Islamic Financing: Home Loans (Part 3)

islamic financing

Conventional home loans operate on a basic principle of gaining profit. Banks loan money, the money is paid back with interests. Like mentioned in the previous article, if there is a late payment or if payment is paid before the agreed time, a penalty is charged. As banks want to gain more money through interest, there is another way to leeway all these options. Islamic home financing is a fast growing option here in Malaysia. Unknowingly to many, Islamic home financing is for all regardless of faith and ethnicity. Sometimes, it can even provide a better deal than conventional home loans! This article will explain briefly what is Islamic home financing, its principals and how it operates.


As the name suggests, Islamic home financing is based on Shariah laws and its practical application. The main tenant of the sharia law in the financial aspect is that riba, or interest, gharar, or speculation, haram, or unlawful, is forbidden. These concepts are deemed dishonorable and illegal. This means that money has no intrinsic value, thus not allowed creating more money. Therefore, Islamic banks must provide services or products in order to earn profits. Islamic banks implement a simple concept of purchasing on the borrower’s behalf and selling it back to the borrower at profit. Instead of the interest rate being used, profit rate is calculated.
(Note. This is why the term home financing is used here rather than loan because a loans generate interests. Profit rate just sounds better and more appropriate)


Some commonly used methods are Murabahah, Musyarakah or Ijarah. Murabahah basically is a cost-plus profit markup, which means buy and sell. You and the bank will enter into a contract where the bank buys the property for you. The bank will then re-sell the property to you at a higher price from the profit rate estimated and then you will pay in the form of installments over a fixed period of time.

Malaysian real estate and properties commonly use the concept of Al Bai Bithaman Ajil. This subset concept of  Murabahah is based on the deferred payment sale through buying and selling. The bank buys the real estate at an agreed price, while the individual and the bank will determine the tenure and the manner of the installments. This will include the actual cost of the home and also incorporate the bank’s profit margin. The fixed monthly installments are determined by the selling price, repayment period and the percentage margin of financing.


On the other hand, Musyarakah translates into a form joint enterprise with the financial institution and the party forms a partnership over the purchased property. All losses and gains are borne by both parties. In Malaysian real estate, the concept of Musyarakah Mutanaqisah is used, having floating rates in the form of rental. Both parties agree to purchase for a mutually agreed percentage and the one with the bigger share (which is the bank) will rent out the property to the individual for a fee. At the same time, the individual will buy the bank’s share of the property at agreed installments until the full equity is reached. The floating rates are according to the current market rate such as the Base Lending rate and are popular especially in Malaysia.


Ijarah is the financial institution leasing the owned property to the lessee. Ownership still belongs to the bank and it is rented to you for a specified period of time with terms and conditions. For real estates and property, transferring property ownership at the end of leasing is possible. The bank will buy the property the individual will buy back the property by paying monthly installments. This concept allows you to buy out a property from the bank while paying for “rent”. There are 3 types listed:

  • Al Ijarah Thumma Al Bai – Lease Agreement Incorporating Sale of Leased Asset at the end of the lease tenure.
  • Al Ijarah Muntahiya Bil Tamlik – Lease Agreement with option to Own Leased Asset at the end of the lease tenure
  • Al Ijarah Wal Iktina – Lease Agreement with option to Acquire Leased Asset at the end of the lease tenure


Malaysia has one of the most recognized Islamic financial and banking systems in the world. Despite the confusing Arabic terms, Islamic banking has seen an increase in popularity over the years in Malaysia. The pros of Islamic home loans are great overall, with a 20% stamp duty discount for Islamic Loan Agreement documents for an indefinite amount of time, lower incurred charges on late payments as compared to conventional home loans, and lower rates that do not overburden the customers. Why not give Islamic home loans a try if the opportunity is right? Do check out these loan comparisons from iMoney and RinggitPlus for more information!

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