Is the al bai bithaman a jil relatively attractive home purchase finance instrument evidence from...

IS THE AL-BAI BITHAMAN AJIL A RELATIVELY ATTRACTIVE

HOME PURCHASE FINANCING INSTRUMENT?

EVIDENCE FROM THE BANK ISLAM MALAYSIA BERHADAND

THE PUBLIC BANK BERHAD

Mohd Burhan Bin Yusof 1¹ and Mohd Fadzli Bin Ahmad 2 ²

¹’² Politeknik Sultan Azlan Shah, Behrang, Perak

[email protected], [email protected]

ABSTRACT: The interest of this research project is in examining the attractiveness of an Islamic

home-purchase financing instruments known as Al-Bai Bithaman Ajil (BBA). The attractiveness of this

Islamic home-purchase financing is examined and compared from the following perspectives: (a)the

comparative behavior of BBA home-purchase financing through time, (b) the comparative costs of

BBA home-purchase financing, (c) the demand of the BBA home-purchase financing in relation to the

market rates of interest and (d) the interrelatedness of the rate of profit on BBA home-purchase

financing with some selected macroeconomics and financial variables.In order to meet the objective the

data from the Bank Islam Malaysia Berhad are examined in comparison with the data from of the Public

Bank Berhad conventional housing loan. This study will be based primarily on two types of secondary

data. The first type of data used is financial data includes annual value (amount) of the BBA financing,

BBA home-purchase financing and PBB conventional housing loan, total assets of both banks (BIMB

and PBB), rate of profit on the BBA home-purchase financing, rate of return on Islamic bank deposits

and Overhead Expenses (for BIMB only). The second type of data used is macroeconomics data which

includes Base Lending Rate, Inter bank Money Market Rate, Consumer Price Index and Gross

Domestic Product. The sample period of the study is twenty years, ranging from 1988 to 2007.The data

are analyzed from three perspectives: trend analysis, annual repayment analysis and correlation analysis.

Trend analysis is employed in order to analyze the nature and behavior of the BBA home-purchase

financing and conventional housing loan demand through time. The annual repayment analysis is

examined in order to determine the cost of the BBA home-purchase financing as compared to the

conventional housing loan. Lastly, the technique of correlation analysis is used in order to examine the

presence (and magnitude) of relationships between the rate of profit on the BBA home-purchase

financing and some selected macroeconomic and financial variables.Among the major empirical

findings of the study are as followings: (a) the PBB conventional housing loan demand is more popular

than BBA home-purchase financing, (b) in term of loan cost (total repayment), BBA home-purchase

financing instrument appear to be more expensive as compared to the PBB conventional housing loan,

(c)the demand for BBA home-purchase financing is strongly significantly correlated with the market

rates of interest and (d) the rate of profit on the BBA home-purchase financing is also found to be

significantly positively correlated with the market rates of interest. This study suggest that the market

rates of interest plays an influential role in the business of Islamic banking and this phenomena could be

explained by the fact that Bank Islam Malaysia Berhad is operating under the capitalize economic

system where interest is a very important institution in the system.

Keywords: Bai-Bithaman Ajil (BBA), Islamic Home Purchase Financing

1.0 INTRODUCTION

Home is categorized as a basic need.People need home to reside and dwellas the safest haven for

themselves andtheir family members. 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

mailto:[email protected]

*

Basic Word Meaning

Bai Thaman

Ajil

Sale Price

Deferred

country has emphasized that all the commercial banks need to focus on giving out loan for housing

sector (Ahmad Tajuddin, 1993).

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

acquiredhome on a loan basis. Before the establishment of Bank Islam Malaysia Berhad (BIMB) in

1983, the practice of financing has been based on the principle of interest, which is prohibited in Islam.

This conventional interest bearing mode of financing is completely contradicts the Islamic teaching which prohibits riba or usury (Fadzilah Azni, 2003).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 which is known as Al-Bai Bithaman Ajil (BBA).Bai Bithaman Ajil is an Arabic term made up of a number of basic words as shown in the following table:

The above-mentioned basic

words suggest that the BBA is a sale with a deferred payment. A BBA transaction is not a loan but it is a mode of financing through a mark-up process. As a deferred sale, BBA which is permissible in Islam

involves an immediate delivery of goods and postponing the payment of price to a later date. In such an

event, it is permitted to charge a higher price than the prevailing market price.

Every BBA transaction would involve five tenets (rukun) to follow: (a) a buyer (which is normally a

house buyer), (b) a seller (which is normally owner or vendor of the asset), (c) an asset which is first

purchases by the bank from owner or vendor at a particularprice (i.e. cost price), (d) selling price or

contract price (which is cost price plus profit margin) which is thebuyer of the asset has to pay to the

seller on installment basis and a contract or akad (ijab and qabul).Nowadays, all Islamic banks offer for

two types of BBA financing: Fixed and variable rates. Under the fixed rate BBA, as the name implies,

the amount of monthly payment will remain unchanged throughout the term of the facility. Under the

variable rate BBA on the other hand, the amount of the monthly payment will fluctuate base on the

movement of Base Financing Rate (BFR).Accordingly, the financing rate that the Islamic bank will

earn from a BBA transaction is determined as follows:

(a) Fixed Rate BBA

Rate of Profit = Cost of deposit + Overhead costs + Inflation premium + Default risk premium (spread)

(b) Variable rate BBA

Effective Profit Rate = Base Financing Rate – X %

*Where X is a specified rate (percentage) determined by the bank concerned for rebate.

1.1 Modes of BBA Financing Operation

Zakaria Man (undated)reports the practice of deferred sale (i.e. the BBA) at the BIMB in the following

way: When customers have signed a Sale and Purchase Agreement (S&P) to purchase a property, they

can approach an Islamic banking institution for financing. The Islamic bank will assess the customer‘s

application in relation to their eligibility, tenure of financing and payment capability.Upon approval, the

bank will purchase (from the developer) the property on behalf of the customer through the Property

Purchase Agreement and pay the developer or seller on the purchase price (i.e. cost price). The Property

Purchase Agreement is executed on the basis that the customer already have the rights to the property

concerned based on the S&P between customer and the developer or seller. The bank purchases those

rights in order to provide them the financing. The banks subsequently sells the property back to the

customer through the Property Sale Agreement at an agreed selling price which includes a profit margin

for the providing the financing to the customer. Thus the price that the customer needs to pay the bank

(on installment basis) is determined as follow:

Selling Price = Purchase Price + Profit Margin

The figure displays the modus operandi of the BBA home-purchase financing:

(3) Bank sells the asset to the customer at a selling

price (e.g: RM60, 000 + profit margin)

BANK

CUSTOMER

(2) Bank purchases

the asset from owner

/ (e.g: at RM60,

000)

(4) The customer repays the selling

price to bank by installments. If

n=240 months and profit margin =

RM 48,000, monthly installment =

RM108, 000 /240= RM450

OWNER / VENDOR

OF ASSET

(1) Customer

identifies the asset

to be acquired

Source: Saiful Azhar Rosly (2005)

2.0 LITERATURE REVIEW

Islamic banking appears to be mysterious to many people including academics. Therefore countless

article and books on Islamic banking and finance describes the nomenclature and ideologies behind it.

The cross-country Islamic bank literature has focused attention on describing only the markets within

individual countries. Consequently, to date academic studies of Islamic banking could be described as

follow:

(a) There has been limited empirical research in Islamic banking because lack of data.

(b) A number of studies have relied on results of research related to individual countries rather than

cross-country information. Thus, make the studies not universal.

Mohd Ali (1990) claimed that BBA is a combination contract of al Bay‘ (buy and sale) with contract of

cost plus profit margin (al-Murabahah) and contract of sale of good with deferred payment near in the

future (al-Taqsit). BBA has been the main Shariah principle that underlies Islamic home financing for

the BIMB. Mahmood Sanusi et.al in their paper entitled The Role of Khiyar al-‗AYB in al-Bay‘ Bithaman Ajil financing (2004), define BBA as a mark-up sale in which payments are delayed and make in equal

installments.BBA is also known as Bay‘ Muaajal which is one the facilities offered by most Islamic

bank. BBA is a contract involving the sale of goods on a deferred payment basis. In other words, BBA

is a trade-deal which seller or vendor allows buyer to pay the price of a commodity at a future date in

lump sum or installments.

The Muslim jurists have the view Islamic alternatives to interest-bearing loan, namely BBA and

Murabahah are not based on debt contract but rather on the contract of sale (Saiful Azhar Rosly, 2003).

It follows that profit generated from the sale is considered permissible (halal). However, profit made

from a loan (qard) in Islam is not permissible (haram) because it constitutes riba.The fact that in Islam

profit is permissible where interest is prohibited (haram) is clearly mentioned in four different

revelations in the Quran. The first revelation emphasizes that interest deprives wealth of God‘s

blessings (Surah Al-Rum: 39). The second revelation condemns it, placing interest in juxtaposition with

wrongful appropriation of property belonging to others (Surah An-Nisa: 160-161). The third revelation

enjoins Muslims to stay clear of interest for the sake of their own welfare (Surah Al-Imran: 130).The

forth revelation establishes a clear distinction between interest and trade, urging Muslims to take only

the principal sum and to forgo even this sum if the borrower is unable to repay (Surah Al-Baqarah: 275-

281). It is further declared in the Quran that those who disregard the prohibition of interest are at war with God and Prophet.The Ulama‘ however are rather silent on why BBA credit price always higher

than cash. They say as long as the buyer is willing to pay the agreed price via bargaining and haggling,

and the sale in concluded with the offer and acceptance (ijab and qabul), the contract is considered

valid. (See, Zaharuddin (2007)).

Mervyn Lewis et.al (2001), according to Khurshid Ahmad (1994), Murabahah and BBA are permitted

in the Shariah under certain conditions. Technically, it is not a form of financial mediation but a kind of

business participation. The Shariah assume that the financier actually buys the goods and then sells

them to the client. Unfortunately the current practice of ‗buy-back on mark-up‘ is not in keeping with

the conditions on which Murabahah or BBA are permitted. What is being done is a fictitious deal which

ensures a predetermined profit to the bank without actually dealing in goods or sharing any real risk.

This is against the spirit of Shariah injunctions.

Fadzilah Azni (2003)noted that an ordinary conventional housing loan is given on the basis of debtor

and creditor relationship. Under this method of transaction is charged base on the interest rate normally

quoted at a certain percentage above BLR over loan period, repayable in periodic installments. The

BLR fluctuate up or down and it will affect the total loan cost. Simultaneously, amount overdue in

conventional loans are normally capitalized.However, under the Islamic Banking scheme, since BBA

concept is being applied, a seller and buyer relationship will be binded and the selling price is fixed in

advance. The sales price is then repaid in periodic installment and then agreed that the installment will

remain fixed throughout the financing period. As such, customer‘s interest rate risk is eliminated.

Furthermore, amount overdue will not be capitalized.

2.1The Superiority of Bai Bithaman Ajil Financing The mode of BBA home-purchase financing is considered superior as compared to the conventional

housing loan:

(a) Rate of profit and installments are fixed over the period of contract

PENYELIDIKAN DAN INOVASI MEMPERKASA KUALITI PENDIDIKAN TVET | 256

In BBA financing, there is no interest charges. The rate of profit on BBA financing is fixed over the

period of the contract. Whereas under the conventional housing loan the rate of interest charged changes

according to the rate of interest in the market. (See, Osman Sabran (2000)).A fixed rate BBA is a

powerful hedging tool against interest rate. Interest rates or conventional bank profits vary from time to

time as dictated by the market, but cannot hold for the BBA, as any variation in the profit portion of the

selling price will cause the selling price itself to change, thus violating the BBA contract. Therefore,

when Islamic bankers see higher interest on loans, there is nothing they can do to increase the price of

existing BBA facility. (See, Rosly (1999)).Moreover, periodical installments (monthly/quarterly/half

yearly) under BBA contract remains fixed over the period of the contract and no adjustment is made if

interest rates fluctuate. The fixed periodical installments are determined by the selling price, repayment

period and the percentage of margin. (See, Sharifah Faigah (2006)).

(b) Predetermined profit without bearing any risk

Under the BBA contract the financier, the Islamic bank in this case earns a predetermined profit without

bearing any risk. However, this issue is controversial since according to the Shariah principle;

predetermine profit without bearing any risk is prohibited. (See, Siddiqi (1983)).

(c) Fixed Selling Price

According to Osman Sabran (2000), one of the specialties of BBA financing is no additional or hidden

costs that will change the selling. Meaning to say, there is no compounding of arrears and it will allow

for better financial planning for BBA customers. The BBA selling price of the property is fixed

throughout the duration of the tenure. The bank has to make sure the selling price remains unchanged

till the contract expires, because any change in price will make the contract null and void. This fixed

price nature of the BBA contract is advantageous for the BBA contract customers for two reasons: First,

better financial planning since they have advanceknowledge of the amount of money to be paid and

secondly, they will not be affected by price changes during the period of inflation.

Beside the superiority of BBA financing, there are weaknesses of BBA contract that requires serious

reexamination. This is to ensure that a just and agreeable system that protects the welfare of consumers

and sellers is implemented, which all Islamic contract must fulfill.

Mahmood Sanusi et.al (2004), in their study have detected that the application of BBA contract in

Malaysian Islamic Banks had apparently overlooked the requirement of ‗iwad (equal counter value or

compensation). This is done by way of passing the obligation of warranty to the vendor: when this true

a BBA sale has put a waiver in protecting the rights of consumers and thereby placing welfare on the

backseat. Theoretically, in a BBA sale the bank as a seller must be liable for any defect and the ensuing

compensatory damages. The option of defect (Al-Khiyar al-‗Ayb) is operative once the goods are sold,

which the bank must honor in order to claim legitimacy on the profit made.

While according to Yasmin Hanani et.al (2004), extensive application of BBA in Malaysia as an

alternative mode of financing has been subjected too much controversy because of the legal

documentation used in the BBA contract deemed to ignore the welfare of customers. Accordingly,

banks act as financier rather than selling party. Furthermore, the right of customer to annul the contract

and right of option have been excluded. In this paper, the authors examines and analyze how far the

principle of Masalih Mursalah (unrestricted public interest) is adopted in the legal documentation of

BBA and whether the application of this principle is in line with the spirit of Shariah.

In addition, Abdul Wahab (2005) cited in the High Court, the BBA home-purchase financing facility of

RM346, 000 were ordered to pay the bank as a claim of debt of RM 958, 909.21 after the borrower

defaulted for two years and eight months. Even if the market value of the security under the charged is


RM400, 000 and that price is obtained at auction, the borrower still owns another RM558, 909.21 to the

bank. He noted that consequences of defaulting on the BBA home-purchase financing were far more

burdensome than a conventional housing loan.

2.2 The Practice of Bai Bithaman Ajil in Financing in Malaysia

In Malaysia, BIMB as any other commercial bank, offers BBA as financing tool to acquire asset such as

residential houses, buildings and shop houses. The BBA contracts only deal with the installment sale

between the bank and the customer. Theoretically, in the BBA contract of BIMB the bank sells the

house to the customer at a mark-up price. A mark-up price consists of the cost price plus a profit margin

the bank wants to make over a specified financing period, say 20 years.

Norhashimah (1996), in her paper has proposed that knowing the demand of Islamic home financing

using BBA and Murabahah in Malaysia is high and substantial.Almost all bankshave to cope up and

utilize it as a foundation of their own Islamic Home Financing products. The author however raised two

issues pertaining to the BBA contract which requires further discussion:

(a) Given the popularity of the BBA contract among Muslim in Malaysia today,

seriousreexamination is much needed because the lack of protection ofconsumers‘welfare... A

just Islamic contract consists of protection of consumers‘ interest and welfare.

(b) The author also point out that there is a debate on the repayment of BBA financing including

profit charged are higher than conventional banking, although the methodology is legal and not

collide with Shariah principle.

Wan Ismail (1996), in his paper " Kaedah Pembiayaan secara Islam: Satu Analisis", uses numerical

comparison method between total earnings of interest on conventional housing loan with total earnings

of profit on BBA home-purchase financing. The author finds that for house costing RM 100,000 which

was bought in 1983, the house buyers under conventional interest bearing loan has to pay back to the

bank a total of RM181, 789.79. While the house buyer under BBA home-purchase financing with

BIMB has to pay about RM 190, 005.10. The author state that the total profit on BBA home-purchase

financing is RM 90, 005.10 or equal to 90 % of the cost price while total earning of conventional

housing loan is RM81, 798.79 or about 80% of the cost price. The author raised that total profit by

Islamic bank about 90 % of the cost price give a connotation that the BBA home-purchase financing

and conventional housing loan are just the same or similar transaction but have a different name.

Pressed further, the BBA home-purchase financing can be considered as an exploitation of the buyer.

As identified by Shaikh Mahmud (1989), the main arguments of those who are against BBA are that it

opens the back door towards interest-based transactions. They argue that if we accept the difference

between spot and futures prices of commodities, we cannot logically reject interest which is also an

identical difference between the spot and future prices of a commodity called money. Hence, they argue

that BBA is a mere stratagem to avoid the name of interest and yet retain substances.

BBA contract also has been subjected to some controversies with regards to its permissibility. This is

because there are differences among Muslim scholars whether the price charged by the seller under

BBA can be higher than the spot price. Even the scholars, who are of the view that charging a price

higher than the spot price in the case of BBA is permissible under the Shariah, do not favor its

widespread use by the Islamic banks. The report of the council Islamic Ideology (Pakistan) on the

elimination of interest, for example, sounded a note of caution in this regard in these words:"However,

although this mode of financing is understood to be permissible under Shariah, it would not be


advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back door

for dealing on the basis of interest."

Siddiqi (1983) has also expressed his sentiments in the matter in the following words: ―I would prefer

that BBA be removed from the list of permissible methods altogether. Even if we concede it‘s

permissibility in legal form we have the overriding legal maxim that anything leading to something

prohibited stands prohibited. It will advisable to apply this maxim to BBA in order to save interest-free

banking from being sabotaged from within‖. Further on he says: ―Should some pressing situations defy

any other solutions, we can at least confine the use of BBA specifically to them as a temporary measure,

while prohibiting it‘s use in other situations‖. Additionally, another argument that was forwarded by the

opponents of BBA is that, BBA practices illegal transaction based onthe hadith ofthe Prophet when he

prohibited ―two sales in one sale‖ (bay‘atanifi bay‘ah). This is based on the interpretation of the Hadith

which reads: "The Prophet s.a.w prohibited two sales in one single sale."The Hadith is subjected to

many interpretations by the jurists that are with regards to the meaning of ―two sale in one single sale‖.

Among the interpretation of the phrase is the sale of commodity with two different prices, i.e. one for

the spot prices and the other with two difference prices (spot and future prices) in one transaction is

prohibited.

Although according to Ataul Hoque (1987), majority of Muslim jurists allow the selling price in

deferred sale set to be higher than the cash sale. However this permission does not go without any

condition. It is provided that in order to be compatible with Shariah the following condition must be

fulfilled: firstly, the object of a sale must come into the possession of the bank before being handed over to the other party, secondly in case of default or delay of the payment by the customer, the price can no

longer be raised and lastly if customer is in financial difficulty, respite should be given to him, and

another date be fixed for the payment of the balance of the price.

In view of the controversy regarding the legality of BBA, it is wiser in the opinion of the Muslim jurists

that BBA be used with caution. The danger that BBA may deteriorate into purely financing

arrangements with agreed profit margin being no more than a camouflage for interest, will still remain.

Accordingly, it would not be advisable to use it widely or indiscriminately.

2.3 Interest Rate and Demand for Bai Bithaman Ajil Financing

The relationship between interest rate and the demand for BBA is believed to be positive. Rosly (2005)

highlights that, when people expect interest rate will drop further, to some extent the demand for BBA

financing may fall because BBA financing will tend to be more expensive. On the other hand the

demand for conventional housing loan might increase due to lower interest charge. By examining the

possible outcomes of the dual banking system in Malaysia during a rising and falling interest rates, the

author stressed that changes in interest rate could affect the performances of Islamic bank because the

demand for BBA financing might also be affected.

Saiful Azhar Rosly et al in their paper al-Bai Bithaman Ajil financing: Impacts on Islamic Banking

Performance (1999) claims that during economic prosperity, the demand for BBA financing by non-

Muslims increases relatively to loans. He also argues that over-dependence on BBA financing has

somewhat made Islamic banking fall into employing a negative-fund gap strategy during both periods

of economic boom and slowdown. At the macro-level, Islamic banks with high dependence on BBA

financing tend to behave in a pro-cyclical manner. In his study, He finds that BIMB's profit margin

declined relatively to conventional banks during the 1996 / 97 interest rate hike.


Fadzilah Azni, in her study entitled "Pembiayaan Perumahan secara Islam:Antara nilai komersial dan

tanggungjawab sosial (2003)", use a numerical comparison analysis between rate of interest and profit

rate on BBA home-purchase financing. By having this numerical comparison analysis, it enables her to

look at trend between the rate of interest and profit rate on BBA contract. This trend analysis is

classified between two types of housing credit facilities that is below RM 100,000 and more than RM

100,000.The author also makes a comparison analysis between credit repayments of housing credit facilities that is below RM 100,000 and more than RM 100,000. The finding of this study suggests that

the BBA financing repayment is higher or more expensive compared to the conventional housing loan.

Our reviews of related literature suggest that the number of experienced bankerswho are able to

examine the BBA home-purchase financing in Malaysia is still limited. Hopefully this study of BBA

home-purchase financing able to produce interesting findings that could be useful for futurehome

buyers and policy makers.

3.0METHODOLOGY

In the Malaysian banking business, fixed returns (predetermined returns) products are among the most popular financing option (see, Norhashimah (1996)). The BBA, Murabahah and Ijarah contract are examples of such product.However, the BBA home-purchase financing scheme as practiced by the

BIMB appears to be a controversial mode of financing because of higher profit rate charged.1

It is argued to be more expensive (to customers) as compared to the conventional interest bearing housing loan (see, Zaharuddin (2007), Saiful Azhar Rosly (2005), Fadzilah Azni (2003), Norhashimah (1996),Wan Ismail (1996) and Ataul Hoque (1987).

Actually, in most discussions on the BBA home-purchase financing, the following are amongst the

major issues raised:

(a) The BBA home-purchase financing is more expensive as compared to the conventional housing

loan.

(b) The demand for the BBA home-purchase financing is influenced by market interest rate.

(c) The rate of profit on the BBA home-purchase financing is said to be free from the market interest

rates. However, in practice the BBA profit rate might move in tandem with market interest rates.

(d) The rate of profit on the BBA home-purchase financing is implicitly claimed to have a

relationship with Rate of return on Islamic Bank Deposit (ROD), Overhead Expenses (OE),

Consumer Price Index (CPI) and Gross Domestic Product (GDP) (see, Saiful Azhar Rosly

(2005)). Do the above-mentioned issues and claims significantly reflect the reality of the Bank Islam Malaysia

Berhad?

3.1 Hypothesis The above-mentioned issue is examines based, on the following basic null hypothesis (Ho): (a) The annual value (amount), growth and stability of the Bank Islam Malaysia Berhad BBA home-

purchase financing have not been significantly different from that of the Public Bank Berhad

conventional housing loan.

(b) The cost of the Bank Islam Malaysia Berhad BBA home-purchase financing is not significantly

different (higher) than that of the Public Bank Berhad conventional housing loan.

(c) The demand of the BBA home-purchase financing has no significant relationships with the

market rates of interest.

1

It is believed thathigher profit rate imposed on BBA financing as compared with the conventional interest rates on loans is impose to hedge against rising interest rates in attempt to secure the performance of Islamic bank that might affect from the

changing of market interest rates.


Rate of Profit on BBA

Home-purchase Financing

(DV)

(d) The rate of profit on the BBA home-purchase financing has no significant relationships with

some selected macroeconomic and financial variables.

3.2 Conceptual Framework

The following figure depicted the conceptual framework of the study:

1. Base Lending Rate (BLR)

2. Interbank Money Market Rate (IMM)

3. Rate of return on Islamic Bank Deposit

(ROD) 4. Overhead Expenses (OE)

5. Consumer Price Index (CPI)

6. Gross Domestic Product (GDP)

(IV)

Figure 1: Conceptual Framework for the effects of BLR, IMM, ROD, OE, CPI and GDP on Rate

of Profit on BBA Home-purchase Financing

3.3Correlation Analysis

Correlation analysis measures the degree of relationship between two variables. The correlation

coefficient (also known as Pearson‘s product moment correlation coefficient) is a statistic which means

how good the mathematical relationship between the two sets of data, that is for example data x and y.

This correlation coefficient is usually referred to as r and its value given by the following equation:

б X б Y

r = n ∑ XY - ∑ X ∑Y

√ n ∑ X² - (∑ X) ² √ n ∑ Y² - (∑ Y)²

or

r = Cov X Y

Where;r = correlation coefficient n = amount of sample data

X = variable X

Y = variable Y

б = standard deviation for variable

X and Y

Cov XY = covariance for variable X and Y

The value of r can be range from – 1 to + 1. The sign (+) or (-) of the r tells us whether the correlation is

perfectly positive correlation or perfectly negative correlation. A value of zero means no correlation at

all between the two series of the data. If we squared the correlation coefficient denoted by r, we will get

what is known as coefficient of determination. The purpose of this method is to measure the accuracy of

a regression line‘s prediction. It shows how many percent of the variation in the dependent variable is

explained by the independent variables chosen. This coefficient of determination which is denoted as r²

and its value given by the following equation:

r² = b o ∑ Y + b1 ∑ XY – n Y²

∑ Y² - n Y²

The coefficient of determination may range from 0.0 % to 100 %, tell us the percentage of variation in

dependent variable (y) which is explained by the independent variable (x).


Null Hypothesis (H0) Result from

Two Sample T-

Test

Reject / Accept

(H0)

i. The annual value (amount) of the BBA home-purchase

financing has not been significantly different from that of

the Public Bank Berhad conventional housing loan.

p-value= 0.005

Reject

ii. The annual growths of the BBA home-purchase

financing have not been significantly different from that of

the Public Bank Berhad conventional housing loan.

p-value = 0.860

Accept

Finding 1

The PBB conventional housing loan demand is more popular than the BBA home-purchase

financing.

3.4T-Statistics The T-Statistics is generally reported in parentheses below the regression coefficients. This T-Statistics

used in the T-Tests that to determine of there is significant relationship between the dependent variable

and each of the independent variables (p-value < 0.05). T-Value is calculated by dividing the value of

Coefficient (b) with Standard Error of Coefficient (Se).

T-Statistics = Value of Coefficient (b)

Standard Error of Coefficient (Se)

Interpretation of T-Statistics is according to T-Distribution table of T-Value of book-T for 95%

confidence Interval. Where,

Degree of Freedom (d f) = No. of Observation (n) – No. of Independent Variable (K) - 1

3.5 Data Description As the title of this research project implies, this research project involve studying home financing

instrument of two banks: Bank Islam Malaysia Berhad and Public Bank Berhad. The study will be

based primarily on two types of secondary data that is financial data and macroeconomics data.

Financial data includes of annual value (amount) of BBA financing, BBA home-purchase financing,

PBB conventional housing loan, rate of profit on BBA home-purchase financing, rate of return on

Islamic bank deposits and overhead expenses (for BIMB only). Macroeconomics data includes rate of

interest, base lending rate, Interbank Money Market rate, Consumer Price Index and Gross Domestic

Product. The data for the study are obtained from the following sources: Bank Negara Malaysia annual

report, monthly statistical bulletin of Bank Negara Malaysia (various issues), Bank Islam Malaysia

Berhad annual report, Public Bank Berhad annual report and data stream.The sample period of the study

is twenty years, ranging from 1988 to 2007.

4.0 RESULTS Given the objectives of the study as noted above, findings of the study (in relation to the related null hypothesis) is summarized in four categories as displayed in Exhibits 4.1 through 4.4:

Exhibit 4.1: The BBA Home-purchase Financing Vis-à-Vis PBB Conventional Housing Loan:

Behavior Through Time

Exhibit 4.2:The BBA Home-purchase Financing Vis-à-Vis PBB Conventional Housing Loan: Cost

Comparison


Two Sample T-

Reject / Accept

(H0)



Correlation Analysis

Result from Two

Sample T-Test Reject /

Accept (H0)

i.The rate of profit on the BBA home-

purchase financing has no significant

relationships with the market rates of interest

ii.The rate of profit on the BBA home-


relationships with the rate of return on

Islamic Bank Deposit

iii.The rate of profit on the BBA home-


relationships with percentage change in

the operating expenses of BIMB

iv.The rate of profit on the BBA home-


relationships with the Gross Domestic

Product and Consumer Price Index

r- value BLR = 0.741

r² BLR=0.5491

r- value IMM =

0.567 r² IMM=0.3215

r =-value = 0.753

r²= 0.5670

r -value = - 0.737

r²= 0.5432

r-value CPI = - 0.379

r² CPI= 0.164 r-value GDP = 0.423

r² GDP= 0.063

p –value BLR

=0.000

p -value IMM=0.009

p –value =0.001

p –value=0.002

p -value CPI=0.164

p -value

GDP=0.063

Reject

Reject

Reject

Accept

Finding 4 The rate of profit on the BBA home-purchase financing is found to be significantly and positively

correlated with the market rates of interest, rate of return on Islamic bank deposit and percentage

change in the operating expenses of Bank Islam Malaysia Berhad.

Test i.The cost of the Bank Islam Malaysia Berhad BBA home-

purchase financing is not significantly different (higher) than

that of the Public Bank Berhad conventional housing loan.

p-value =0.000 Reject

Finding 2 In terms of loan cost (total repayment /selling price), the BBA home-purchase financing instrument appears to be more expensive as compared to the PBB conventional housing loan.

Exhibit 4.3:The Demand for BBA Home-purchase Financing Vis-à-Vis Market rate of Interest


Two Sample T-

Test

Reject /

Accept (H0)

i.The demand of the BBA home-purchase financing has no significant relationships with the market rate of interest.

p -value =0.000 Reject

Finding 3 The demand for the BBA home-purchase financing is strongly and significantly correlated with the

market rates of interest.

Exhibit 4.4: The Rate of Profit on BBA Home-purchase Financing Vis-à-Vis Some Selected

Macroeconomic and Financial Variables


In general, finding of this study suggest that the market interest rates plays an influential role in the

business of Islamic banking and this phenomenon could be explained by the fact that the BIMB is

operating under the capitalist economic system where interest is a very important institution in the

system.

5.0 DISCUSSION

In order to justify why the BBA home-purchase financing appears to be more expensive compared to

the PBB conventional housing loan, elements of welfare and religious implications should be taken into

account.First of all Islamic Banks are licensed and registered companies with Registrar of Companies

(ROC) and listed in the Main Board of Kuala Lumpur Stock Exchange (KLSE). Therefore, their main

objective of the establishment is maximization the shareholders wealth (profitable organization). In

order to achieve this objective, Bank Islam Malaysia Berhad offers a wide variety of product and

services that are based on the Shariah principle. Bank Islam Malaysia Berhad actually not a welfare

organization that offers free services to all peoples. They also have the investor which is same as the

conventional bank. All those investors expect a good or handsome return from their investment in

Islamic bank. As such to realize this objective they need to charge certain priced for their products and

services that might be lower or higher that what the conventional banking has been charged.The second

reason why the Bank Islam Malaysia Berhad charging higher price than conventional banking is

because they have a large number of staff to ease their daily business transactions. All those staffs are

not free and therefore BIMB needs to pay for their salary. Thus, objective of the profitable organization

is important to BIMB because to secure high number of staff that can manage the bank effectively and

efficiently.The third reason why BIMB charging higher price than conventional banking is because the

BIMB needs to cover higher operating costs includes their building operation costs and other equipment

such as the ATMs machines. If all their product and services is free or cheap, the question that arises is

how long the BIMB can survive during this globalization area? Bear in mind the BIMB is not only need

to face stiff competition with our local conventional banks but they also need to face a huge competition

with foreign banks that has been set up in the country. As compared to the BIMB, this foreign bank for

example has a huge capital that can influence our financial markets especially our property market.

Surprisingly, they can offer attractive rate for home financing as compared to BIMB to capture the

interest of the potential house buyers. The fourth reason is a higher profit will ensure a higher rate of

returns for the depositors that deposit their money in BIMB. The current Islamic banking system that is

based on Shariah principle of profit sharing like the Al-Mudharabah Saving Account, Al-Wadiah

Saving Account and many more are in fact pretty customer oriented. This is highly beneficial and

profitable to depositors. A high return of profits for BIMB through their BBA home-purchase financing

instruments will inject a gain of profit to depositors who save their money in the Al-Wadiah Saving

Account. This gain or Hibah is only offered in Islamic banking. This is one of the benefits in using

Islamic Banking products that people do not realized.

Finally, when people claimed that the BIMB is much expensive compared to conventional banks should

realize that the welfare depends on their profitability. This is to ensure that the bank can survive and

continue their operation as the alternative source of banking for the entire society especially in the

Muslim countries.

6.0 CONCLUSION

All in all, the perceptions that the BBA is expensive and does not play any role for the welfare of the

society are actually inaccurate. People who claimed that the BBA home-purchase financing is much

expensive compared to the conventional housing loan fail to make a fair judgment and justification base

on the most important aspect of a business establishment, which is maximizing wealth and at the same


time offering a service that substitute a Haram business practice by overlooking the one aspect of the

weaknesses of the BBA contract that is higher price charged. In a nut shell, the BBA home-purchase

financing from the BIMB is a relatively attractive home-purchase financing instrument for future house

buyers even though it is much expensive as compared to the conventional housing loan..BBA is

certainly the best option for every god-fearing Muslim in the country who seek the blessing of Allaah

Azza wa Jal face in acquiring their rightful home through the permissible (Halal) channel. The practical

implications of the findings of this study could be considered as follows:

(i) House Buyers (customer)

Muslim house buyers especially should choose the BBA contract to finance their home-purchase to

ensure further growth and development of Islamic banking industry in the country. During the early

yearsof establishment of the Islamic banks, their offered product and services may appear to be

expensive as compared to the conventional banks, but theoretically, in the future Islamic banks may

have the capacity and ability to offer betterpricedservices and products.

(ii)Islamic Banks

In order to ensure the Muslims can afford to finance their home-purchase by using the BBA contract, Islamic banks should reduce the rate of profit charged on the BBA home-purchase financing that will simultaneously lower the cost (selling price) to purchase the house. Thus, it will make the BBA home-

purchase financing less expensive as compared to the conventional housing loan. By reducing the rate

of profit charged on the BBA home-purchase financing, it will surely is more attractive than the

conventional housing loan.

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