Can a housing loan be considered ‘Islamic’ when the customer is asked to pay half a million even though the bank only released RM10,000 to the developer? That is why Islamic housing loans should be based on the musharakah mutanaqisah (MM) concept instead of the popular al-bay bithaman ajil (BBA).

A consumer wanted to buy a condominium priced at RM249,500. He signed up for a BBA loan with Bank Islam and as is the practice, the bank bought the condominium from him and sold it back to him at RM744,766. On his part he agreed to make monthly payments to the bank for the next 30 years. When the project was eventually abandoned, he offered to pay the bank the RM10,000 it had released to the developer.

To his horror, he received a lawyer’s letter demanding payment of RM505,368 (which is equal to the profit that the bank should have realised plus the amount already disbursed to the developer). He was equally flabbergasted when he was told that the amount demanded by the bank complied with Shar’iah requirements.

To protect those who put their faith in Islamic housing loans, the loans should be based on the musharakah mutanaqisah (MM) concept.

The MM is basically a diminishing partnership contract whereby the bank and customer would co-own the house. Thereafter, the customer would pay a monthly rental on the property to the bank. As the house is jointly owned, part of the rental would therefore actually belong to the customer himself. Accordingly, over time the customer’s share of ownership of the property would progressively increase and he eventually ends up fully owning the house.

Bank Negara should direct banks to use the MM concept to avoid the problem inherent in the BBA concept. For consumers , loans based on the MM concept are definitely fairer and therefore truly more Islamic.

The writer is president, Consumers Association of Penang.