What are the value proposition and selling points of taking an Islamic home loan as compared to a conventional loan? There are certain features in-built in an Islamic structure that gives benefits that appeal to certain types of customers, based on their needs and requirements for the product.
The concept of Islamic finance lies in providing financing to consumers based on pre-determined profits rather than dealing with interest. To consumers, whether Muslim or otherwise, Islamic Banks have much greater social and moral responsibilities to ensure that their principles of financing are fair to everyone.
Other than providing greater social and moral responsibility and fairness, Islamic home loan offers quite a few advantages, such as:
1. No lock-in period
In the banking world, there is a lot of effort to onboard a customer for particular financing, and home financing is one of them. The process can take 3-9 months and involves a lot of people and it is natural for a bank to want to earn income as much as possible, as long as possible from the customer. That would not happen if the customer settles early.
The bank will impose a minimum “lock-in” period of between 3-5 years where customers are prohibited to sell, settle or refinance their houses. If they do, an early settlement penalty (usually 1.0% on the amount to be settled) will be imposed. Under Islamic financing, this feature is not generally accepted. Therefore to impose a penalty when a customer is attempting to pay off its debt remains an issue in the area of Islamic Banking.
Another example is when a bank absorbs the legal fees for the financing, that actual expense can be recovered if the early settlement is made within the lock-in period. This Shariah requirement has proven popular for customers seeking short-term financing (plans to upgrade their properties within a few years) as well as property investors seeking options to dispose of properties when opportunities arise.
2. 100% stamp duty waiver for home refinancing
The government agrees to allow for a 100% stamp duty waiver for Islamic Financing when it is refinanced from a conventional bank. This is to encourage the refinancing market as it appeals to customers seeking additional financing on a property’s capital gains.
This waiver is applicable for all refinancing from conventional bank to Islamic banks on the amount refinanced (provided the original loan has already paid for the stamp duty prior to the refinancing). This applies to individual customers as well as companies.
3. Ceiling rate price protection
The Ibra’s guidelines say it is acceptable for the bank to charge a ceiling rate to formalise the Aqad, but the day-to-day charging of the customer must be based on a mandatory rebate mechanism where the effective rate is at par which what a conventional normal benchmark rate is. This means that the customer is not overcharged.
More importantly, the customer will not be charged more than the ceiling rate should the normal benchmark rate increase to above the ceiling rate. This provides customer price protection against high fluctuations of the benchmark rates. In a nutshell, with a Ceiling Rate you get the best of both worlds – if the benchmark rate is below the ceiling rate, you enjoy the benchmark rate (same as conventional loans), and if the benchmark is above the ceiling rate, you only pay based on the ceiling rate (not the same as conventional loans).