More Gen-Y customers opting for Islamic home financing in Labuan
credit risk and high operating costs matter.
Some of the potential problems faced is the need to chase monthly instalments from customers and house buyers’ non-performing loans. These problems are supposedly managed by banks, not developers.
This article reports some of the latest responses of Gen-Y customers on the issue and reasons why Islamic home financing can stay unperturbed despite the proposed scheme. Indeed, Islamic banks have offered various types of Islamic home financing products to capture their customers’ different needs for different types of properties.
For instance, a customer who purchases a complete property can approach Bank Islam Malaysia Berhad (BIMB) for tawarruq financing facility while he can approach Bank Muamalat Malaysia Berhad (BMMB) for istisna financing facility if he intends to build a house on his own land.
In contrast, the proposed developer loan scheme provides an alternative for house buyers facing difficulties in securing both Islamic and conventional banks to finance their house purchase. This indicates that the banks are under the weather.
To cope with this issue, an online survey of 186 bank customers was recently conducted in Labuan to examine the Gen-Y’s willingness to opt for Islamic home financing despite the proposed scheme.
Two questions were asked: (Q1) Does the developer loan scheme give you a better option for mortgage (Yes/No), (Q2) Which of these is your preference for your future mortgage (Choose one only) (A: Developer loan scheme, B: Islamic home financing).
Concerning Q1: 80.1 per cent (149/186) of the respondents believed that the scheme did not offer a better option for their mortgage while the rest concurred with it. Concerning Q2: 10.8 per cent (20/186) of the respondents opted the scheme while 89.2 per cent (166/186) opted for Islamic home financing.
Some reasons are provided to explain why Gen-Y customers, in majority, opt for Islamic home financing instead of the scheme:
Shariah principles – Islamic home financing products are governed by Shariah principles where ethical principles and values are established to allow better governance of the products. Unlike the developer loan scheme, Islamic banks approve mortgage applications, to a certain extent, based on the customers’ creditworthiness instead of the banks’ claim for profit. This concern has been deliberated by BIMB where its approval rate is more than 70 per cent and also suggesting, somewhat, the maqasid al-Shariah is taken into account.
Large scale of financing – Islamic banks have financial expertise and transactional experience to manage a large scale of financing involving a large number of house buyers. Developers, on the other hand, will face difficulty when they are offering a large scale of mortgage to their clients, unless if they introduce their own banks to support the scheme otherwise.
The banks also enjoy economics of scale, when the cost of financing is reduced with an increased number of financing approvals while it is slightly absent in its peers.
Established deposit-financing facility – In essence, Islamic banks have sufficient funds to support the growing number of mortgage applications from customers.
They can easily attract new deposits to finance long term assets (i.e. mortgages) via their creative and innovative deposit products. Developers, to a certain extent, have limited funds as they are reliant on the units sold to house buyers. In some cases, however, developers rely on banks to finance their housing projects, leaving them particularly vulnerable to interest rate risk and liquidity.
Competitive rate – Based on the scheme, house buyers will be charged with an interest rate of between 12 and 18 per cent for those with and without collaterals, respectively, leaving the buyers in stress to service loans at such high interest rates.
The rates, in fact, are expensive compared to Islamic base financing rate. For instance, BIMB offers 6.60 per cent of the base financing rate as of July 27, 2016, which is cheaper than the scheme. In fact, the ceiling rate is given for floating rate based home financing to protect the customers’ monthly instalment.
All told, the scheme proposed is essentially suitable for selected property developers (who do have the financial strength) and is not applicable to all developers. Given the results of this survey, there exists evidence that Islamic banks have designed attractive promotion packages with an improved customer service to attract Gen-Y customers in Labuan for mortgages.
Nevertheless, it is also essential for the banks to work with developers by fostering a sort of smart partnership with them, which in turn will help unqualified house buyers to obtain full housing financing in a safer way.
*The author is a Senior Lecturer/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance.