DEPARTMENT OF ESTATE MANAGEMENT

FACULTY OF ARCHITECTURE, PLANNING AND SURVEYING,

UNIVERSITI TEKNOLOGI MARA PERAK

GROUP ASSIGNMENT FOLDER

Course Code : REM 252

Course Name : REAL ESTATE AGENCY PRACTICE II

Name of Group Members Matric No.

1) Nur Aina Suraya binti Md Saif 2018656104

2) Nurul Hamizah binti Arifin 2018209338

3) Siti Nur Athirah binti Rusdi 2018684532

4) Wan Ezmira Farhanah binti Khairul Fuad 2018698024

Name of Group Leader: Siti Nur Athirah binti Rusdi Matric No. : 2018684532

Assignment Title: The Differences between Conventional Loans and Islamic Loans in Commercial
Bank

Due Date of Assignment: 14th May 2020 Submission Date: 14th May 2020

DECLARATION : We declare that no part of of this assignment has been copied from other person’s work except
where due acknowledgement is made in the text, and no part of this assignment has been written for me by any
other person except where such collaboration has been authorised by the lecturer concerned.

Group’s Leader Signature: ................. athirah...................... Date: ..................14th May 2020.....................

A lecturer/tutor has and may exercise a right not to mark this assignment if the the above declaration has not been signed.

If the above declaration is found to be false, no mark will be awarded for this assignment

Copyright@Estate Management Dept, UiTM Perak

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Table of Content

No. Title Page

1 1.0 Introduction 3

2 2.0 The differences of conventional loans and Islamic

loans in commercial bank
2.1 Conventional loan in commercial bank 4-5
2.2 Islamic loan in commercial bank 5

3 3.0 The advantages and disadvantages of conventional

loans and Islamic loans in commercial bank.
3.1 The advantages and disadvantages of 6
conventional loan in commercial bank
3.2 The advantages and disadvantages of 7
Islamic loan in commercial bank

4 4.0 Conclusion 8

5 5.0 References 9

6 6.0 Appendices 10

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1.0 Introduction

In general, loan is when money or assets are given to another party in exchange for
repayment of the loan principal amount plus interest. In Malaysia, a property loan can be
categorized into two groups which is conventional loan and Islamic loan.

Conventional loan is when a borrower agreed to repay the loan amount together with
interest over an agreed loan period. In conventional loan, the banks lends money to borrower
with an interest. Banks then earn the profit from the interest charged on the amount borrowed.
If the borrowers late to make a payment, the bank has power to charge additional interest to
the amount borrowed. This means that there are extra fees when paying late, meaning that
borrowers will end up paying back more than they borrow. In other word, conventional loan
does not need to conform to a halal requirement as Islamic Bank. For conventional loan, when
you take out a loan, you will repay the loan amount, along with the interest rate and the
prescribed rate over a set tenure by instalment. So, when we want to apply for a conventional
loan, we must provide the required income documents. Example of conventional loan in
Malaysia is Affin bank, Alliance Bank Malaysia Berhad, HSBC Bank Malaysia Berhad and
many others.

In a nutshell, Islamic loan is based on Shariah laws, the Islamic religious law as stated
in Quran and Hadith and Sunnah. The Islamic bank’s financing is for as a purchase and resale
of real estate, such as car or house instead of loan. In Islamic loan, there is no interest to be
charged when late payment. All the products offered are halal and Shariah compliant. Islamic
loan which is refer to Shariah principles are strictly rule such as halal business, Riba which
mean lending at high rates interest and Zulm which is cruel activities. The Shariah Advisory
Council of Bank Negara Malaysia (SAC) is the powerful authority on Islamic Finance in
Malaysia. Islamic bank serve for the public first, and the main focus is to ensure halal economic
growth. Islamic financing is instead based on making a profit through the sale of commodities.
Under Islamic property financing, banks are required to buy an asset which is property from
the seller and sell it back to the buyer with profit. The buyer will be allowed to pay for the
property in instalments.

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2.0 The Differences between Conventional Loan and Islamic Loan in Commercial Bank

Conventional Loan Islamic Loan

Not running based on religious principles Run based on Sharia law, the Islamic
religious law

The borrower will be charged with interest The borrower will not be charged with
interest

The bank is liable to pay back the capital The bank is not liable to pay back the
invested to the customer capital invested to the customer

2.1 Conventional Loan in commercial bank

2.1.1 Not running based on religious principles

As well as Islamic loan, conventional loan is also different in many ways. A conventional
banking is a profit-making organizations and is not running based on religious principles. This
will benefit to the owner of business that running illegal business such as selling alcohol,
gambling and other non-halal products. They can apply any loan at conventional banking
because the banks will not look thoroughly the sources of their customer’s income as long as
they are able to pay back the loan.

2.1.2 The borrower will be charged with interest

When applying any loan at conventional banking, the borrower will be charged with interest.
If the customer are late in paying the loan, the bank will charge additional interest and this
means an interest charges will be added to the amount of interest owed since the last payment.
Charging an interest is the main income for conventional banking. The disadvantages is the
borrower will feel burden to pay the debt with additional interest while the superior will get the
benefit.

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2.1.3 The bank is liable to pay back the capital invested to the customer

Next, when a customer deposit money into their account and the bank will invest the
money to make sure the customer can earn extra money from savings. As mentioned above,
an investment is not a promising business where the capital invested are not secured. If they
lose money in an investment, the bank is liable to pay back all the money to the customer.

2.2 Islamic Loan in Commercial Bank

2.2.1 Run based on Sharia law, the Islamic religious law

There are many differences between conventional loan and Islamic loan. Firstly, Islamic
loan is a loan that run based on Sharia laws, the Islamic religious law as stated in Quran,
Hadith and Sunnah. It is established as a purchase and resale the real assets. Sharia laws
prohibits illegal activities such as gambling, usury and uncertainty. If any individual, company
or organizations wants to apply any loan at Islamic loan, the bank will check the source of their
income and will reject the application if the sources of income comes from dubious sources.
Islamic banking will only accept loan from anybody that compliant the Sharia law.

2.2.2 The borrower will not be charged with interest

Other than that, Islamic loan also prohibiting usury which is why they are not charging any
interest. In Sharia laws, applying interest on the lend money will cause the borrower more
burden. According to Bank Negara, Islamic loan hire purchase imposes a late payment fee of
1% per annum of the due instalment. Lower charges are incurred in late settlements and this
will give more time to the borrower to settle their debt without having to worry about high
interest.

2.2.3 The bank is not liable to pay back the capital invested to the customer

In addition, whenever a customer deposit money into their account a bank will invest their
customer’s money. As we know, an investment is involving high risk and the capital invested
are not well secured. The investment can make us lose money or gain money. If Islamic loan
lose the capital invested, they are not liable to pay the money back to the customer. But this is
rarely happens in Islamic bank because the banks really take care of the customer and the
investment.

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3.0 The Advantages and Disadvantages of Conventional Loans and Islamic Loans in
Commercial Bank

3.1 The Advantages and Disadvantages of Conventional Loans in Commercial Bank

3.1.1 Banks will offer a suitable loans with ability of borrowers

The advantages of conventional loans in commercial banks is banks usually check the
borrower background, income and more. Banks will check the borrower income to make sure
that the borrower has the ability to pay the loans in the future. As for borrower background,
banks usually checks their status whether they are bankrupt or not. It is because if the
borrower bankrupt they will not have ability to pay the loan in the future. Then, banks also will
check their debts obligations every months to make sure that their income will have a balance
to pay the loans to the banks. By doing this, banks will offer a lower loans to borrowers to make
sure that the borrowers can pay the payments later.

3.1.2 Interest rates increase

The disadvantages of conventional loans in commercial banks is interest rates which

every borrowers that lends money from banks need to pay interest from the amount that the
banks give to them. The interest is quite high depends on the amount that the banks give to
the borrowers. If the borrowers pay the payments late, the interest will be increase. It is to
make sure that that the borrowers will not pay the payments late and pay the payments on
time.

3.1.3 Down payments

Other than that, the down payment that the borrowers need to pay is expensive. The
payments usually 20% from the amount that the banks give. It also complicated because the
borrowers have to show an evidence that the down payment is their own not others. But, if the
borrowers didn’t have a down payments, their application of loan might not be successful. This
might be hard for the borrowers to lend money from the banks.

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3.2 The advantages and disadvantages of Islamic loans in commercial bank

3.2.1 Didn’t apply interest for borrowers

The advantages of Islamic loans in commercial banks is they didn’t have an interest
unlike conventional loans. It is because earning of interest is prohibited in Islam. Since it is
prohibited, so Islamic loan was not charged with any interest.

3.2.2 Compounding interest

Islamic also didn’t have a compounding loans which usually applied to the borrower
that pay the payments late. For the borrower that pay the payment late, the high interest is
1.00 % per annum only.

3.2.3 Stamp duty offer

Then, stamp duty offer to attract people with this Islamic loan, they also cut 20% for
duty stamp for an Islamic loan agreements. For the people who change from conventional
home loan to Islamic home loan will be excluded 100% from pay the duty stamp.

3.2.4 The borrowers might not clearly understand about agreement.

The disadvantages for Islamic loan in commercial banks is since the Islamic loans didn’t
charge an interest for late payments, charge for early settlements and so on, the borrowers
might not be clearly the other charge that the Islamic loans might have. This show that the
contract for the Islamic loans is quite weak.

3.2.5 Islamic loan is more expensive for other charge

In addition, the Islamic loans didn’t charge an interest unlike conventional loans, so the
Islamic have their own charge like they have more legal agreements that conventional loans.
All of this legal document they need to pay, this is how the Islamic loan collected their profits.

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4.0 Conclusion

In conclusion, what can we conclude from the above topic that has been discussed
which is about conventional loan and Islamic loan in commercial bank is that there are
advantages and disadvantages for both types of loans.

For conventional loans, the disadvantages are that they does not need to conform to a
halal requirements. They also charged for extra fees when we make a late payment. Other
than that, Conventional home loans are very direct stating clearly their extra charges or
penalties for defaults, late payments, early settlements, or other issues. Next, interest rate for
conventional loan is usually higher than others loan. But, there is also a benefits when apply
the conventional loan. Firstly, the advantage is the borrower has more down payment invested
in the property resulting in a lower payment and less interest paid over the life of the loan.

For Islamic loans, they have numerous advantages. The benefits of Islamic loan is that
they do not charge for extra fees when making late payment. In addition, to not charge us with
high penalties, the late payment fee for Islamic home loans can be charged around 1.00% per
annum, which is much lower than conventional home loans. In Islamic home loans, the terms
and conditions in the contract may be less clear. Islamic home loans are simply an alternative
made available for those who prefer Syariah-complaint financing.

However, as a consumer, the choice between Islamic or conventional home loans is

our decisions, even if you’re non-Muslim. So, everyone can apply for Islamic loan if they think
that is the best choice. For disadvantages of Islamic loan, from non-Muslim to Islamic finance
products is that they require transactions to be ‘halal’ in nature. This means that you are not
allowed to purchase alcohol or any type of ‘non-halal’ products and services using an Islamic
credit card.

In conclusion, both loans has pros and cons. Both types of home loans, whether
conventional or Islamic, are the same. We still can get financing for our property and insurance
for it. The objectives will still can be achieved which is to get the home loan. So, we must
choose properly and think wisely before making a decision to apply for loans based on what is
the best for us. It is because loan is such an important things because it involved someone’s
ability in the present and future time.

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5.0 References

1) Author: Vicki A. Benge ( MONDAY, 26TH SEPTEMBER 2017 ) WHAT ARE THE PROS &
CONS OF A CONVENTIONAL LOAN?
Retrieved from:
https://smallbusiness.chron.com/pros-cons-conventional-loan-40466.html
2) Author: Irene ( MONDAY, 28TH MAY 2018 ) PROS AND CONS OF ISLAMIC HOMES
LOAN
Retrived from:
https://www.bolehcompare.com/articles/pros-and-cons-of-islamic-home-loans/
3. Author: iMoney Editorial ( TUESDAY, 2ND OCTOBER 2012 ) TYPES OF HOME LOAN IN
MALAYSIA
Retrieved from:
https://www.imoney.my/articles/types-of-home-loans-in-malaysia
4. Author: GoBear Team ( TUESDAY, 17TH SEPTEMBER 2019) CONVENTIONAL LOAN VS
ISLAMIC LOAN, WHICH IS FOR YOU?
Retrieved from:
https://www.gobear.com/my/blog/conventional-loan-vs-islamic-loan-which-is-for-you
5. Author: Faleel Jamaldeen FOURS WAYS CONVENTIONAL AND ISLAMIC
COMMERCIAL BANKS DIFF
Retrieved from:
https://www.dummies.com/personal-finance/islamic-finance/four-wys-conventional-and-
islamic-commercial-banks-differ/
6. Author: GradesFixer ( MONDAY, 28TH JANUARY 2019 ) CONVENTIONAL BANKING
SYSTEM
Retrieved from:
https://gradesfixer.com/free-essay-examples/conventional-banking-system/
7. Author: SOAS University of London’s online course HOW DOES ISLAMIC FINANCE
DIFFER FROM CONVENTIONAL FINANCE
Retrieved from:
https://www.futurelearn.com/courses/risk-management/0/steps/39287
8. Author: Gavin Pereira ( 5TH APRIL 2016 ) CONVENTIONAL BANKING VS ISLAMIC
BANKING
Retrieved from:
https://ringgitplus.com/en/blog/banking/conventional-banking-vs-islamic-banking.html

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6.0 Appendices

Diagram 1: The diagram shows the asset growth of Islamic vs Conventional Bank to show
the evidence to make people think wisely

Source: https://www.televisory.com/blogs/-/blogs/islamic-vs-conventional-banks-in-the-gcc

Diagram 2: The diagram shows the data of differences purpose in commercial and Islamic
bank
Source: https://asean.elibrary.imf.org/view/IMF001/12864-9781475504224/12864-
9781475504224/12864-9781475504224_A001.xml?redirect=true

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