Affordable financing for homeownership in Sabah

TYPICALLY, one finds it is explicitly difficult to get full ownership of a house while he is still young. Savings or investments are outlets which could help himself to get the property at his convenience, but his age is somehow an antagonist that shortens his time to get full ownership for the house in the long run.

Affordable financing facility is the key for a person to purchase a house that promotes his homeownership for an improved well-being. There is a dire need for a so-called “Islamic” affordable financing to exist in Sabah. The reasons are two-fold.

Firstly, Islamic banks have mostly targeted the rich and middle-class people instead of providing services alike to the poor and needy who also exist at large. Secondly, taking up a mortgage from Islamic banks is much pricier than that of their conventional peers and the requirements by the former are quite strict that a needy person could not afford it.

Sabah has a relatively growing number of housing projects in East Malaysia. Sabah properties are generally under the “Malaysia My Second Home Programme” which may explain why Kota Kinabalu, for instance, is the heart of domestic and foreign potential home buyers. Sabah is also subject to the government’s My First Home Scheme.

This week, I aim to explicate affordable financing from the context of Islamic mortgage. For this purpose, three questions are in need of answers. Question #1 What are the features of affordable financing? Question #2 - What are the indicators involved? Question #3 - What are the issues related to affordable financing?

There are four (4) features of affordable financing but which are not confined to: The first one is the purpose. There is an argument that claims the offering of affordable financing should benefit the customers’ homeownership and banks’ profits as it captures a “responsible financing” notion. It is aimed at balancing the need for profit and social responsibility of Islamic banks to society at large.

The second feature is the pricing mechanism. The pricing mechanism used should reflect the level of creditworthiness and the genuine need of customers. The pricing level should not be too high or too low, as the former benefits the bank at the cost of the customer while the latter benefits the customer at the expense of the bank. Zakat or sadaqah funds are in need to cover missing instalments when a customer faces financial hardship.

The third feature is the segmented customer. Customers are differed according to their socio-economic background. Affordable financing is thus confined to middle class and poor/needy mainly for the first homeownership.

The fourth feature is well-being. Affordable financing is projected to maintain an individual’s level of halal consumption even when a new financing is approved. A financing, although Islamic, is not considered as affordable when one’s well-being including his current consumption is distracted. Thus, Islamic banks should promote improved customers’ well-being through affordable financing to regain the claim not only as “Islamic” but also as “affordable”. No leeway is given for any extreme consumerisms.

There are a few indicators that can be used to call a financing facility as an affordable financing but which are not limited to: Firstly, payment holiday. Offering payment holiday on an Islamic mortgage sounds generous, but it can also embrace some bad wonders. Commonly, payment holiday is aimed at helping bank customers for genuine purposes. Compensating the missing a few instalments with zakat or sadaqah funds by banks can be an alternative pathway to ensure the financing tenure is maintained instead of extending it. Yet, more research is needed to claim whether it is feasible or not. The current claim is groundless.

Secondly, debt service ratio (DSR), computing as total monthly commitment divided by total monthly income and multiplied by 100 per cent. It governs the maximum financing amount one can ask for. According to Bank Negara Malaysia (2015), an aggregate DSR of below 60 per cent for 80 per cent of new approved loans/financing is prudent and resilient in underwriting standards of banks.

Thirdly, maqasid well-being index (MWBi). Well-being refers to a satisfactory condition of one’s life that is emanated from good actions. Individuals who have a score of 3.75 and above are deliberated to have a high MWBi, denoting the taking of the financing breeds a better well-being in servicing their debts. More research, however, is needed for lucidity and visibility of the index to Islamic mortgage.

Three (3) points are provided for the third question. Firstly, the pricing of affordable financing is related to the purchase price of the house. The rising cost for materials used for housing development emanated from various factors can lead to the increment in price. Developers face the challenge of supplying the so-called “affordably-priced properties” at the expense of lower lucrativeness. This has a direct effect on the price of Islamic home financing that needs to service the customers. The customers explicitly bear two prices, the one that is from the purchase price from developers and the second that is from the mark-up from banks.

Secondly, there exists a limited consensus with respect to the definition of affordable financing in property. The logic of defining affordable financing from the context of affordable housing may not be directly applicable, the two are built from different contexts although they are related. One size does not fit all. Can a financing be known as affordable financing when it is offered below the market rate? Research is needed to close the gap.

Thirdly, affordable financing has a great potential for demand but it is rather weakened by lack of supply. The distribution of affordable financing is somewhat scarce for Sabahans. There is a case when a Sabahan finds difficulty in fulfilling his dream as if affordable financing is limited or expensive. Hence, a jumble exists whether Islamic financing is affordable financing or not? He assumes an Islamic mortgage must be affordable as far as it brings forward the religion of Islam in the mortgage industry. Is it true?

All in all, the consumer who approaches the Islamic bank for a mortgage is not only financing a house but also a “home”, which at this point should provide a wakeup call to Islamic banks that financing a house is an expensive decision which affects a family’s well-being. The advent of Islamic affordable financing is somewhat a means to greater competitive decisions where the benefits are equally felt by a bank and a customer. The former earns profit by doing good mortgage and the latter owns his dream house by patronising the bank.

Given this assertion, it is timely for the bank and other parties involved to make a cosmetic change to define Islamic mortgage from the context of affordability where different packages are offered for different customers where the concepts of distinctiveness, welfare and fairness (DWF) are upheld, at least.