INTRODUCTION

The Islamic financial services industry has been growing rapidly in these recent decades.
Financial institutions have experienced a dynamic, fast-paced, and competitive environment at a
cross-border scale. One of the most growing parts is the new paradigm of Islamic Banking, which
has remarkably captured the interest of both Islamic and contemporary economists. This is
evidenced by the greater participation of players and wider product offerings encompassing all
sectors of banking, takaful and the capital market. Innovations of products and services are taking
place swiftly in providing competitive product offerings to meet the more diverse and differentiated
requirements of consumers and businesses.

Islamic banking has been in existence since the 1970s, and it has shown tremendous growth over
the last 30 years. The practice of Islamic banking now spreads all over the world from the East to the
West, all the way from Malaysia, Bahrain to Europe and the US. Therefore, Islamic banking has
become one of the most important trend in the business world and also in everyday life.

Currently, Malaysia is having a significant number of Islamic banking institutions including full-
fledged Islamic banks, Islamic banking window and Islamic banking subsidiaries. A rapid growth in
the Islamic finance industry in Malaysia has created competition among industry players, ultimately
affected the structures of Islamic banking products, services and activities.

The main purpose of this assignment is to study the Home Financing Islamic banking products
available in Public Islamic Bank Berhad(PIBB). For instance, it's important to identify the factor of
growth of PIBB assess their viability and applicability in respect to individual and corporate
consumers. More specifically, analysis the history and development of PIBB in the Malaysia.
Furthermore, in order to determine the corporate and individual of a particular consumer towards
PIBB. It is crucial to indicate the enthusiastic of potential clients for a new product.

HISTORY OF ESTABLISHMENT OF PUBLIC ISLAMIC BANK BERHAD

Public Islamic Bank Berhad(PIBB) is a wholly-owned subsidiary of Public Bank

Berhad(PIB) and has commenced operations on 1 November 2008 and is chaired by Ismail
Ibrahim as Chief Executive. PIBB had offer Islamic banking products and services to the public
when it started as a window via Public bank. It then contributed to the Islamic banking whole
field, focusing on consumer and retail financing, small and medium enterprises as well as
financing and deposit taking industry.

One of the key players in the Islamic banking industry and also the top 5 Islamic banks in
Malaysia. A strong capital growth from RM30 million in 1993, to RM3.6 billion as at 31
December 2016. There are 259 Public Bank branches across the nation, in addition to its
developed Islamic branches at Kg Baru, Kuala Lumpur and Putrajaya. Public Islamic Bank
offers full Shariah-complaint banking solutions that meet customer needs.

PIB Board of Directors- TAN SRI DATO’ SRI DR. THE HONG PIOW, TAN SRI DATO’
SRI TAY AH LEK and DATO’ SRI LEE KONG LAM.

PIB Chief Executive offices- En Abu Hassan Assari Bin Ibrahim

PIB Syariah Committee- Prof. Emeritus Dato’ Paduk Dr.Mahmood Zuhdi bin Haji Ab Majib
(Chairman) and Haji Mohd Ridzuan bin Awang.

Public Islamic Bank Berhad has been offering highly competitive Islamic banking
products. There is BBA Housing Plans to finance homes, BBA Swift and BBA Smilax packets to
finance the purchase of shophouses, warehouses and industrial properties. AITAB Buy-i rental is
offered to finance the purchase of a motor vehicle. The overdraft facility or Cash Line Facilities
are also provided to customers who need short-term financing plans. Public Islamic Bank Berhad
is actively promoting BAE for selected personal financing-i for government agencies and
companies.

Among other products that are offered by Public Islamic Bank Berhad include investment
and deposit accounts. They are offered in various types such as Wadiah-i accounts, Wadiah
Akakun Semasa-i, Mudharabah Savings Account-i, and General Mudharabah Accounts.

All products and services offered by PIBB are subjected to Shariah and are supervised by
the Independent Shariah Committee. Not only that, Public Islamic Bank has posted a 25 percent
growth rate over the past five years and has contributed significantly to the company's profits.
HOME FINANCING

Home is categorized as a basic need and defined as a building for human habitation,
because people need a home to reside and the home will dwell as the safest haven for themselves
and their family members. For having our own house, we need money whether to buy, rent or
build it. This made it possible for veterans borrow money for the purchase or building of a home.
For many decades, people purchase a house by apply for a conventional house loan from a bank,
credit union or other private financial institution to obtain money.

Having said this, issues which are related to home financing appears to have significant
socioeconomic and political implications. Perhaps based on this view, the Malaysian government
through Bank Negara Malaysia (BNM) which is the Central Bank for the country has
emphasized that all the commercial banks need to focus on giving out loan for housing sector.

Under the current economic environment of our country, very few people can afford to
purchase a house on cash basis because it involves a large amount of money. Consequently, most
people acquired home on a loan basis. This conventional interest bearing mode of financing will
completely contradict the Islamic teaching which prohibits riba or usury. With the establishing of
Islamic banking and financial system in Malaysia somewhere in mid80s, home buyers today
have two choices of home financing: (a) Conventional mode of financing which is interest
bearing loan and (b) Islamic home financing.

Islamic financing are benevolent loans that are interest or profit free. Secondly, contracts
are technically not financing, but “Buy and Sell” or “Joint Partnership” agreements. The most
common form is based on Al-Bai Bithaman Ajil (ABBA), which is itself a subset of the
Murabahah concept. Less popular are facilities based on Musyarakah Mutanaqisah (MM).
Malaysia has one of the most advanced Islamic Finance industries in the world. Since its initial
introduction, Islamic financing products have evolved and matured to be comparable to and just
as competitive as other conventional loan packages. But there are some key differences. For
example, conventional housing loans have interest, which is not allowed in shariah principal,
whereas Islamic house financing does not have interest.

Public Islamic Bank Berhad provides housing financing with low installment payments in
line with easy repayment method. PIBB used the concept of Musyarakah Mustanaqisah (a
growing partnership) also known as Musyarakah Mustahiah Bitamlik (partnership ending with
ownership). Musyarakah Mustanaqisah involves the parties that are banks and customers, where
customers will be partners in the ownership of a house with the largest shares owned by the
bank, while the subscribers are the minority owners.

Through this concept, banks and customers will share capital to earn a home ownership.
The ownership is over both the customer and the bank. The house to be purchased by the
customer will be wholly owned by the customer if the customer repays all the funds financed by
the bank within a fixed period of time. However, the refusal of the customer to repay the
financing will cause the customer to lose the asset and the name can be blacklisted by the bank.

In addition, Public Islamic Bank Berhad also offers Home Save Packages. This package
connects the customer's housing loan to the customer's current account where the current credit
balance in the current account will be used to reduce the outstanding housing loan balance for the
benefit calculation even customers can enjoy savings on interest. Customers applying for
mortgage financing from Public Islamic Bank also have some benefits including: -

 Financing is at a competitive rate

 Payment period is flexible
 There are various payment channels including payment via banking, ATM and others
 (i) MODUS OPERANDI FOR HOME EQUITY FINANCING -i

The Shariah concept applicable in Home Equity Financing-i is MUSYARAKAH

MUTANAQISAH AND IJARAH. (refer appendix 1)

a) MUSYARAKAH MUTANAQISAH (MM) or also known as DIMINISHING

PARTNERSHIP whereby the customer and the Bank jointly acquire and own the property. The
customer, as an owner/tenant, promises to acquire periodically the Bank‟s ownership in the
property.

b) The second Shariah concept applicable is Ijarah (Rental) or Leasing whereby The Bank then
leases its share of property to the customer on the basis of Ijarah (lease). The customer pays
rental to the Bank under Ijarah, which partially contributes towards increasing their share in the
property. At the end of the Ijarah (lease) term and upon payment of all lease rentals, the customer
would have acquired all the Bank‟s shares and the partnership will come to an end with the
customer being the sole owner of the property.

There are three parties involves in MMP, which is the customer, bank and the developer. Public
Islamic Bank participates as a financial partner, in full or in part for a project or a business
venture. The bank agrees to accept payment on an instalment basis or in lump sum from the
partner to sell the bank’s partnership interest. The Modus Operandi of Musyarakah Mutanaqisah
is shown in the next section.
 Modus Operandi for Mutanaqisah Musyarakah

bank

1
2
5 rental equity Capital

1 asset

3
customer
4

Assumption:

Anlynn wish to buy a newly build corner lot house which is priced at RM850, 000. She is willing
to put a 10% of the price as down payment, which also the part of his share capital. On the other
hand, Public Islamic Bank agrees to fund the remaining 90%, which is RM765, 000. The current
prevailing rent for similar house in the locality is 3.52% per annum. Anlynn wants to buy back
the capital portion of the bank in 20 years time.

There are several steps in the Home-Equity Financing Modus Operandi. The steps from 1 to 5
are explained as follows:

Step 1:

The interested customer, which is Anlynn, went to the Public Islamic bank and apply for house
equity-financing loan. When the bank approve the Anlynn’s application on house financing loan,
the Bank and Anlynn forms a Musyarakah Agreement or Diminishing Partnership whereby both
the parties jointly own the asset, which is the house. In this partnership, Anlynn puts a down
payment of 10%, her share capital on the house will be 10%, while the rest of 90% share capital
belongs to the bank.

Step 2:

The capital contributed by the partners, which is the Bank and the Customer (Anlynn), are used
to purchase the house (asset) from the developer. Once the process complete, both the Bank and
Customer (Anlynn) are now the co-owner of the house.

Step 3:

The bank leased the asset based on the portion of share capital to the Anlynn.

Step 4:

Anlynn stay at the property as residence and pays rental to the bank for the use of her share of
capital over the property. The rent is according to the current prevailing rate of the similar
property – based on the remaining bank’s equity ratio. In this case, Public Islamic bank financing
rate is 3.52%.

Step 5:

Overtime customer (Anlynn) will purchase the banks equity. The banks equity of property is
divided into for example : 20 units (based on financing year) of 4.5% each (90% / 20) and the
customer (Anlynn) promises (wa’ad) to buy one unit at the end of each year for the next 20
years.

At the end when Anlynn fully owns the property and the rent is reduced in proportion to unit
bought by Anlynn.

Step 6:

Once Anlynn fully bought the bank’s equity, the ownership of the asset is transferred to her and
the partnership with Public Islamic Bank is terminated automatically.
(ii)MUSYARAKAH MUTANAQISAH PARTNERSHIP CALCULATION
Assumption:

Anlynn wish to buy a newly build corner lot house which is priced at RM850, 000. She is willing
to put a 10% of the price as down payment, which also the part of his share capital. On the other
hand, Public Islamic Bank agrees to fund the remaining 90%, which is RM765, 000. The current
financing rate (BR) offered by Public Islamic bank is 3.52% per annum. (refer appendix 2)
Anlynn wants to buy back the capital portion of the bank in 20 years time.

Rental Rate RM850,000 * 3.52% = RM29,920

RM29,920 / 12 months = RM2493

a) the annual return for the bank :

Rental rate, R = RM2493

Tenure = 12 months

Total equity, TE = RM850,000

𝑟𝑒𝑛𝑡𝑎𝑙 𝑟𝑎𝑡𝑒 × 𝑇𝑒𝑛𝑢𝑟𝑒 ×100%

Annual rate of return (P%) =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

2493 ×12𝑚𝑜𝑛𝑡ℎ𝑠 ×100%

=
850,000

= 3.52%
b) The monthly periodic capital payment by Anlynn to the Bank
Rental Rate = RM2493

Tenure, T = 12 months

Total Equity, TE = 850,000

N = 20years * 12 months = 240months

Anlynn’s initial equity, CE = 85,000

Monthly Periodic Capital Repayment (PCP) 𝑖 [𝑇𝐸 − (1 + 𝑖)𝑛 𝐶𝐸

(1 + 𝑖)𝑛 − 1
where i 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛
12 𝑚𝑜𝑛𝑡ℎ𝑠
3.52%
=
12 𝑚𝑜𝑛𝑡ℎ𝑠
= 0.003
Monthly Periodic Capital Repayment (PCP) 0.003 [850000 − (1 + 0.003)240 × 85000
(1 + 0.003)240 − 1
2026.68
=
1.05
= 1930.18
C) What would be Anlynn’s present investment for the first month?

Rental Rate = RM2493

Tenure, T = 12 months

Total Equity, TE = 850,000

N = 20years * 12 months = 240months

Anlynn’s initial equity, CE = 85,000

Customer Share in rent, CSR = RM249.3 (10% of RM2493)

Monthly Periodic Capital Payment (PCP) = RM 1930.18

Anlynn’s Present Investment, for the first CE1 = CEn-1 +CSR + PCP
month, CE1 = 85000 + 249.3 + 1930.18
= RM87179.48
Explain how the product benefits the customer
In Malaysia, keeping up with recent trends the bank provides online services which
customers can use to enter all bank products and services from the benefit of their home without
going to an outlet. Customers who are interested can submit their contact information on the
official website of the bank and they will be called by bank officials soon afterward.

This Public Bank Home Equity Financing-i is based on the Shariah concept of
Musharakah Mutanaqisah also known as the Diminishing Partnership where the bank enters into
a joint agreement of house tenure with the customer and the customer make payment for monthly
repayments.

Upon the end of the repayments, the ownership of the house is shifted to the customer.
Whichever completed as well as under-construction property can be thought for this house
financing loan. Every individual or joint holder is qualified to apply for this loan which comes
with flexible payments. Besides that, customers are free to redraw the total of loan from their
Public Islamic Bank currents or savings account.

Home Equity Financing-i offers the means to buy a home or even to refinance with tenures up to
35 years.

BENEFITS:

1. Competitive financing rate and margin of finance

2. Flexible payment period

2. Redraw facility available

3. Government incentives on stamp duty

4. Multiple payment channels via internet banking, ATMs, PBB/ PBB branches

It is a housing finance plan based on the syariah concept of Musharakah Mutanaqisah

(Diminishing Partnership). The interest rate is variable and join to IBR. It depends on
customer’s situation and income, they can select between a full flexible or semi flexible package.
Both the semi-flexi and full-flexi versions are allow to reduce their loan principal with any
additional cash deposit. In addition, they can withdraw whichever extra cash paid. Also, for those
customer who need a greater margin of financing is also available, they can go up to 100% if you
contain Zero Moving Cost (ZEC) such as MRTA and legal fees in their total financing.
Obviously, approval is subject to a credit form.

The full-flexi version links customer home loan account to a current banking account
which means they only pay interest on the amount for their remaining loan principal deduct the
balance of their current account. Wisely customer can save a lot of money if they retain their
current account in a good credit. Certainly, they are able to withdraw funds when they wish,
there are no limits and no fees on it. They will be charged RM10 every month for the current
account and a previous set up fee of RM200. Whereas for the semi-flexible version the principle
is just the same, only different in banking method, customer may only withdraw funds one time a
month and they also need to make request at the bank to do so, and they will be charged
an RM50 fee for every withdrawal. Therefore, that is a good motivation not to withdraw funds
too often.
  Compare and contrast the Islamic product chosen vis-à-vis the conventional
banking counterpart by using an equivalent.

The banks that we chose were Public Bank and Public Islamic Bank. Our product is Home
Equity Financing-i.

Differences between Public Bank and Public Islamic Bank

Public Bank Public Islamic Bank

What is the product about? Non-free legal
documentation
Facility Home plan
Calculated based on Variable or fixed rate basis
Bank rate calculation Interest
Governing authority Bank Negara Malaysia
Plan 5 home plan and more plan Shariah concept of
Early settlement 1% charge on loan balance
outstanding to compensate
loss of interest
Late payment Compounded for next
month interest
Insurance Types MRTT and Fire Takaful
Risk ownership Customer bear all risk to
loan
Home equity financing-i
Home equity financing-i
Variable rate basis
Profit
BNM and Shariah
Committee
Musharakah
Mutanaqisah(diminishing
partnership)
No allowed
No compound charge
allowed
Mortgage Reducing Term
Takaful (MRTT) or fire,
house holder and house
owner takaful
Bank bear some risk to
earn return
Insurance Types MRTT and Fire Takaful Mortgage Reducing Term
Takaful (MRTT) or fire,
house holder and house
owner takaful

Public Bank house financing loan

 The inconstant rate of Islamic home loan is based on Musharakah Mutanaqisah, it can be
choose whether full-flexible or semi-flexible option to suit the borrower needs.
 Full flexi loan is enables customers pay money into the home loan whenever he or she
wants and withdraw the cash whenever customers like.
 Semi flexi home loan is allowing customers to make overpayments on his or her
mortgage to reduce the loan principle.

Public Islamic Bank home financing loan

 Public Islamic Bank offers Islamic banking products and services to small and medium
enterprises, individual customers and corporate customers in Malaysia.
 Public Islamic Bank will offers online services which mean the customers are able to
access all bank products and services from their comfort home. It does not necessary to
going to a branch. For those interested customers can submit their contact details on the
official website of the bank and they will be contacted by bank officials soon afterwards.

The similarities between Public Bank and Public Islamic Bank

 Home Equity Financing-i provides the incomes to obtaining a home or even to refinance
with tenures up to 35 years.
 The packages of these two banks are full-flexible or semi-flexible option to suit the
borrower needs.
 Margin of finance is 90% + 10% for financing of Mortgage Reducing Term Assurance
(MRTA) and other entry costs.
 Zero entry cost packages for both of the banks.
 Overdraft facilities are available for home loan users.
 The minimum age required is 21 years old to apply home loan.
 The maximum age is 70 years old, cannot be more than 70 years old.
 Everyone can apply for home loan if it is salaried and self-employed with consistent
income.
 It is suitable for the completed, under construction properties and refinancing purpose.
 Both banks home loans are come with lock in period for 3 years. Borrowers will need to
pay additional 2% of the outstanding loan amount to bank if borrowers decide to sell or
refinance the property within 3 years.
 Late penalty fee is charged for 1% p.a. on any overdue amount.
 Stamp duty is as per the Stamp Act 1949.
 The processing and facility fees, up to RM30,000 is needed to pay RM53.00, in between
RM30,001 to RM100,000 is needed to pay RM106.00, whereas above RM100,000 is
needed to pay RM212.00.
 Base rate is 3.52% p.a.
 No guarantor requirement is needed.
 The termination or cancellable fees is charged for RM2120 if the facility is cancelled
prior to the disbursement.
 Service fee for redraw facility-I is charged by RM53.