When it comes to financing and getting loans, Malaysia’s financial institutions offer a variety of products and services. For the average consumer like you and I, this can cause headaches. But fret not, because the main thing to understand is that there are two main types of financing, namely conventional loans and Islamic loans. While the latter is gaining popularity, many are still in the dark about it.

What are they, what are the differences between the two and why would you choose Islamic financing over conventional ones? Let’s clear the air on these two products so you can make an informed choice right away when approaching your local bank for financial assistance.

What is a conventional loan?

A conventional loan is when a bank lends you some money and you pay the amount borrowed back to them in installments over a specified period of time. The payback amount is usually inclusive of some amount of interest that is regarded as a profit to the bank. Interest rates can be a fixed rate or based on a floating rate.

What is an Islamic loan?

Meanwhile, an Islamic loan works on a slightly different concept. When you want to borrow money from the bank to buy a house for example, the bank essentially “buys” the house on your behalf and sells it to you at a profit.

A contract is drawn up to define the profit rate to the bank, and these can be either a fixed or a floating rate. Similar to a conventional loan, the payment to the bank is staggered over a period of time.

It is important to note that Islamic loans adhere to Islamic laws known as Syariah law. At the same time, it is also closely monitored by the financial industry’s rules and regulations.

How do I choose?

For Muslims, the choice is easy. Many will choose to go for an Islamic loan provided by an Islamic banking institution as it is in line with their religious beliefs and they are assured of a “halal” or clean product.

This is because Islamic financing adheres to the principles of Islam and follows Islamic banking and economics practices. It rules out activities that are prohibited by the religion.

For example, Islamic financing prohibits investments in businesses or activities considered “haram” or sinful in Islam such as gambling houses or alcohol production businesses. By taking out an Islamic loan, Muslim borrowers are assured that the money transacted comes from “clean” sources.

I’m not a Muslim. Can I still choose Islamic financing?

Certainly! There is no reason why non-Muslims cannot utilise Islamic financing. There is no discrimination factor against non-Muslims in such a case. In fact, non-Muslims who are selective over the sources of their finances may find that the concept of Islamic financing agreeable.

In a nutshell, Islamic finance works like a normal bank in that it delivers financial products and services to customers. The main differences are:

  1. The concept of borrowing and lending is slightly different from conventional banks. In Islamic financing, there is no concept of interest. Instead, the financing is based on the concept of sharing, sale or leasing.
  2. Islamic banks engage in morally-acceptable activities, thus will not indulge in financing socially questionable activities such as gambling and other vices.