Factors Affecting the Pricing of Islamic Home Financing in Malaysia

This paper, a collaboration with my academician wife,  was published in The Malaysian Corporate Secretary Journal.

Below is the conclusion of the paper.

" The overall price of an Islamic home financing includes upfront cost, total profit (BBA financing), total rental (MM financing) and incidental fee charges.  The upfront cost are processing fee, disbursement fee, legal fee, stamp duty and MRTA and incidental fee charges are late payment penalty fee, capital prepayment fee and early settlement fee.

While BBA profit and MM rental are conceptually different, the mechanism applied to compute the profit or rental is the same.  Both BBA and MM financings make use of annuity concept and standard mathematical amortization model.

There are many factors affecting the total home financings such as amount of financing, tenor, rate(s), age of customer, banks’ policies on advance or early payment or extra payment, instalment amount, payment pattern, profit during construction, late payment fee, capital prepayment fee, early settlement fee, banks’ incentives and government incentives. "

An Analytical Study on The Pricing of Islamic Home Financing and Conventional Home Loan

 

For my MSc. in Islamic Banking and Finance thesis, I decided to research on the pricing of Islamic Home Financing and compare it with conventional home loan. The motivation was to verify my belief that being an Islamic banking product does not make it cheaper or expensive although there were claims made that Islamic financing are more expensive than conventional loan.

Below is an excerpt from my Thesis abstract.

" This research paper attempts to analytically study the pricing of Islamic home financing versus conventional home loan to examine the competitiveness of the pricing of conventional home loan and Islamic home financing.  Specifically, this research will identify the components of loan and financing prices, the formula used in calculating the various price components and the factors that affect the price calculations.  This research will also gather available pricing related data and finally make comparisons of the various pricing components of conventional home loan and Islamic home financing.  The finding of this research shows that the pricing formula for conventional loan and Islamic financing are the same.  If all factors affecting pricing calculation are the same, the price of a conventional home loan and Islamic will be exactly the same.  What makes a loan or a financing more expensive than the other is the product feature and other terms and conditions imposed by the loan or financing providers.  There was some truth that product feature wise, Islamic BBA home financing appeared to be more expensive in the past.  Now that Islamic banking products have evolved, the pricing of floating rates BBA and MM financing have become very competitive with conventional home loan products. "