Malaysia has a robust and thriving Islamic Banking, Finance Services and Insurance industry that provides banking and financial services and products that comply with the Islamic law of Sharia (Islamic financing products are available to all, irrespective of religion). Here, we will take a brief look at some of the main categories of such products:
Islamic financing – There are a wide range of Islamic Financing options (not “loans” as understood in the traditional sense), both secured and unsecured, available including the equivalents of personal loans, car loans, business, commodity and trade financing. These operate under a number of Sharia principles including Tawarruq, Bai Inah, Mudharabah, Bai Murabahah, Wakalah, Ijarah etc.
Islamic home financing – In Malaysia, Islamic home financing takes two forms. We will take a look at the underlying concept and both the forms:
Murabahah – A cost plus profit mark-up agreement. Here, the bank buys an asset and sells it to the customer at a pre-agreed profit or mark-up. Generally, this term is used to describe financing agreements with tenors less than 12 months.
- Bai’ Bithaman Ajil (BBA) or deferred payment sale – Here, the bank buys the property and sells it to the customer at an agreed mark-up. The customer makes installment payments (principal + mark-up) to the bank over an agreed tenor. After completion of all payments, property ownership is transferred to him.
- Musharakah Mutanaqisah (MM) or diminishing mutanaqisah – The bank and the customer buy a property as partners with the bank usually holding most of the share. Over time, the customer makes installment payments (principal + mark-up) gradually acquiring more of the property till he becomes sole owner.
Islamic credit cards – I-credit cards operate on the principle of Ujrah (Fee) whereby the bank imposes a charge or fee on the customer for the use of the card and associated benefits, privileges and services. Credit cards could also be issued under the Bai Al-Inah principle. This is a salecontract with immediate repurchase. It takes place when a person sells an asset in credit andimmediately buys back the asset in cash at lower price.
Islamic hire-purchase – Islamic hire-purchase facilities in Malaysia operate under the concept of Al-Ijarah Thumma Al-Bai (AITAB) which is in turn comprised of two separate contracts; the first is Al-Ijarah (lease) under which the hirer hires the goods from the owner at an agreed rental over a specified period of time. The second is the addition of an option to purchase (Bai); upon the expiry of the hiring period, the hirer is given an option to enter into a second contract to purchase the goods from the owner at an agreed price.
Islamic insurance – Also known as Takaful this involves a group of participants who mutually guarantee (Taawun or mutual assistance) each other against loss or damage. Every participant makes a contribution (Tabarru) into a common fund pool which is managed by a Takaful operator who operates using either Mudharabah (profit sharing) or Wakalah (agency).
When a participant suffers damages, the Takaful operator makes appropriate payouts. Surplus remaining after making compensatory payments will be shared amongst the participants. Takaful is thus a protection and a profit sharing measure.
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