Islamic personal loans in Malaysia are commonly referred to with the term ‘personal financing’. It is a term that is widely used in Islamic banking instead of the term ‘personal loan’, which is used in conventional banking.
Islamic personal financing in Malaysia is based on the concept of Bai’ Al-‘Inah. It is a concept which involves selling and buying back an asset by a seller (bank) on a deferred payment basis. A seller (bank) will sell to a buyer (client) on a cash basis. The seller will later buy back the transaction on a deferred payment basis, where the price is higher than the cash price. It can also be applied when a seller sells to a buyer on a deferred basis. A seller will later buy back the transaction on a cash basis at a price which is lower than the deferred price, thus the transaction amounts to a loan. In personal financing, the asset involved in the Bai’Al-‘Inah concept of buying and selling would be the cash.
Other Shariah concepts used by Islamic banks are the Shariah principle of Murabahah via Tawarruq for personal financing. By definition, Murabahah is a type of sale where the commodity is sold for cash or at a deferred price. Tawarruq refers to purchasing an asset with a deferred price, and then selling it to a third party to obtain cash.
Islamic banks will then charge customers an amount known as a ‘profit rate’ (essentially an interest rate) for providing them with a personal financing facility. This is because charging interest is not allowed in Islamic banking. Islamic banking uses the term profit rate rather than interest rate because of the way the financing is structured. Therefore, unlike personal loans offered by conventional banks, which have interest rates, Islamic banks will offer personal financing with a profit rate that will be defined in the personal financing contract.
Under Islamic banking, personal financing is not considered a loan, but instead as the purchase and resale of an actual asset. For example, it can be a car, house, commodity or a stock, depending on the type of financing you need.