Did you know that there are a few types of financing available in Malaysia?
Type of Financing
Here is the list of financing option that is available to us:
- Term financing (also known as fixed-rate)
- Variable financing
Term Financing
Term financing [1] permits a consistent repayment plan. Maintaining a steady monthly instalment over the entire financing repayment duration. In Malaysia, this form of financing for home financing has been the customary practice (previously). Offering customers a transparent repayment schedule and ensuring banks can predict interest payments reliably.
Variable Financing
In 2003, Bank Negara Malaysia, BNM introduced a new financial option as an alternative to the usual fixed-rate financing. This new option is called variable rate financing. Aims to help Islamic financial institutions manage the risk they face when their profits don’t match the rates offered on deposits.
Basically, this new system lets these institutions change the profit rates on loans. Which helps them offer better rates to people who deposit money. This means that customers who put money in Islamic banks can get good returns. Similar to what they might get in conventional banks.
Without this option, people might move their money from Islamic banks to regular ones. Which in turn could hurt the Islamic banking system. Variable-rate financing is an improvement on the fixed-rate financing system.
Normally, in fixed-rate financing. The selling price of something bought on credit (read financing) like a house includes a set of profit rate that is higher. However, with variable-rate financing, the selling price and payments are adjusted regularly to match the current market rates. Making it more in line with what is happening in the market.
The Mechanism
In simple terms, when a Bank buys something from a customer and then sells it back on a payment plan, it’s like taking a loan from the Bank. Imagine the Bank pays for an item immediately and then you pay the Bank back in monthly instalments over some time.
The Example
Let’s say the Bank buys something from you for a higher price. Then, you agree to pay back a fixed amount every month. If the financing rates set by the Bank are higher than what’s happening in the market, they’ll give you a discount (called a rebate) on what you owe each month. For instance, if the Bank’s financing rate is 12% but the market rate (read OPR) is 10%, they’ll subtract the difference from what you have to pay back each month.
But if the market rate goes up later, let’s say to 11%, the Bank won’t discount so much. This way, the Bank can adjust how much they charge you each month based on what is happening in the market. This kind of system helps the bank give better returns to people who put money in the Bank.
They set a high maximum rate to protect you. If the market rate goes beyond what they’ve set, your rate won’t go any higher. This gives you some assurance that you won’t pay more than the maximum financing rate they’ve set.
When the financing is finished, if there’s any difference between what you paid and what you were supposed to pay, the bank will give you that difference back as a rebate. Also, if you decide to pay off the loan early, the bank has to give you some money back based on what you’ve paid and the current rates.
The bank can also adjust the repayment period if the rates change but they have to follow some rules. The way Bank figure out how safe this kind of financing is for the Bank is the same as they do for regular fixed-rate loans.
Source:
- BNM Glossary
- Introduction of Islamic Variable Rate Mechanism, BNM