Islamic mortgages in Malaysia are growing at three times the pace of non-syariah-compliant home loans, boosted by tax incentives and flexible payments.
Residential loans that comply with the tenets of Islam increased by an average 37 per cent in the past five years, compared with 11 per cent for non-Islamic financing, central bank data show. Syariah-compliant lending for housing purchases reached an all-time high of RM40.6 billion (US$12.9 billion) in April, or 15 per cent of the RM270 billion market.
Malaysia’s government is providing a 20 per cent discount on stamp duty for Islamic mortgages, seeking to expand syariah banking assets to 40 per cent of the total by 2020 from 22 per cent, or RM435 billion last year. Lenders are also offering more flexibility on the loans so that monthly payments rise and fall to reflect changes in the benchmark interest rate, which is currently at 3 per cent after being reduced to a record low of 2 per cent in 2009.
“Demand is healthy and should continue to gain traction,” Badlisyah Abdul Ghani, chief executive officer at Kuala Lumpur- based CIMB Islamic Bank Bhd, the country’s second-largest lender, said in a June 11 interview. “Given the incentives and government aspirations, syariah home loans can easily account for 30 per cent of total lending for properties by 2020.”
Malaysia, which pioneered Islamic finance 30 years ago, is promoting syariah-compliant mortgages as it seeks to enhance its position as a global hub for the industry. The tax breaks are attracting non-Muslim investors looking to buy homes in the nation where 60 per cent of the 29 million people practice the religion, Badlisyah said.
Under syariah law, which includes the concept of risk- sharing, home buyers have a number of financing options such as Ijarah, where the bank buys property and leases it back. In a Bai Bithaman Ajil contract, the lender purchases the dwelling and sells it to the customer at a mark-up, with repayments made via installments.
The government started its “My First Home Scheme” in October 2010 to spur property market growth. It raised the borrowing limit on house purchases for workers earning less than RM3,000 a month in 2011 to RM400,000, from as low as RM100,000. No down payment is required. First-time buyers are also allowed to use money from their state pension funds.
The average house price across the country rose at a compounded rate of 3.5 per cent last decade and reached RM223,270 at the end of 2010, outpacing inflation of 2.2 per cent over the period, according to Terence Wong, the head of research at Kuala Lumpur-based CIMB Investment Bank Bhd. Relative to the “mean” household income, the cost is the lowest in Asia at 4.6 times, he said.
“The house-to-earnings ratio is lower than Thailand and Indonesia,” Wong said in a June 14 interview. “Even 7.4 times in Kuala Lumpur is below the region’s average of 11.4, making the capital downright cheap.”
Islamic mortgages, which forbid interest payments, offer more flexibility in terms of a default than non-Islamic housing loans, according to OCBC Al-Amin Bank Bhd, the Kuala Lumpur- based syariah-compliant unit of Oversea-Chinese Banking Corp in Singapore.
“The penalty charged on the default amount is much lower compared with conventional housing loans because Shariah boards don’t want Islamic banks to burden customers,” Syed Abdull Aziz Jailani Syed Kechik, CEO at OCBC Al-Amin, said in a June 8 interview. “Syariah boards allow banks to charge customers for the cost incurred in managing the default but you can’t make a profit out of it.”
Islamic banking assets in the Southeast Asian nation rose at an annual rate of 21 per cent in the past five years, while syariah-compliant home loans have increased every month since December 2006, according to data from the central bank.
There’s still room for further growth, according to the Kuala Lumpur-based unit of HSBC Holdings Plc, the top arranger for global sales of Islamic bonds, or sukuk, this year.
Sukuk issuance almost doubled to US$19.5 billion in 2012 from US$10.6 billion in the same period last year, according to data compiled by Bloomberg. The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded ringgit- denominated notes, increased 0.1 per cent last week to a record 108.241, taking gains this year to 2.4 per cent.
Average yields on sukuk sold globally declined seven basis points, or 0.07 percentage point, last week to 3.62 per cent, the least since April 30, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between average yields and the London interbank offered rate, or Libor, narrowed three basis points to 260 basis points, the HSBC index shows.
The yield on Malaysia’s 3.928 per cent Islamic bonds maturing in 2015 declined two basis points to 1.93 per cent yesterday, according to data compiled by Bloomberg. The difference in yields between Dubai’s 6.396 per cent November 2014 securities and Malaysia’s debt narrowed seven basis points to 173 basis points, a record low. Islamic bonds sold to international investors returned 4.2 per cent in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 6.9 per cent, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.
“People are more receptive to Islamic finance in the Southeast Asian nation,” Rafe Haneef, CEO at HSBC Amanah Malaysia Bhd. in Kuala Lumpur, said in an interview on June 13. “Islamic mortgages aren’t limited to Muslims.”
Malaysia has 24 commercial banks and 17 financial institutions providing home loans that comply with religious tenets, according to the central bank’s website. The government waives stamp duty on syariah-compliant mortgages for people looking to refinance their non-Islamic borrowings, CIMB’s Badlisyah said.
Home buyers prefer Islamic financing packages because they are “attractive and transparent,” Muzaffar Hisham, CEO of Maybank Islamic Bank Bhd, a unit of Malayan Banking Bhd, the country’s biggest lender, said in an e-mail on June 16.
“The government’s incentive schemes such as tax and stamp duty remissions, as well as the growing awareness of Islamic products, are driving growth in Islamic mortgages,” Kuala Lumpur-based Muzaffar said.
(Business Times / 19 June 2012)
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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com
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