The unbelievable Islamic banking loan

Almost every bank today in Malaysia have Islamic financial/banking section. Is the popularity due to the demand of customers or there is some hidden agenda behind it? That's what we are going to look at in this article. Many would be surprise once the truth is revealed.

Today we could see many are talking about Malaysia being the No.1 Islamic financial hub in the world. It is something we all should be proud of. Yet, many still do not know how it actually works. Many assumes since its Islamic, it means the rates should favor the people and not the bank. Many thinks it's a pure form of investment. Yet, there are something in it which everyone should be watching out for which could diarrhoea your money. Here is why?

Conventional loan uses principal or balance reducing method to calculate your interest. This means that the interest is charged based upon your principal balance every year. The principal will reduce whenever you make a payment. Every time you make a monthly payment, you are actually paying interest and reducing the principal with whatever left after paying interest. So, making extra payment to your loan at any times would definitely reduce the total interest charged as your principal is reduced.

Islamic loan is calculated exactly like your car hire purchase loan. The interest (even thou that's not what they are calling it;they call it profit rate) is charged on the borrowed principal amount times the number of years up front. What does this mean? It means you are paying a lot more interest on your loan. Not just that, paying any additional payment amount will not reduce your total interest as it's already charged up-front, even thou they have some rebate when you have finish paying your loan earlier. But, the rebate is useless as the bank have already charged most of the interest at the beginning. I will write another article on this in near future and how to deal with it.

Here are some illustrations to compare conventional loan and Islamic loan.


Check out this table to make comparison between conventional loan and Islamic loan.


No wonder all banks, including those foreign origin such as HSBC and Standard Charterted are rushing to open Islamic financial service. The amount of profit they could earn is unbelievable. They could earn double compared to conventional loan. This is really unfair to the people. By right they should be charging less than 5% for Islamic loan to make it equivalent to conventional loan. Let's see what is the true effective interest rate for the Islamic loan. Hope nobody will get heart attack after looking at the figure.

A 5% interest (profit rate) for a 10yrs Islamic loan is equivalent to.... Roll the drum...
Yes, my friend. There's nothing wrong with your eye. It is 29.97%. FYI, just like a hire purchase loan, the shorter your loan tenure the lower the effective interest rate, and the longer the tenure the higher the effective interest rate. So, just imagine those who have taken Islamic housing loan 30 years. They would be paying through their nose.

Who's fault is it? Is it the religion itself at fault? No, my friend. It have nothing wrong with the religion. It's the greedy corporate trying to suck all the money out of you by showing innocent faces at you. There is nothing wrong with the concept. They just need to charge a lower profit.

So, is all Islamic loan have disadvantages? There are some advantages of Islamic loan. But, the disadvantages outweigh advantages. Here are the advantages:

1. If your payment overdue, there are no late payment penalty charges.
2. Even if you overdue, there are no additional interest charged on the overdue amount. They would only charge accordingly.

Btw, there was another disadvantages until the court overruled it in Affin Bank Bhd vs Zulkifli Abdullah case. Check out this links for more details:

Call For More Transparent Islamic Banking Documents
Affin Bank Bhd vs Zulkifli Abdullah

How about from tax planning point of view? Islamic loan is still at disadvantage, as they are calling it as profit rate and not interest rate. So, too bad if you have invested in a property by securing an Islamic loan. You can't do any interest rate deduction from your rental income.

So, friends.. Until the profit rate is reduced to a acceptable rate, Islamic loan is a big NO NO.