How Does Islamic Personal Loan Work?

Many still do not understand how personal loans from Islamic banking differ from conventional banks. This article makes it easy with the known facts to help you understand Islamic personal loans and expand your financial options!

The Basics of Islamic Banking

Islamic banking is a Shariah-compliant banking which is the law of Islam as defined in the Quran, hadith and sunnah. The difference between conventional and Islamic banking is that no money is actually lent to the borrower because Islamic banking will “buy” the goods for the customer and then sell them to the agreed price. Islamic banking is governed by Islamic law and the rules of the financial industry, and it is well regulated just like conventional banking.

Islamic banks must adhere to certain principles and cannot charge interest. One of the principles of Islamic banking is to ensure that the products offered to the halal and shariah compliant customers. As such, there are shariah members who are qualified to give opinions on Islamic financial products. However, although the Islamic banking system differs from the conventional banking system, there are some similarities between the two. For example, Islamic banks offer products and services similar to those offered by conventional banks.

However, Islamic banks carry out activities in accordance with Islamic shariah principles which prohibit all matters as stated below: ·

  • Illegal business (alcohol, gambling, etc.) ·
  • Riba (high interest rate lending practices)
  • Gharar (speculative or dangerous sale where value is uncertain)
  • Zulm (exploitative, oppressive or cruel activities and practices)

Islamic bank operations in Malaysia also need to be carried out in accordance with certain procedures prescribed by the Shariah advisory council of Bank Negara (SAC). The board of advisors is the highest Islamic financial institution in Malaysia. Some of the responsibilities of the SAC include examining and confirming the legality of sharia law in Islamic financial products.

In Islamic principles, money has no intrinsic value and time does not produce any returns. Therefore, seeking compensation after lending money in the form of prohibited and unauthorized benefits in Islamic banking.

However, the value of money can be increased if invested which in turn increases the size, success and profitability. Thus Islamic banks impose a profit rate instead of interest rate on their financial products.

See also: Learn How Islamic Credit Cards Works

How Does Islamic Personal Loan Work?

Personal loans from Islamic banks in Malaysia are based on the application of the concept of Bai ‘Al-‘Inah . It is a concept widely used by Islamic financial institutions for ‘personal finance’ which is a term commonly used in Islamic banking. Bai ‘Al-‘Inah is a concept that involves the sale and repurchase of transactions by the seller (bank) based on deferred payment. The seller will sell to the buyer (customer) in cash.

The seller will then repurchase on a deferred payment basis where the price is higher than the cash price. In personal finance, the assets involved in the concept of Bai’Al-‘Inah to buy and sell will be cash. Thus, unlike conventional loans offered by conventional banks, Islamic banks will offer personal financing at the rate of profit that will be specified in the personal financing contract.

The list of Islamic banks in Malaysia is:

  • Affin Islamic Bank Berhad
  • Al Rajhi Banking & Investment Corporation (Malaysia) Berhad
  • Alliance Islamic Bank Berhad
  • AmBank Islamic Berhad
  • Asian Finance Bank Berhad
  • Bank Islam Malaysia Berhad
  • Bank Muamalat Malaysia Berhad
  • CIMB Islamic Bank Berhad
  • HSBC Amanah Malaysia Berhad
  • Hong Leong Islamic Bank Berhad
  • Kuwait Finance House (Malaysia) Berhad
  • Maybank Islamic Berhad
  • OCBC Al-Amin Bank Berhad
  • Public Islamic Bank Berhad
  • RHB Islamic Bank Berhad
  • Standard Chartered Saadiq Berhad

In addition to the Bai’Al-‘Inah concept some Islamic banks apply the principle of Shariah Murabahah through Tawarruq for personal financing. Murabahah is a type of sale in which a commodity is sold for cash or deferred. Tawarruq refers to the purchase of an asset at a deferred price and then sells it to a third party for cash.

Most Islamic personal loans also have Takaful (insurance) coverage but they are not required. So you can choose to take out a personal loan with or without Takaful. However, the profit rate will depend on whether you decide to take out personal financing with Takaful coverage.

This rate is lower if you take Takaful, as it reduces the risk for banks and because banks can also make money from selling you protection. Among the advantages of Islamic personal financing if there is a late payment, the charges are lower than conventional loans because the rate of compound interest ( compounding interest ) is prohibited.

Best Islamic Personal Loans in Malaysia 

Maybank Islamic Personal Loans

  • Minimum amount is RM5,000
  • Maximum amount of RM100,000
  • Fixed monthly installments
  • Minimum 2 years, maximum 6 years

Hong Leong Islamic Personal Loan-i

  • Minimum amount of RM5,000 and Maximum RM150,000
  • The interest rate is 7.5% per annum up to 13.5% per annum, but the final profit rate will be stated in the Notice of Disbursement to be given to you upon payment
  • Takaful is optional
  • Approval rate is fast in 48 hours
  • Minimum income eligibility of RM2,000 per month

Interested? You can apply here.

Bank Rakyat Private Loans-i

  • Provided for private sector professionals • Minimum RM3,000 and maximum RM150,000
  • The profit rate is 6.16% without Takaful, 6.74% without Takaful.
  • Ibra (rebate) will be given for early payment based on the profit earned.
  • Minimum loan term of 1 year, maximum loan term of 10 years
  • Minimum income eligibility of RM2,000 per month

Islamic banking is gaining worldwide recognition with Muslim and non-Muslim customers. Therefore, if the principles of Islamic banking appeal to you there are other financial products that you should check for personal financing. For more Shariah-compliant personal loans and Islamic credit card options, try our comparison tool.


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