Over the years, Islamic finance has grown at a rapid pace globally and is now a market worth more than $3.5 trillion. I set out to explain the 5 advantages that Islamic finance offers.
It helps by assisting financial inclusion
World Bank defines financial inclusion as ‘Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.’ (Worldbank.org, 2017).
The conventional banking system is based on interest payments at a rate pre-set on the deposits of money. Payment and receipt of interest is prohibited under Shariah Law, so Muslims abstain from banking. However, through Islamic banking, financial inclusion can be promoted and bring a larger pool of savings in the local and global economy.
Reducing the impact of harmful products and practices
Shariah principles forbid any transactions that support industries or activities which are forbidden in Islam. For example, usury, speculation, and gambling – whether these are legal or not in the place of transaction.
Principle of financial justice
Financial justice is a requirement that helps Islamic finance products function in a Shariah compliant way. The Western financial system looks at making profit through interest payments and makes the beneficiary liable for any risk. Islamic finance paves way for the sharing of profit/loss and risk involved in proportional manner
Financial justice is a basic requirement for the functioning of Islamic finance products. Western or conventional financing looks forward to profit through interest payments and makes the beneficiary completely liable for any risk. Contrary to this, Islamic financing paves the way for the sharing of net profit/loss and the risk involved in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on profits of a project, it is necessary that he/she should also carry a proportional share of the loss of that project.
Encouraging stability in investments
In Islamic finance, investments are approached with a slower, insightful decision-making process, when compared to conventional finance. Companies whose financial practices and operations are too risky are usually kept away by Islamic financing companies. By performing intensive audits and analyses, Islamic finance promotes the reduction of risk and creates the space for a greater investment stability.
Accelerating economic development
Islamic finance companies certainly have profit creation and growth as their objectives. For which, they choose to invest in businesses based on their potential for growth and success. Thus in the Islamic banking industry, each bank will invest in promising business ventures and attempt to out-perform its competitors, in order to attract more funds from its depositors. This will eventually result in a high return on investments both for the bank and the depositors. This is unlikely in a conventional bank, where depositors redeem returns on their deposits based on a pre-determined interest rate.
Financial markets are seeing a growing success story with Islamic finance, a unique form of investment which corresponds with the values of socially responsible investing which is also Shariah Compliant.
Islamic finance is an equitable mode of finance that derives its principles from the Shariah, the Islamic law. The most distinctive element of Islamic finance is the prohibition of interest, whether nominal or excessive, simple or compound, fixed or floating. Shariah Compliant financial transactions are based on the essential maxim of sharing risk and reward. The customer and the financier share the risk of any investment on agreed terms and divide any profits between them. Islamic finance does not allow creating new financial risks in order to gain profit; it is about protecting society from trickery, fraud and social tensions.
Shariah products also stress accountability, fairness, and transparency. In addition to risk sharing and the prohibition of interest, under the principles of Shariah, investment is also disallowed in businesses that deal with alcohol, pork, gambling, weapons, tobacco, media, ‘conventional’ financial institutions, pornography and anything else which it deems ‘Haraam’ (unlawful). It also ensures that not only underlying investments but also the contractual terms agreed between investors and the investment manager conform to Islamic principles.
Islam also disallows certain contracts due to inherent elements which render them ‘Haraam’ (unlawful). This concept covers particular types of uncertainty or contingency in contracts such as options trading, short selling, futures, derivatives, and conventional insurance. All Islamic investment fund companies have appointed Shariah boards which not only provide approvals on individual investments on a regular basis but also conduct a Shariah audit annually to ensure all activities of investment funds are fully compliant. All dividends and profits are screened by the Shariah Audit Committee to ensure full Shariah Compliance of the final declared dividend or profit.
Shariah Compliance Screening
There are certain criteria which must be fulfilled when investing in a company for such an investment to be Shariah Compliant. There are essentially two stages involved in the Shariah screening process. It is important that the holding company including the subsidiary company fulfills the industry screen. For example, a vehicle asset manufacturing company may have a vehicle asset financing subsidiary which generates impermissible income via conventional and interest-bearing lending practices, therefore investing in the holding company would be impermissible.
1. Sharia Industry Screen
The following business activities are impermissible from a Shariah point of view: 1) Conventional Banking and Insurance 2) Alcohol 3) Pork and all non-Halal food items 4) Gambling 5) Tobacco 6) Adult Entertainment and all other impermissible actions as decided by the Shariah Supervisory Board 7) Conventional derivatives and 8) Weapons
2. Shariah Financial Screen
The Shariah Financial Screen monitors the impact of non-Shariah Compliant practices of a company and its potential impact on corporate performance. The investment companies must be compliant with the Shariah Financial Ratios as decided by the Shariah Supervisory Board.
Screening means that: 1) Conventional Debt/Total Market Capitalization must be less than 33 percent 2) Cash +Interest Bearing Deposits/Total Market Capitalization must be less than 33 percent 3) Total Interest/Revenue must be less than 2 percent.
Shariah Governance and Shariah Board
Shariah Governance refers to the structured policies and procedures of the Islamic Investment Fund to ensure full Shariah Compliance. All Shariah-compliant investments must be certified by experts in Shariah, generally through a panel or board comprised of respected Shariah scholars who are qualified to issue “Fatwas” (religious rulings) on financial transactions. This panel of Shariah experts ensures full compliance of all Shariah-compliant investment funds. The Shariah Supervisory Board not only provides initial approvals on investment objectives and investment strategy of all funds but also reviews the investments periodically to ensure the continued compliance of the investments of the funds to Islamic principles. Moreover, the Shariah Audit Committee conducts annual Shariah audits of all funds to ensure adherence to their rulings during the year.
Common Shariah Investment Funds
The most common forms of Shariah-compliant investment funds are equity funds, private equity funds, trade finance funds, real estate funds, and money market funds. Such funds are either unlisted private funds, listed funds, private or public partnerships. These investment funds employ Islamic contracts which ensure that the terms and rights of all parties are safeguarded in conformity with Islamic principles (examples and definitions are given below).
Musharakah: A partnership where profits are shared according to a pre-agreed ratio while losses are shared in proportion to the capital investment of each partner. This equity financing arrangement is widely regarded as the purest form of Islamic financing.
Mudarabah: An investment partnership under which the investor (the “Rab-ul-Mal”) provides capital to the investment manager (the “Mudarib”) in order to undertake a business or an investment activity. While profits are shared on a pre-agreed ratio, losses are borne only by the investor.
Ijarah: An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows the investor to earn profits by charging rentals on the asset leased to the user.
Murabaha: Purchase and resale of an asset. Instead of lending money, the investor purchases the specific asset from a third party and resells it at a predetermined higher price to the user. By paying this higher price over installments, the user of the asset effectively obtains credit without paying interest.
The classical equity instruments in Islamic commercial law (musharakah and mudarabah) require partnership and profit sharing. In financial markets, investing in stocks and equity funds is permitted but must conform to certain guidelines. Conventional interest-based lending or bonds are not permitted. Islam encourages asset-backed financing with the risk being shared by the provider and the user of the asset.
Basic Fundamentals
Shariah Investments must follow the same rigorous regulatory and compliance requirements as conventional funds to ensure transparency, reliability, and sustainability for investors. A mere Shariah certificate is not sufficient proof or attestation to the credibility of Management or the business case of such investment funds. Investors should seek proper professional advice and conduct background checks before undertaking to make any investment.
Investors must seek the following basic fundamentals in any investment:
1. Regulatory Compliance– Never invest your hard earned money in a non-regulated entity as the funds are not monitored or reported to the regulator and there is very little recourse in the event of default or irregularity. A Shariah fund does not mean your money is necessarily protected from fraud, theft, and mismanagement. It has happened in the past, so beware.
2. Governance Structure – Never invest in one-man band investments as that is a recipe for Ponzi schemes and financial ruin. Investigate Management and Ownership carefully. There are many wannabe investment gurus and financial advisors who have little or no experience in financial investment management.
3. Risk and Audit – Always seek audited financials signed and endorsed by a reputable firm before investing in any company. The investment fund must have an audit and risk committee that oversees risk management and internal audit functions.
4. Target Assets – Always understand the underlying assets of the fund. Many Shariah funds are not balanced and are over-aggressive exposing you to unnecessary high risk.
5. Shariah Audit – A Shariah Audit signed by a reputed scholar is extremely important as that allows external parties to review the operations of the fund internally.
6. The rate of Return (ROI) – Always seek market-related returns or slightly above average. High returns are signs of systemic and inherent financial risks to the business models of such investment funds which offer high returns. Remember if it is too good to be true, it probably is. The fund fact sheet will be a good indicator of historical performance.
7. Shariah Certification – A fund being Shariah Compliant is not an endorsement of the credibility of any investment. Every individual must conduct their own research and investigation before making a decision.
8. Emotion – Greed, and fear are the most common emotions which have led to the destruction of many empires. Let your decisions be guided by sound and robust financial and economic wisdom.
Gold is a commodity that holds a universal value throughout the globe and has been used as a trading commodity throughout the ages. The rare mineral is always recognised as a high valued form of currency and that is why many people look towards gold, in hopes of growing their existing wealth.
Unfortunately, there have been scams in Malaysia that saw individual investors putting in as much as RM200,000 for non-existent gold. The report also stated that investors in the Klang Valley alone had lost RM340 million to these scams.
It is not surprising why some investors are sceptical about investing in gold, unless there is a physical form factor that they can keep. However, having a gold bar at home can be risky in the case of theft. With scams and the danger of having physical gold in mind, would gold still be a good investment?
Where Do I Get it?
For a seasoned player who would like to diversify their portfolio, there is always the option of purchasing gold via our banking systems. Banks like CIMB Bank, Public Bank, UOB, Maybank, Kuwait Finance House all offer a gold investment account.
These investment accounts allow you to purchase and sell gold at the bank’s set price without having any gold in its physical form factor. With most of these accounts, you can get started with as little as owning a single gram of gold.
Are Gold Investments Really Safe?
According to the financial eggheads over at the balance, gold is not just a commodity for safe haven, it is also a direct investment. It does not churn out any dividends or interest. It is directly related to the world market prices which co-relates to supply and demand. That also means you are affected by global economic issues and not just local ones.
That is why it is good to have it in its non-physical form. You can purchase gold via gold deposit accounts and sell it immediately unlike physical gold that takes far more time.
Be that as it may, gold related investments via banks are not protected by Perbadanan Insurans Deposit Malaysia (PIDM). That means, if the bank goes bankrupt for whatever reason, you can kiss your investments goodbye.
Is Gold Better Than Cash?
In some ways, yes. Late last year, India made a drastic change to demonetise two of its largest banknotes in order to reduce corruption. The entire population was in a state of frenzy and in order to maintain a monetary value of their savings, they swarmed jewellers and spent the currency that was soon to be devalued.
During such uncertain times, people turned to gold as a safe haven in order to maintain the value of their money. When a government chooses to demonetise a currency, gold would still hold its value even though it may not be the easiest commodity to use in case you need to buy a loaf of bread and some milk. However, the majority of the time when we still use regular paper currency, cash is still king.
So Should I Buy Gold?
As we’ve mentioned, gold as an investment asset is great to have during times of economic uncertainty and it’s a relatively stable store of value to boot. So if you buy gold, make sure that it’s for those reasons.
But if putting your money in something that is not protected by PIDM is not going to allow you to sleep at night, then it is going to be a horrible investment for you. Don’t put your health at risk thinking about your investments. If you’re just getting started with investing, you could opt for something safer like fixed deposits instead. Dive into our fixed deposit page and discover which one is paying out the highest interest and begin growing your money.
Do you have anything to add to this article? Share your thoughts and ideas with us in the comments section down below!
Small businesses take out commercial bank loans with the hope of using borrowed capital to become more profitable. Loans can come from sources other than banks, such as credit unions, public funds, or private investors, and small businesses can use inventory or accounts receivable as collateral.
Depending on where and how the loan originates, borrowing money can be dangerously expensive, as interest and fees are associated with virtually every loan. Businesses can and should calculate the amount of total interest that will be paid over the course of a loan before accepting one.
Below are four reasons taking out a business loan can be worth the risk.
1. To Purchase Real Estate and Expand Operations
Banks are likely to loan money to existing firms that want to purchase real estate to expand their operations. Expansion generally happens if a firm is turning a profit, has a rising cash flow, and has positive forecasting numbers for the future. This is a scenario that makes a bank likely to approve a small business loan. Bank loans for real estate are usually in the form of a mortgage. Long-term bank loans will use company assets as collateral, and will require monthly or quarterly payments from profits or cash flow. The loan term can run anywhere from 3-25 years and will have an interest rate associated with its repayment.
2. To Purchase Equipment
Businesses have two choices with regard to the acquisition of equipment: they can buy it, or they can lease it. If a business owner borrows money to buy equipment, they can take a tax write-off of $25,000 the first year, and depreciate the rest of the equipment over its economic life. The equipment can also be sold for salvage value when it’s outdated or no longer functional. A cost-benefit analysis is necessary to determine whether it’s better to buy or lease equipment for a given company. When a bank makes a loan for equipment, it’s usually an intermediate term loan which runs less than three years and is repaid in monthly installments. Repayment will often be tied directly to the useful life of the equipment being financed.
3. To Purchase Inventory
Banks sometimes make short-term loans (repaid within a year) to small businesses that have developed a trustworthy relationship with the bank. Making payments on time and holding a positive balance in a checking or savings account are both ways to build trust with a bank. Some small businesses are seasonal in nature, such as retail, hospitality, and agricultural businesses. If a company makes most of its sales during the holiday season, they can take out a short-term loan to purchase most of their inventory in advance. Bank loans to purchase inventory are generally short-term in nature; companies strategize around repaying them once the season is over, using proceeds from their seasonal revenue.
4. To Increase Working Capital
Working capital is the money used to manage day-to-day business operations. Small businesses may take out a loan to satisfy operational costs until their earnings reach a certain volume. If the debtor has good credit and a solid business plan, a bank loan can offer short-term money for a business to get off the ground and grow. Working capital loans generally have a higher interest rate than real estate loans because banks consider them riskier; if the business is mismanaged at a crucial time during its infancy, or if the earning assets of the business never generate a profit, the company will face bankruptcy.
Taking out a housing loan to buy your first property is something most of us will go through. There are a number of things you should consider, such as which type of loan you’re going for, which bank you’re getting your housing loan from, how can you afford your legal fees, and more!
Not everyone is able to fully finance their first home out of their own pocket.
In most situations, the majority of us will turn to housing loans to acquire our first property. For first-timers, applying for a housing loan can be quite an intimidating process.
In this article, we’ll cover what are the key things to look out for when you’re applying for a housing loan in Malaysia. Let’s start from the basics!
1. What’s An Interest Rate?
This is the first thing you’ll want to consider.
An interest rate determines how much the bank charges you for the use of its money. It’s based on a percentage of the loan amount you borrow, which is also known as the principal.
Naturally, you’ll want the lowest possible interest rate – a small difference in percentage can mean thousands of Ringgit saved when you’re working with a large loan amount.
So, do take some time to compare various loan packages from different banks and go for the one that offers you the best rates.
There’s also a second question you’ll want to ask yourself: Should you go for a loan package with a fixed interest rate, or the one with a variable interest rate? 1(a) Fixed Interest Rate
Fixed interest rate, as the name suggests, is an interest rate that doesn’t change throughout the duration of your loan.
If your interest rate is 4.2% per annum, then that’s the rate you’ll pay for the rest of the loan period. 1(b) Variable Interest Rate
Variable interest rate, on the other hand, is based on something known as the Base Lending Rate (BLR), which is regulated by Bank Negara Malaysia (BNM).
For example, if the current BLR is 6.5% per annum, the bank might offer you -2.2% per annum.
This means your housing loan is charged at an interest of 4.3% (6.5% – 2.2%). So, you’ll pay more interest if the BLR goes up, and less when it goes down!
BLR varies across all financial institutions in Malaysia. Click here for the latest BLR effective as of 14 June 2019.
While there’s no surefire way to determine which type of interest rate is better, variable interest loans tend to have lower rates compared to fixed interest loans.
However, fixed rate loans are more advisable if you don’t want to deal with the uncertainty of changing interest rates.
Since the monthly instalment amounts won’t change under a fixed rate, long-term financial planning is easier when it comes to servicing your housing loan.
Are you calculating your housing loan payments now? It’s much easier with our home loan calculators.
2. The Type Of Loan You’re Getting
Banks in Malaysia offer different housing loan packages, but they generally fall into three categories: term, semi-flexi and flexi loan. 2(a) Term loan
A term loan is a type of loan that has a fixed repayment schedule.
With this kind of loan, the amount you pay per monthly instalment is the same for the duration of the loan.
In most circumstances, this type of loan doesn’t allow you to reduce your loan interest with advance payments. Additional payments are treated as pre-payments for future instalments.
You may write to the bank to make a special request, but the bank will grant it at their discretion and there’s no way to guarantee it’ll work.
If you make additional payments without having made prior arrangements with the bank, the money will simply sit in the account, and you won’t be able to withdraw them.
It neither earns you interest as a deposit, nor does it help you save on loan interest. 2(b) Semi-Flexi loan
Under a semi-flexi loan, any extra amount you pay on top of your monthly instalments is automatically used to lower the principal, which lowers the amount of interest charged.
Unlike a basic term loan, you don’t need to make special arrangements with your bank.
You can also withdraw the additional amount you’ve paid, but the bank will charge a processing fee. Some banks may also require you to write in, before allowing you to make a withdrawal. 2(c) Flexi loan
Under a flexi loan, your housing loan account will be linked to a current account. The instalment amount is automatically deducted every month from the current account.
Any extra funds placed in the current account is used to lower the principal loan amount, which in turn, lowers the interest payable.
You can also withdraw the extra funds whenever you like!
Most banks will collect monthly fees for the maintenance of the current account. These fees are usually between RM5 to RM10. However, not every bank will offer a flexi-loan option.
If you’re curious about other types of loans, here’s a comprehensive guide for you!
A Comprehensive Guide To The Different Types Of Property Loans In Malaysia Guide
A Comprehensive Guide To The Different Types Of Property Loans In Malaysia
A lock-in period is the period of time during which you’ll incur a penalty fee IF you pay off the loan in full, which may happen when there’s a sudden need for either of the following:
Full settlement Refinancing Selling your property
The objective behind such restriction is for banks to obtain a certain minimum return on the advance payment that covers the amount of loan and administration expenses.
In general, this period ranges from 2 to 5 years, and the penalty is 2% to 5% of the loan amount.
A lock-in period is usually counted starting from the day that the bank issues the first payment to the property developer.
For example, let’s say you’ve decided to pay a full settlement for a RM400,000 housing loan within its lock-in period of 5 years, with an exit penalty fee of 3%. You’ll be forced to bear a penalty of:
RM400,000 x 3% = RM12,000
Now, you may be wondering, “How would this affect me? I couldn’t pay off the entire loan during that time anyway.”
Suppose a situation arises where you want to sell off the property you took out the loan for, or you want to refinance your home because you’ve found a better interest rate elsewhere.
If either of these happened during the lock-in period, you’ll have to pay for the penalty.
With that in mind, you’d want to keep an eye out for housing loan packages that have shorter lock-in periods.
Do check for the interest rates too – if the lock-in period is short but the interest rate is really high, you’ll probably want to give that package a pass – more so if your loan tenure is long.
4. Your Margin Of Finance
Buying house concept with giving money and key
A Margin of Finance (MOF) is the amount of money that a bank allows you to borrow for your loan, which in turn, decides how much cash you need to pay upfront for the property.
It’s usually expressed as a percentage of the total cost of your property.
For example, you want to buy a property worth RM750,000, and the bank offers to cover 90% of your purchase price. So, the amount of loan you’ll get is:
(90% x 750,000) = RM675,000
Your MOF is assessed based on the following factors:
The type of property you’re purchasing The location of that property Your age Your income
If you’re a first-time homebuyer in Malaysia, you’re usually able to obtain a loan that’s up to 90% of the property purchase price.
Back to the example above, let’s say the bank grants you a loan at 90% of the purchase price which is equal to RM675,000.
This means you’ll need a minimum of RM75,000 in cash to pay for the downpayment, which is the remaining 10% of the purchase price.
In Malaysia, the minimum downpayment for a property is 10% of the transaction price.
You’ve struggled through your fair share of ups and downs, and you’ve pushed past a lot of uncertainty. Through it all, your business idea persevered, and you believe that you are now ready to take your small or medium enterprise to the next level.
All you need is a little bit of financing, and what better way to get that than through a SME Business Loan?
But before you dive right into your loan applications, we’d like you to know that we’re rooting for you – which is why we’ve prepared a little list below of important things to keep in mind when seeking out an SME Business Loan. Sink your teeth into it right now!
1. Official SME Status
Is your business officially recognised as a Small or Medium Enterprise (SME)?
According to Bank Negara Malaysia (BNM), for a business entity to be recognised as a SME, it should fall within the following parameters: Sector Size Manufacturing Maximum sales turnover of RM50 million or Maximum of 200 full-time employees Service and other sectors Maximum sales turnover of RM20 million or Maximum of 75 full-time employees
Additionally, your SME should also be registered as an entity of such a nature under Suruhanjaya Syarikat Malaysia (SSM). Only then will its status as an SME be officially recognised, and this recognition is a make-or-break part of your SME Business Loan application.
2. Operating Time
An important criteria to be met in order for you to receive Small Business Financing from SME Bank – which was established specially by the Malaysian Ministry of Finance to assist SMEs – is that your business must have at least two years of operation under its belt.
The same criteria is also stated under RHB Group’s requirements for its BIZPOWER SME Business Loan and SME Financing Online schemes.
It is thus recommended that your business operates for more than two whole years, with propers records of operation being documented during that period, before you apply for an SME Business Loan.
3. Equity or Ownership
SME Corp. Malaysia advises that for a Malaysian SME to receive funding in the form of soft loans, a majority of its equity must belong to a Malaysian or Malaysians who are currently residing in Malaysia.
Specifically speaking, this body states that at least 60% of the business’ equity must be owned by Malaysians. This requirement can also be observed in other financing providers, such as in CIMB’s SME Loans – although the minimum ownership percentage in this case is only 51%.
4. Maximum Loan Amount
Knowing each loan’s maximum limit will allow you to apply for a source of financing that truly meets the financial needs of your business.
The maximum amount differs from one loan to the next depending on a variety of factors, such as the purpose of the loan.
For example, AmBank’s SME Portfolio Guarantee is a flexible loan that has a maximum cap of RM1 million, while its SME Biz Property Extra loan – which caters to SME owners who are looking to purchase properties for their businesses – has a cap of 148% of an asset’s value.
Another factor which affects the maximum amount would be the presence of a collateral. In the example above, the former option does not require a collateral and is thus smaller in size, while the latter can only be obtained with a guaranteed collateral from borrowers.
5. Loan Tenure
You may already be aware of this, but there is no harm in reminding yourself that loan tenure periods vary in accordance with the amount of money they involve.
For illustration, if you apply for Affin Bank’s SME Financing Scheme loan and obtain the maximum funding amount of RM10 million, you will have to complete your loan repayment within 20 years from the date on which you receive the money.
However, do keep in mind that you will not only be repaying the amount you borrowed within the tenure period. Interest rates will be involved, and you should clarify what the exact rate of a loan is before applying for it.
Conclusion
Towards better borrowing!
Now that you have taken note of these five key components of any SME Business Loan, get your research started and secure yourself a loan that matches your business requirements comfortably.
Don’t forget to keep your future plans for your business in mind as well when applying, as a business that is planning to expand globally will probably require more financing than one that is planning to stay on local shores.
So you’ve been eyeing a commercial property and now you’re ready to make a purchase. Before you go any further, it’s good to understand the intricacies of purchasing commercial properties as well as how commercial property loans work. The following are some helpful information that will assist you in the process of securing your commercial property loan.
Firstly, what is the commercial property’s maximum loan percentage? For commercial properties, the maximum loan that you can obtain is up to 85% under personal name as opposed to 90% loan for residential properties. This difference can be a key in your decision making as you will generally need to put more cash upfront for commercial properties compared to residential properties.
On the other hand, commercial property buyers qualify for 80-85% loan margins for commercial property purchases regardless of the number commercial properties purchased. This differs from residential property loan where 90% loan margin is accorded to the first 2 properties and the 3rd residential property qualifies for only 70% loan.
So what types of properties require commercial property loans? Below are the type of properties that will require commercial property loans.
Retail shop lot / Shop house
Office units
Factory lots
SoFo (small office, flexible office)
SoVo (small office, virtual office)
Commercial land
Agricultural land
Serviced apartments
SoHo (small office, home office): this depends on bank policy
While banks have differing criteria when it comes to accepting and approving commercial property loans, the general criteria is always the viability of business for the commercial property. Factors such as location, type of commercial property, type of land and usage, location in mixed development, total number of units and floor location are all taken into consideration in the process of accepting and approving commercial property loans.
So what documents do you need to furnish the bank in order to apply for a commercial property loan? For a Sdn Bhd company (purchasing under company name) that comprises of 2 individuals or more, you will require the following documents.
Form 24 & 49
Latest P&L (Profit & Loss) Statement
Memorandum of Article
Company Profile
Form 9
12 months bank statement
Latest audited report
For those who are running a business under Sole Proprietorship or Partnership, they will be required to provide additional documents namely
Form A and Form D
Name card
For commercial property loans, you need to be aware of a lower maximum margin of finance compared with the 90% for residential property loans. Be ready to put up more cash upfront. Also be prepared for a lower maximum loan tenure, ranging from 25-30 years for commercial properties. Banks also place certain restrictions on the types of commercial properties they would finance hence you might be offered a lower margin of finance if the banks deem the commercial property of your choice is not commercially attractive or viable. The key is to shop around and compare loan details.
Diversifying your property portfolio is generally on of the key reasons for looking at commercial properties. Investors are likely to invest in commercial properties to generate revenue and get profits by leases out to long-term or short-term tenants. With a favourable commercial property loan, coupled with well-managed commercial property, one can get excellent revenue or sale profits.
In Malaysia, the financial products available to businesses are plenty. If you’re a company on the cusp of exciting growth, but feel hampered by the lack of capital, look no further than asset-based loans for an answer.
Asset-based loans provide companies that are aggressively growing with an injection of funds to ensure business continuity.
But first, what are asset-based loans, and do you qualify for such a solution?
Asset-based financing is a flexible option for gaining additional capital by putting up a company’s assets as collateral. In other words, you offer up your assets to a financier in order to receive extra capital to grow your business.
Once you receive this additional financing, it gives you the freedom to take on new initiatives that will grow profits for your business. It’s also a great capital injection to ensure project completion. In some cases, businesses make a request for asset-based loans to finalise an acquisition.
The assets that borrowers can offer up as collateral varies. Different lenders will have different preferences. However, it is common for lenders to ask for accounts receivables and inventory as stakes.
But there is no limit to the type of collateral required. Some financial organisations accept tangible assets such as property (free of encumbrances), gold, art pieces, luxury watches, or cars that appreciate in value, and intangible assets such as share capital.
After some calculations and valuation of the assets up for collateral, the lender may offer up between 50% and 80% of the asset value as cash advance to the borrower.
Borrowers with a good track record of business operations and growth, along with excellent credit standing and financial systems may easily obtain asset-based financing. Successful approval of asset-based loans also depends on the number of customers with good credit ratings that the company has.
Whether you are looking to get some additional working capital to finance your growth, to acquire additional resources, to turn around your business, or simply to get over a financial bump, asset-based loans are a viable option especially for companies with good financial records, fast-moving inventory, and customers with quick turnaround time when it comes to settling payments.
When real estate developers wish to secure supplementary financing to fuel up growth for their property projects, one of the viable solutions they can consider is mezzanine loan financing.
But with so little information about this topic, it’s not always easy to understand what it is, how it works, and what benefits it provides the borrower.
In this article, we will shed some light on this topic so Malaysian property developers can make better decisions about their commercial real estate financing.
What is a mezzanine loan?
Mezzanine loan is a form of financing that combines both equity and debt financing qualities. This unique structure presents many benefits to the borrower. It is particularly useful when companies need to quickly raise funds to boost their project development.
What are the benefits?
When it comes to financing options, financial lenders will usually support Malaysian commercial property developers up to a maximum of 60% of the property value and not more. With mezzanine financing, commercial property developers can obtain capital to make up for the shortfall of 40% and continue to sustain the project.
Another benefit of mezzanine financing is that it is a way for commercial property developers to secure large amounts of financing rather quickly. These loans do not need security and borrowers who have a good record of successful investments can use this to their advantage.
Borrowers who go the route of mezzanine financing also find it advantageous to them because the interest is tax deductible.
How does it work?
To paint a clearer picture of mezzanine financing, here’s an example that illustrates how it works.
ABC Bank offers a mezzanine loan to DEF Company, a commercial property developer in Malaysia. DEF Company utilises this financing to pay off higher interest rates on an existing loan. In addition, the mezzanine financing provides DEF Company with additional working capital to sustain its business, allowing it to expand its services. ABC Bank collects interest payments from DEF Company, and in the case of financing default, will be able to convert the mezzanine financing into equity stocks in DEF Company.
Many will already be aware that Islamic and conventional banking differ in several ways. There are a few important principles of Islamic Finance that govern the banking system and differentiates it from conventional banking. When trying to understand Islamic finance, one must remember that it is based on the Quran and Islamic teachings which emphasises on moderation and fairness for the prosperity of not just individuals but the community and nation, too.
Riba is prohibited
Riba has been translated as usury or excess, and in Islamic teachings, the giving or taking of interest is prohibited. The main reason for this is that Islam believes that lending with interest is an unjust practice that is only advantageous to the lender, while exploiting the borrower.
Instead, Islamic financial institutions offer a variety of financing alternatives for customers based on mutual sharing of the profits and losses and leasing arrangements.
Avoiding ambiguous transactions (gharar)
Islamic finance does not support contracts where items being transacted are uncertain or are of ambiguous nature and where parties involved have unclear expectations or lack certain knowledge to make informed choices. It is considered a form of gambling, an act which is prohibited in Islam. By avoiding these ambiguous arrangements, the customer is protected fairly and avoids excessive risks. As such, Islamic banks will not participate in investments in derivatives, options and futures.
Avoiding investments in prohibited activities
Muslims are prohibited from engaging in transactions that are un-Islamic in nature. This includes gambling as it involves risk-taking and uncertain outcomes. Other prohibited transactions are those that involve investments in alcohol, pork and the like. As such, Islamic financial institutions will not finance ventures involving prohibited activities. Likewise, Muslim investors cannot invest in projects that participate in un-Islamic activities.
Profit- and loss-sharing (mudarabah)
To ensure fairness, Islamic banking is one where customers become “partners” of the financial institution and whatever profits or losses are shared together. For example, to finance the purchase of a house, an Islamic financial institution may offer to purchase the property outright and sell it to the customer at an agreed marked-up price paid in instalments over a period of time, at the end of which, the property ownership is turned over to the customer.
