Islamic Finance

Difference between Islamic Financing & Conventional Financing (2 of 2)

In the previous article, in depth explanations have been given on the key difference between the principle held by Islamic Financing and Conventional Financing in Malaysia. Therefore, in this article we will focus instead on the benefits that each of them brings. This is in order to help those who are still trying to decide between Islamic or Conventional Financing.

Benefits of Conventional Financing
One of the benefits of Conventional financing over the Islamic ones is that the cost for borrowers’ early settlements, late payments or defaults are more transparent in the contract in comparison to Islamic financing.

Moreover, in conventional financing, all a borrower needs to do is to up-stamp the Loan Facility Agreement when they want to alter the terms of the finance such as in cases where the borrower wishes to increase the facility amount. If the same thing were to occur in Islamic financing, it will be more expensive for borrowers as a new Sale and Buy-back Agreement (BBA) will need to be drawn up.

Another advantage of conventional financing is that Islamic financing have difficulties in restructuring or refinancing in the case of default.

Benefits of Islamic Financing
Since Malaysia Government is trying to promote Islamic Financing among the citizens, there are certain advantages in applying for an Islamic financing over the conventional one. Such benefit is that for an indefinite period of time there will be a 20% stamp duty discount for Islamic Loan Agreement documents.

To make this clearer, you should first understand that there are only 2 necessary legal documents for conventional financing (Facility Agreement and Charge documents) but there are a minimum of 3, or in some cases 4, documents that are needed for Islamic financing. This will make the total legal fees for Islamic financing more expensive hence this 20% discount will come in handy.

Besides that, for those of you who would like to refinance from Conventional to Islamic packages, there will be a complete stamp duty waiver (100%) on your existing refinance loan balance. However, do note that this does not apply to any amount that is more than the existing refinance loan balance.

Conclusion
Just as a note of reminder though, anyone can apply for the Islamic financing because it is not restricted to Muslims only. Nevertheless, your application for Islamic financing will be harder if your occupation is considered by the lending institution as not “halal”. Therefore do check with the respective organizations regarding this issue if you have decided on Islamic financing.