When asked about the difference between these two types of financing,
the general answer is that both are the same, except in a conventional
loan, the purchaser will pay interest, and in Islamic financing, the
purchaser will pay a profit.
In a conventional loan, the customer will repay to the bank the loan
amount, together with interest at the prescribed rate. The prescribed
rate is based on a margin above the bank's base lending rate (BLR), and
both the margin and the BLR are variable from time to time. In a case of
late payment or default, the bank is entitled to charge compound
interests. Interest payable may also be capitalised and the capitalised
amount will be subject to further interests.
A common home Islamic financing facility is offered under the Shariah
principle of Al-Bai Baithaman Ajil (BBA). In BBA financing, a bank's
customer buys a property from the vendor under an agreement of sale. The
bank then, at the request of the customer and with the consent of the
vendor, steps in to become a party to the sale agreement by executing a novation agreement between them, making the bank now the purchaser of
the property. The bank's purchase price is described as the loan
facility amount.
At the same time, between the bank and the purchaser, the bank sells the
property to the customer at a selling price which comprises the bank's
purchase price and a predetermined profit margin. The agreement is
usually called the property sale agreement. Since Islamic financing
entails a predetermined profit to be made by the bank, a customer will
never have to worry about a sudden hike or changes in the interest
rates. Right from the onset, he will know the total amount which he has
to pay to the bank. His monthly instalment of the bank's selling price
will not change throughout the tenure of the financing.
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