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.
House financing-I is a Syariah-Based financing facility to finance the purchase of all types of residential properties including houses, flats, apartments or condominiums. This financing facility can also be used to refinance existing housing loans, taken either from conventional housing loans or other house financing-i schemes. The amount of financing provided by the Islamic banking institution depends on the market value or the price of the property. The margin of financing could be up to 95% of the property value, depending on the policy of the Islamic banking institution. The period of financing can be as long as 30 years or until the purchaser reaches age 65. All the components to determine the selling price have to be fixed because the selling price has to be fixed at the time the contract is made. Hence, the profit rate for the BBA financing is fixed throughout the period of financing.
A customer purchases a house from the bank under the Bai' Bithaman Ajil (BBA) contract whereby the payment is on the deferred terms or usually by way of monthly installment. Islamic financing works on the concept of buying and selling where the banking institution purchases the property and subsequently sells it to you above the purchase price.
Modes of operation in The Bai' Bithaman as below:
BANK
NOVATION
DEVELOPER
CUSTOMER
flow of asset/commodity flow of fund
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 installment of the bank's selling price will not change throughout the tenure of the financing.
Buying a house is the single biggest purchase you will make in your life. Under conventional financing, the outstanding loan consists of principal plus the interest charged. The interest is actually the banking institution's cost in obtaining the funds. 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 capitalized and the capitalized amount will be subject to further interests.
DIFFERENCES BETWEEN TAKAFUL AND CONVENTIONAL INSURANCE
The account is known as Al-Tabarru', which means donation, the other one is treated in line with the principle of Al-Mudharabah. It specificies from the outset how the profits from Takaful investments are to be shared between the operator and the participants based on principles of Al-Mudharabah, the ratio could be 5:5 or 6:4 or 7:3 as agreed between the participant and the operator. Participants own the Takaful funds and managed by the operator. Participants give up individual rights to gain collective rights over contribution and benefits. Company is better known as operator, which acts as trustee, manager and also entrepreneur. The minimum age for a person to hold a Takaful certificate is 15 years and infant below 15 should also have the right to be insured under the supervision of respective guardian. Takaful practices are free from the elements of Riba and other prohibited elements, but is evolved around the elements of Al-Mudharabah, al-Tabarru' and other Syari'ah justified elements. The funds shall be invested in any interest free from Shari'ah justified scheme. The entire procedure shall comply the guidelines of the Shari'ah. Investment returns must not be driven by any unethical commercial activities. The entire operation aims at paving the way of brotherhood, solidarity and mutual cooperation. Regulations affecting Takaful are based on the Divine sanction Qur'an and Hadith.
Besides, there is hadith that mentions about the prohibition of gharar in buy and sale contract whereby Takaful is free from this characteristic.
أن النبى عليه الصلاة والسلام قد نهى عن بيع الغرر
Meaning: "Verily, the Prophet s.a.w. forbids gharar trading".
Modes of operation in wakalah concept as below:
Al- Wakalah is a contract of agency. According to this principle, a person (A) will delegates his right or business to other people (B) to act as his representative. B is known as the agent or Wakil. The agent is responsible to contribute his/her knowledge, skills and ability in performing the task assigned to them because both A and B have a contractual relationship. In Takaful operation, a Takaful company as the insurer/operator has the right to employ the agent either on a full-time or part-time basis. The agent is presenting his/her company in which these selected people have to promote and develop the products offered by their company as they are bound to the contract of al-Wakalah.
The Takaful operation is still new to the market compared to the conventional insurance companies. Thus, strategies must be taken into consideration in order to increase the awareness of its existence, as an alternative and substitutes to the existing conventional insurance system. Therefore, it is under the agent's responsibility to identify the potential participant and disseminate information regarding the concept and policy practiced in Takaful business. They need to explain thoroughly to these people so they will get comprehensive understanding and lead to no misconceptions.
Furthermore, the agent is obliged to convince people of its advantages compared to the conventional in order to gain competitive advantage and good credibility. This can also be a proof that Islam has always provides a comprehensive ways of life.
An agent may also assist the Takaful Company by collecting the fund. Since they are representing their company, it is very important for them to produce good image and build strong relationship in effort to maintain good credibility and integrity of Takaful business.
In modern days, there are increasing number of companies have embarked on implementing the concept of Al- Wakalah in their Takaful operation.
If we compare the modes of payment applied between both the Islamic and conventional insurance, we can see that they are basically different in several ways. In conventional insurance system, the agent will receive their commission by deducting some percentage contributed by the participants. For instance, Mr. X is appointed as an agent by one of the insurance company. In the agreement, it has been confined that Mr. X would get his commission of 20% from each participant. Let say the contribution paid for each participant is RM300, thus, he will receive a commission of RM60 per participant. However, Islamic insurance system believes that the above transaction is rather unfair. An agent is representing and working for the company. Therefore, they should be treated as an employee and the Takaful operator as the employer, who is obliged to pay sum amount of money in terms of salary to the appointed agent.
The above diagram explains how the al-Wakalah model is applied in Takaful fund such as General Takaful and Family Takaful. For example, A is the Takaful operator, B works as an agent or Wakil represents A and C as participants or policyholders of the Takaful business. Take note that C is obliged to pay his contribution (premium) to A. However, C could give his contribution to B as B has been authorized to collect the contributions not only from C as well as other participants. The contribution collected will then be pooled into the Takaful fund. The fund will be managed by A based on the principles of Mudharabah and tabarru`. Thus, it can be concluded that all participants are actual owner of the fund.
While, the insurance account is known as general insurance account and life insurance account of fund. It may offer bonus or profit in general terms only especially with profit policies, there is no exact specification with regard to the profit-sharing in contract. It may also decide to give or not to give bonus for any particular year depending on the result of the investment returns. The rate of bonus can vary from year to year up to the discretion of the Board of Directors of the company. Insurance is a buy-sale contract. In which policies are sold and the policy holders are the purchasers. Relationship between the company and the policy-holders is on one to one basis. The minimum age for a person to buy a policy is 16 years, but an infant between the age of 10 and 16 may also have the right to have it under respective guardian. Insurance practices involve Riba (interest) and some other elements, which may not be justified by the Shari'ah principles. The funds may also be invested in an interest-based scheme. They can also be invested in any scheme or project which may not be supported by the Shari'ah discipline. The operation aims a commercial gain on the basis of the principles of business. Insurance law is based on the human thoughts and cultures.
