islamic financing products, there is a cap to the amount that

you pay which is the selling price. The selling price is stated in the contract as the absolute

amount to be paid but in events of refinancing to another bank or early settlement, the

amount to be settled is exactly what you will pay in the conventional loan.

If you take the conventional loans, you will not be able to determine the actual

amount of interest that you are going to pay at the end of the tenure. This is because,

there is no cap to the interest rate which is tied to the BLR which will move with the

market.

There is a little difference between Islamic bank and the conventional bank housing

loan if we look at the computation of the interest rate. Even the interest rate offered by

most banks for the both types of loan is similar. The documentation fee do varies between

bank and also between the two different types of loans.

However, there is no trend showing that document fee charge under Islamic loan is

higher compared to the conventional loan. In fact, there is some banks waive documentation

fee in order to make their housing loan or the mortgage loan package are more attractive.

As for early settlement fee, the terms under Islamic financing are actually more fairer

compared to the conventional.


This is because, they do not penalize loan borrower for settling the loan earlier, in

fact, the penalty is not allowed in this financing. For the early settlement, the bank only

charge customer any expenses incurred if any, by the former and nothing more. Meanwhile,

as for the conventional loan, many bank have early settlement clauses which penalize the

borrower if they early settle the loan. The penalty is different among the bank. Usually, it

is around 2% to 3%.

Next, another perception of the differences between the Islamic housing loan and the

conventional loan is that with regards to the early settlement. For the conventional loan,

when you early settle, you have to pay off the balance outstanding plus whatever penalty

you incur for early settlement. If your principal balance outstanding is RM 140,000 and the

penalty is RM 10,000 the amount you must pay is RM 150,000.

However, under Bai Bithaman Ajil, the amount to settle is always confused with the

outstanding selling price which is include the future profit. Actually, for the early settlement,

the Bai Bithaman Ajil gives away the rebates on the selling price which is equivalent to

future profit not realized, although this is not stated explicity in the document. In short, the

settlement amount for the Bai Bithaman Ajil is actually the principle balance outstanding

which is the same as the amount under the conventional loans.

Furthermore, the differences between the Islamic housing loan and the conventional

loan also can be interpret in terms of transparency. As we know, public disclosure through

the publication of the financial statement has long been the source of information on

business performance of financial institutions. But, in recent years, final institutions under

pressure from market forces, have started focusing on the disclosure of wide range of

information, including management policy, risk exposures, and the risk of management

practices.

Given that disclosure discipline management of financial institutions and helps to

enhance the efficiency and transparency of the markets, and it has acquired great

significance in promoting the stability of the financial system. Like conventional bank,

Islamic bank also engaged in the business that dealing with the money. However, the fact


that which distinguish them, is that their dealing with the depositor are based on the profit

and loss sharing to be dealing in trust money.

Thus, depositors account holders trust in an Islamic banking ability to achieve the

investment goals and make a fair distributions of the revenue and the investment accounts

holders become paramount in the continuity of the Islamic banking system.Given this

importance, Islamic banking are obliged to be transparent which is no hidden cost in the

transactions by making adequate disclosures to their investment account holders, not only

with regard to their own financial condition as is the case with conventional banks but also

in respect of the management of trust money.

Meanwhile, for the conventional bank, the interest amount payable will vary

depending on interest rates movements. Given that housing loan 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. And it is not to allowed to disclosure the

information especially when it comes to the consumer public welfare, it is only the certain

parts that have been allowed to be disclose to the public.

This is because, not all people have good perception and acceptance, when it comes

to their account need to be disclose by the bank, in fact, by disclosure the information, the

customer worrisome become rise. So, to avoid this thing from happen and also for the sake

of efficiency of the bank, the conventional bank had decided not to disclosure all the

information except the needed only.

Besides that, the differences between the Islamic housing loan and the conventional

loan also can be evaluate through the terms of overdraft or credit card. For the conventional

bank, it offer the facility of overdrawing from account of the customer on interest. One of

its form is use of credit card whereby limit of overdrawing for customer is set by the bank.

Credit cards provides dual facility to customer including financing as well as facility of

plastic money which is customer can meet his requirement without carrying cash.


Meanwhile, for the Islamic loan, as the facility of financing is concerned is not

offered by Islamic bank except in the form of Murabaha which is mean Islamic financial

institutions shall the deliver the desire commodity and not the cash.

However, facility to meet requirements is provided through debit card whereby a

customer can use his card if his account carries credit balance. Under the conventional

banking, a customer is charged with the interest, once the facility is availed, however,

Islamic financing, Murabaha is only profit is due when the commodity is deliver to the

customer.

In case of default customer, is charge with the futher interest for the extra period

under conventional system but however, extra charging is not allowed under the Islamic

financing. On top of that, the differences between the Islamic housing loan and the

conventional loan also can be discussed in the terms of deposits.

As information, the deposits are collected from savers under both types of

institutions for reward irrespective a bank is operating under conventional system or Islamic

system. The differences lies in the agreements of rewards. Under the conventional system

rewards is fixed and predetermined while under Islamic deposit are accepted through the

Musharaka and Mudharaba where reward is available.

Meanwhile, under the conventional banking, the return is higher in the long term

deposits and lower in short term of the deposits. Same with the practices in Islamic banking

to share profits with depositors. Higher weight for the profit sharing assigned to the long

term deposits which cannot be invested in long term projects. The only differences in

conventional and Islamic banking system is lies in sharing risk and also the rewards.

Under the conventional system, total risk is born by the bank and the total reward is

belong to it after servicing the depositors at a fixed rate, while under the Islamic system,

both risk and profits are shared with the depositors. The reward of depositors is linked with

the outcomes of investments that is made by the Islamic financial institutions.


Under the Islamic financial system only those Islamic financial institutions will be

able to collect deposits who can establish trust in the eyes of masses hence leading to the

optimal performance by the financial industry.


4.0 ISSUES IN ISLAMIC HOME FINANCING IN MALAYSIA.

Nowadays, Muslims will no need to worry yet if they want to purchase a

house in a force condition by borrow the money from conventional bank. It’s

because, now there are so many Islamic bank. Not only in Malaysia but in others

country too which provides an Islamic home financing product to the people

who want to purchase a house. But, there are some issues or challenges arise in

Islamic home financing. It’s regarding to the product which usually used for

home financing which are Bai Bithaman Ajil and Musharakah Mutanaqisah.

4.1 Bai Bithaman Ajil.

Bai Bithaman Ajil is a sale and purchase transaction for the financing of

assets on a deferred and an installment basis with a pre-agreed

payment period. The sale price will include a profit margin.

In Islamic finance, a sale of goods in which a bank purchases the goods

on behalf of the buyer from the seller and sells them to the buyer at a

profit, allowing the buyer to make installment payment.

The issues in the Bai Bithaman Ajil (BBA) in Home Financing:

4.1.1 Ownership on the House

Basically, BBA involves two contracting parties which are

buyers and sellers. For example is a Bank Hanif which wants to sell

a house to Arman as the customer must own the house before sell

the house to Arman.

But, in practice the bank is not allowed to run a business sale

and purchase of goods without own the assets first. Existing act

also only provides for the bank to provide financing facility to the

customer.


Furthermore, Islamic Banking Act (IBA) 1983 is a civil act.

Although it is include the Islamic banking system, but it is still

insufficient for overcoming the various problems at present now.

This situation causes a lack of ownership for the bank on the

asset. But, according to the Islamic law, a person cannot sell

something that does not belong to them.

As a solution to this problem, we create a scenario to give an

understanding how to settle this problem. For example, bank A

buys the house from Mr. Ismail based on the concept of BBA

through Property Purchase Agreement (PPA). Money paid by the

bank A to Mr. Ismail will be given directly to the developers.

When the bank A has a title to the house, then Bank A sells

back the house to Mr. Ismail through Property Sale Agreement

(PSA). At the same time, the assets will be used as a security and

the bank has the right sell the house to another person if Mr.

Ismail fails to pay the house as in the agreement. It should be

noted that the above scenario described the transaction how

banks give a financing to the buyer.

However, the existing banking laws do not allow the sale and

purchase transactions. Thus, the PPA agreement was introduced

to overcome the problems occurred. At the same time, the assets

will be used as security (collateral) and the bank has the right to

sell the asset if Pak Mat fails to pay the home as in the agreement.

It should be noted that the above described method of

transaction banks lend loan to the buyer. However, the law

existing banking banks do not allow the sale and purchase

transactions. Thus, the PPA agreement was introduced to

overcome the problems occurred.


4.1.2 Problem related to the Fixed-Rate

As we know, BBA offering a selling price of house at a fixed

rate. This situation is follow to the Shariah requirements whereby

to prevent the occurrence of a double price in one transactions. In

contrast to conventional systems where house prices always

fluctuate according to changes in interest rate.

With the existence of fixed rate, the customer does need to

worry in the event of rising interest rates. But, the issue is arise if

the interest rate go down. This situation will give an impact to the

customer habits which usually will choose the lowest price offered

by banking institutions. In this case, if the interest rates decline in

the long run, it will certainly affect the BBA.

However, if interest rates continue to rise, it will benefit the

BBA customer. Therefore, one mechanism is required to make BBA

is a competitive an instrument. So, to overcome this problem, the

Bank Negara Malaysia in 2003 has introduced Islamic Veriable

Rate Mechanism (IVRM). This mechanism is an alternative to fixed-

rate BBA. IVRM using the rebate (ibra').

This method allows the BBA lower the rate of profit to make it

competitive at the time when interest rates fall. Malaysia has

implement low interest rates since 1999 until now to grow the

economy. The existence of IVRM maybe a little late, but it can

provide some comfort to the customer from pay a fixed rate in the

BBA .


4.1.3 Bai Bithaman Ajil in Home Financing is like a

conventional Loan

BBA is a sale not a loan. But, it a sale with a deferred payment

and not a spot sale too. Still it constitutes one form of trading and

commerce. In the Al-Quran says that, “Allah has allowed trade and

commerce but prohibits riba.” (Al-Baqarah).

Hence, profit from sale is lawful and profit from loan is unlawful.

The issue here is in Islam, sale must be on the spot. If not, it is

consider as riba an-nasiah which the riba arise when the late of

payment, so the price of the house become higher.

4.2 Musyarakah Mutanaqisah (diminishing partnership)

Second issues that arrive in home financing in Islamic Banking System is in

Musyarakah Mutanaqisah. Before we precede the discussion of Musyarakah Mutanaqisah,

let us review the meaning of Musyarakah and Musyarakah Mutanaqisah. According to ISRA

(2013), from Hanafi scholars, Musyarakah can be defined as a “contract between partners on

both capital and profit”.

Maliki scholars defined Musyarakah as permission to transact where each of the

partners permits the other to transact with the partnership property while at the same time

retaining his own right to transact with the same property.

While for Shafi’i scholars, Musyarakah is defined as a “confirmation of right of two

or more people over a common property. To conclude it, Musyarakah is an agreement

between two or more parties to combine their asset, labour or liabilities for the purpose of

making profit.

Whereby, according to the ISRA (2013), Musyarakah Mutanaqisah or diminishing

Musyarakah is a form of partnership in which one of the partners promise (wa’d) to buy the

equity (in this case is house) share of the other partner gradually until the title of the equity is

completely transferred to the customer.


This can be concluding that, it is a concept of contract incorporated between the

financier who is the partner, giving rights to the other party or partners to own the asset with

lump sum or in deferred payment as agreed by both parties. However, in modern banking,

there were an issues arrive regarding this home financing under the Musyarakah

Muntanaqisah.

Issue related to Musyarakah Mutanaqisah:

4.2.1 The Holiday Payment

The first issue that I notify in this Musyarakah Mutanaqisah is about the

holiday payment. Holiday payment is a payment that the customer does not have to

pay in one period of time. It is may be one month in a year.

The issue arrive on what is the status of the instalment payment on that month.

Is it the amount of that month have been totally abolished or is it will be bring on

the next month. In normal Islamic business transaction that carried out

Musyarakah Mutanaqisah, the amount are being carried forward which is adding

with the amount that has to pay in the next month.

This means the customer still need to pay and the abolishment is not kind of

rebate or discount. It is more to deferment of the payment that are given by the

bank. The payment method for the next month is whether in lump sum or little by

little.

For example, instalment for every month is RM500, after the month that

payment holiday occur, the customer could pay in total RM1,000 or pay for

RM600 every month till the amount are being covered.

The customer also can pay by adding the year or month of payment. For

example, initially the payment should be in 30 years, after the payment holiday,

the customer have to pay in 30 years and 5 month.


4.2.2 Time Of Economic Crisis

The second issue that arrive in Musyarakah Mutanaqisah is in the time of

economic crisis. Is it will be influenced by the Base Financing Rate (BFR), because

the BFR are influenced by the Overnight Policy Rate (OPR) and OPR are

influenced by the current economic state and government policy?

In this case, the banks already have the solutions for this problem. The

solutions is every products that the Islamic bank introduce, there are the ceiling rate

(cap rate) and the banks will never goes up more than the ceiling rate in prescribing

the profit. If the current BFR are low, the customer will enjoy the benefit and if the

current BFR are high, the bank will ensure that it will not be uncertainty amount

that will increase accordingly.

4.2.3 The Use of Islamic Bank Rate (IBR) with Adjustment as the Profit Rate

The third issue that arise is the use of Islamic Bank Rate (IBR) with

adjustment as the profit rate. The profit are differed according to the amount of

financing and whether the house is under financing or already completed.

For example, in home financing, if the range of financing is between RM100

thousand to RM500 thousand, the IBR will be 1.70% while for the house that are

under construction, the IBR will be 1.60%. for the range of financing above the

RM500 thousand, the adjustment rate will be increased by 1% from both

completed and under construction.

From the percentage that shown above, it shows that the bank still use the

conventional interest rate as benchmark. In the real practice of Musyarakah

Mutanaqisah, the bank should use the rental rate.


4.2.4 Bank Charged for the Penalty Fee

The fourth issue that I noticed in Musyarakah Mutanaqisah is the bank still

charged for the penalty fee to the customer for rescheduling their payment when

they are not capable to pay the instalment amount according to the initial

schedule.

The customer will ask for the bank to reschedule their payment amount

according to their capability and the consequences is the payment period will be

longer and the bank has to change their agreement contract.

The issue arrive here is, the bank will charge a fee for the rescheduling of

payment amount and the penalty fee for the dispute of the initial agreement.

Besides that, the customer also has to pay back the services charge in

rescheduling of the payment. This means, the customer has to bear the second

payment or charge in producing the rescheduling of the payment.

This issue clearly shows that the banks are not truly followed the principle of

Musyarakah accordingly because in Musyarakah, every cost and profit are shared

between both parties that are entered into the agreement.

Moreover, every cost that is charged in partnership should be incurred by

both parties because they have agreed to be a partnership whether they got profit

or losses and the capital are contributed by both parties.

In the banking system, every cost that is occurring in the partnership is bared

only by the customer and the bank only bear for the cost from capital.

This clearly showed the unfairness in incurring the problems arrive in the

partnership. The banks also imposed a penalty charge to the customer for the

failed in instalment as in initial scheduled.

Hence, according to the original Musyarakah, in the case of profit and loss,

both party is actually have to bear. This will lower the burden between the parties

in payment of the management cost.


Although in the end of the period, the equity will be owned by the customer,

in the time of partnership, the cost should be bared by both parties in order to

lower the cost or burden of the partner.

This is because, in the end of the partnership, the bank will also enjoy the

profit from the partnership. As we already know that the amount of instalment

that the customer have to pay are higher than the amount that the bank have to pay

to the developer.

4.2.5 The Payment of Guarantee Takaful to the House

The fifth issue that arise in Musyarakah Mutanaqisah house financing is about

the payment of guarantee takaful to the house. This guarantee should be bared by

both parties because in the beginning, the ownership of the equity is owned by both

parties and the cost occurs should be bared by both parties as well. In partnership,

they are responsible to bear the cost of guarantee and not only by one party.

This is because, the protection to the equity will benefit by both party involve

and as a guarantee to the equity. From what have been discovered, the bank

nowadays only followed the principle of Musyarakah Mutanaqisah in providing a

takaful or suggests takaful company to the customer as a guarantee to the property.

In contrast, the bank did not involve in guarantee the equity. Both of the party

is actually should bared the equity. However, in partnership, both of the party in

conjunction to make sure that the equity are in safe and protect the equity from

destruction or defect.

4.2.6 Production of the Documentation

The last issue that have been discussed in producing the documentation that

relate to the Musyarakah Mutanaqisah. The local Islamic bank faces the problem in

preparing the documentation of the contract due to the lack of the Shariah lawyers

that are expert and well understand the Musyarakah Mutanaqisah contract.


To sum up, in financing equity by using Musyarakah Mutanaqisah, it will be

more practical by increasing the quality of concept according to Shariah. This will

lead to the improvement and development of the contract of Musyarakah

Mutanaqisah because this contract is actually effective in house financing. Hence,

any changes in the responsibility for the property should be referred to the original

contract and any changes should be beneficial by both parties.

As a newly implemented product, Musyarakah Mutanaqisah based contract is

not excluded from having some flaws and limitations. However, there are still some

rooms for improvement to make it a better product.

The collaboration from various parties and economic scholars is very

important in improving Musyarakah Mutanaqisah based contract to make it more

Shariah compliant and assessable to all type of income group and still maintaining

its commercial value.

In addition, the bank are considered as Islamic that are being guided by

philosophies of Islamic business, which are, firstly, the philosophies will be used by

the management or policy makers of the bank in the process of formulating

corporate objectives and policy.

Secondly, these philosophies serve as an indicator as to whether the particular

Islamic bank is upholding true Islamic principles. The representatives should know

these philosophies.

Other than that, Islamic banking is a subset of the overall Islamic economic

system. They must strive for a jut, fair and balanced society as envisioned and

deeply inscribed of Shariah.


5.0 CONCLUSION

After discussing about this assignment, we can see that Hong Leong

Group consisting two types of banking, which are Conventional Hong Leong

Banking and Hong Leong Islamic Banking. Its both play an important role in our

nation banking industry by serving not only for wealth management service,

deposit and business banking but also consisting of other services such as

conventional house loan or Islamic house financing.

Malaysian should be proud because here we have a variety house loan or

financing products to help us especially the new workers or young people to

own their house by the easiest way. However, applicants actually should have

some knowledge about these both types of conventional house loan and Islamic

house financing.

It is because some of us still have not much information about the

differences between their principle, calculation and especially about the debtor-

creditor relationship between the depositors and the bank that only applied by conventional

bank and not Islamic bank.

So, when the conventional bank using this relationship, it also mean that they will charge the

interest to the customers which is not allowed or permissible by Islam. The conventional loans

actually make us don’t know about the actual amount of interest that we are going to pay at

the end of the tenure.

The public should understand about the interest rate charged by most banks including in

housing loan can make them loss if they pay late rather than choose Islamic housing financing.

However, for the documentation fee, it is actually varies depends to the bank and different

types of loans but basically, there is no trend showing that document fee charge under

Islamic loan is higher compared to the conventional loan.

So, to help the Muslim customers, Islamic product is developed in this country which then

was replaced by Bai Bithaman Ajil and Musharakah Mutanaqisah which the Islamic


financial institutions rents out its share in property to customer that pays the installments to

Islamic financial institutions.

We also can see that everyone now have a choice either want to choose

Islamic housing financing or conventional housing loan but until now, many

public still have negative mindset that Islamic financing also provide interest

including for Islamic housing loan financing because some of them snot have

not much understanding about the issue such as the use of Islamic Bank Rate (IBR) with

adjustment as the profit rate, the penalty fee and the payment of guarantee takaful to the house.

The conclusion is, as Muslims, of course we should support our Islamic

products including by support of Islamic housing financing beside broader our

knowledge about the principal in this financing which is important so that we

can differentiate professionally and take the best decision when apply either

Islamic house financing or conventional loan.


6.0 ATTACHMENT

Wisma Hong Leong group which is located at 18 Jalan Perak, 50450 Kuala Lumpur

Hong Leong Bank and Hong Leong Islamic Bank corporate’s logo


Hong Leong conventional online housing loan, which can be apply directly from

https://www.ecloan.com.my/mgAcqCpgn/mgacqcpgn.asp?

pcode=PropertyLoan

https://www.ecloan.com.my/mgAcqCpgn/mgacqcpgn.asp?pcode=PropertyLoan

https://www.ecloan.com.my/mgAcqCpgn/mgacqcpgn.asp?pcode=PropertyLoan


Hong Leong Islamic Financial Report 2013, which shown their housing financing is RM 6 756 902 000 for 30 June 2013, increase than previous years value.


Product which usually used for Hong Leong Islamic Home Islamic financing, Bai Bithaman

Ajil is RM 8 764 050 000 for 30 June 2013, shown a positive increment rather than previous

years.


Conventional Hong Leong Bank house loan financial statement for 30 June 2013 is only RM 3 092 687 000 compare than their housing Islamic financing which is RM 6 756 902 000 at the same date.


7.0 REFERENCES

Internet

Islamic versus conventional financing. Retrieved :March 22, 2014, from,

http://loanstreet.com.my/learning-centre/islamic-vs-conventional-financing

Islamic home loan / Financing in Malaysia Explained. Retrieved : March 22, 2014, from,

http://loanstreet.com.my/learning-centre/islamic-home-loans-explained

The difference between Islamic loan and conventional loan. Retrieved: March 19, 2014, from, http://finance.advice.my/585824/May-I-know-what-is-the-difference-between-Islamic-loans-vs-conventional-loans

How to choose between Islamic and conventional home financing. Retrieved: March 19, 2014 from http://1stophomefinance.wordpress.com/home-loan-interest-rate-application-property-financing-packages-islamic-conventional-blr/choosing-between-islamic-home-financing

The Islamic and Conventional Journal, Volume 2. Retrieved: March 19, 2014, from, http://www.ijbssnet.com/journals/Vol._2_No._2%3B_February_2011/20.pdf

The article of the differences between Islamic and Conventional bank. Retrieved: March 19, 2014, from, http://zaharuddin.net/senarai-lengkap-artikel/38/297-differences-between-islamic-banks-a-conventional.html

The article of Islamic banking. Retrieved: March 20, 2014, from, http://www.islamic-banking.com/iarticle_5.aspx

The Hong Leong Islamic Bank. Retrieved : March 18, 2014, from, http://www.hlisb.com.my/lss/iart08.htm

The Hong Leong Bank Berhad. Retrieved : March 18, 2014, from,

http://www.hlb.com.my/pfs/loan/loanhl_f.jsp?flag=loanhl_f

Hasan. (2010). Bai Bithaman Ajil. Retrived: March 20, 2014, from

http://islamic-finance-simple.blogspot.com/2010/04/bai-bithaman-ajil-

bba.html

Ustaz Nazri. (2009). Issues on Bai Bithaman Ajil. Retrived: March 20, 2014,

from http://usnazri.blogspot.com/2009/10/bai-bithaman-ajil.html

http://usnazri.blogspot.com/2009/10/bai-bithaman-ajil.html

http://islamic-finance-simple.blogspot.com/2010/04/bai-bithaman-ajil-bba.html

http://islamic-finance-simple.blogspot.com/2010/04/bai-bithaman-ajil-bba.html

http://www.hlb.com.my/pfs/loan/loanhl_f.jsp?flag=loanhl_f

http://www.hlisb.com.my/lss/iart08.htm

http://www.islamic-banking.com/iarticle_5.aspx

http://www.islamic-banking.com/iarticle_5.aspx

http://zaharuddin.net/senarai-lengkap-artikel/38/297-differences-between-islamic-banks-a-conventional.html

http://zaharuddin.net/senarai-lengkap-artikel/38/297-differences-between-islamic-banks-a-conventional.html

http://www.ijbssnet.com/journals/Vol._2_No._2%3B_February_2011/20.pdf

http://1stophomefinance.wordpress.com/home-loan-interest-rate-application-property-financing-packages-islamic-conventional-blr/choosing-between-islamic-home-financing



http://finance.advice.my/585824/May-I-know-what-is-the-difference-between-Islamic-loans-vs-conventional-loans

http://finance.advice.my/585824/May-I-know-what-is-the-difference-between-Islamic-loans-vs-conventional-loans

http://loanstreet.com.my/learning-centre/islamic-home-loans-explained

http://loanstreet.com.my/learning-centre/islamic-vs-conventional-financing


Muhamad Asyraf. (2010). Bai Bithaman Ajil 2. Retrived: March 20, 2014,

from http://www.academia.edu/3721385/Bai_Bithaman_Ajil_2

Mohd Sollehudin bin Shuib, Joni Tamkin Borhan & Azizi Abu Bakar (2011). Musharakah

mutanaqisah home financing products: an implementation analysis, Product Advantages and

Issues at Citibank (Malaysia) Berhad. Retrieved from

http://penerbit.uthm.edu.my/ojs/index.php/JTS/article/viewFile/364/248 (musyarakah

muntanaqisah)

Book

International Shariah Research Academy for Islamic Finance ISRA (2013). Islamic financial

system. page 244-249

Abdul Ghafar Ismail (2010). Money, Islamic Banks and the Real Economy. Published by

Cengage Learning, page 73-75

http://penerbit.uthm.edu.my/ojs/index.php/JTS/article/viewFile/364/248

http://www.academia.edu/3721385/Bai_Bithaman_Ajil_2

islamic housing financing and conventional housing loan by banks

Economy & Finance