Investigating Into Alternative Pricing Mechanisms For Maybank Islamic Products MMTF-i

Ezry Fahmy Bin Eddy Yusof
Investigating into Alternative Pricing Mechanisms for Maybank Islamic

products-Musharakah Mutanaqisah Term Financing-i (MMTF-i)
By
Ezry Fahmy Bin Eddy Yusof1
International Centre for Education in Islamic Finance (INCEIF)
Kuala Lumpur, Malaysia
1
Degree in Bachelor of Economics (Honours) from International University Malaysia. Currently pursuing Charted
Islamic Finance Profesional (CIFP) program at the International Centre for Education in Islamic Finance (INCEIF).
Investigating into Alternative Pricing Mechanisms for
Maybank Islamic products-Musharakah Mutanaqisah Term Financing-i (MMTF-i) ~ Page 1 of 22 ~
1.0 Introduction
As one of the human basic necessities, housing is for many households around the world
both the largest expense and the most important asset. Housing also is an important determinant in
measuring the quality of one’s life. But back then at the time where there is still no emergence of
the Islamic banks in Malaysia, all of the banking operations are merely interest-based. Housing
loans that provided by the bank were based on the interest rate. Stand towards promoting the
capitalism view of profit maximization, the banks is broadly content with earning interest on the
loan regardless of the social and financial implications of the business.
The differences in worldview between Islam and the capitalism is the core reason why it
leads to different approaches use especially when it is reflected in the practice of Islamic banking
and finance of which the salient feature is the prohibition of riba ( interest), gharar (uncertainty),
maysir (gambling) and any other elements that clearly prohibited by the Shariah law. Due to this, it
is not surprise that the concept of financing in Islam differs with that of conventional financing.
Therefore, this is understandable that loans offered by the conventional banks are the main mode of
financing under conventional financing using interest as a time factor for borrowed money. The
operations is obviously involves mainly receiving and lending money on interest which is strictly
prohibited in Islam.
Thus, the emergence of Islamic bank in Malaysia in 1983 is consider as an opportunity for
“interest free” financial products to be introduced and automatically filling up the large vacuum of
demand from consumers who are conscious about involving themselves in interest or riba.
Currently in Malaysia, we can observe so far that in the banking industry practiced, there are at least

three ways to buy a house which is through housing loan offer by the conventional banks, Bai’
Bithaman Ajil (BBA) home financing and/or Musyarakah Mutanaqisah Partnership (MMP) offer
by Islamic banks.
1.1 Appraisal between housing loan and home financing
Housing loan is a conventional product, since loan is widely used by the conventional banks
that merely dependent on interest-based system. Most people take on a housing loan from a banking
institution which offers different loan packages to cater for the needs of different users. We can
compare rates and choose a loan based on its features, fees and charges as well as the quality of
service offered by the institution that suit and cater our needs and capability of payment.
Commonly, the length of a housing loan can up to 30 years or when the borrower reaches the age of
65, either one of these condition meet first.
Each loan packages are differs from one institution to another, so customer is advise for not
to put decision on any single feature. Moreover, customers usually look out for features like flexible
repayment terms or graduated payment schemes to suit your repayment capability. As long as the
customers have all the required documents for the application, the lending process will be easily
approved. The monthly installments for a housing loan is fixed over a period of time choose by the
customer, the main core calculation of housing loan is merely payments that consist of the loan
amount plus the interest. Thus housing loan practiced by the conventional banking is implementing
riba which is totally prohibited in Islam.
On the other hand, Bai’ Bithaman Ajil (BBA) home financing is among the earliest attempts
in Islamic home financing products. It is by far the most predominant and widely used concept by

Islamic financial institutions in Malaysia. Bai’ Bithaman Ajil (BBA) home financing can be explain
as the sale of house on deferred payment basis at an agreed selling price which includes profit
margin agreed by both parties. Profit derived from the buying and selling transactions and payment
will be paid by buyer through installment method. A case in point, if the financing amount is
RM100000 for a period of 20 years, and the profit rate is 8%. Thus the installment per month would
be RM837, and the total selling price is RM200880 (RM837 x 20years x 12 months). It is obviously
see that the BBA home financing in Malaysia may use Constant Rate of Return or “Fixed Monthly
Rest non-compounding” formula. Thus the formula is quit the same with conventional banking but
there is no compounding effect on non-payment.
In contrast, Musyarakah Mutanaqisah Partnership (MMP) is a diminishing partnership. It is
a form of partnerships where the ownership ratio of the financial institution gradually decreases in
favor of the customer, during the tenor of the financing. In addition, another term for Musyarakah
Mutanaqisah is Musyarakah Muntahiyah Bi Tamlik. It is a form of partnership contract whereby the
financier allows his partner to buy assets in one payment or in installments based on terms agreed
by both parties.
MMP consists of several contracts which are musyrakah (partnership) contract under
concept joint ownership and ijarah (rental) contract where the equity of financier follows a
diminishing balance method. According to Muhammad Taqi Usmani, he believes that MMP is the
best house financing because can be leased out according to agreed rental.
According to calculation and research by Meera and Razak (2005), the balance of financing
before expiry contract under MMP would be the same but in BBA would still be much higher. This

is because MMP follow a diminishing balance schedule. Therefore under MMP house financing the
amount pay will never exceed the financier original contribution. The usage of MMP also according
to most scholars that are based to housing cooperative is more likely contribute towards the
achievement of the Maqasid Al Syariah compare to BBA. This is due to the cooperation or
Musyarakah made by the institutions and clients can avoid new money creation as in fractional
reserve banking thus come into a probability of bringing harmonious balance between the monetary
sector and the real economy.
2.0 Islamic banking: an overview
Since year 1983, Malaysia’s entry into Islamic banking industry shown and over the past 25
years, it has succeeded in developing a vibrant Islamic financial market through offers of wide
range of Shariah-compliant products, from retail products such as takaful (Islamic insurance),
mortgages, investment instruments and even large-scale project financing.
Islamic Banking Act that came into effect on 7 April 1983 marked its official introduction
into the banking arena. Later Bank Islam Malaysia Berhad (BIMB) was the monopoly in Malaysia
that offers Shariah compliant products and services during its first establishment at 1983. Up to 10
years BIMB is given an opportunities to fully focus on the Islamic banking industry alone, the
opportunities given are in order to let BIMB to create as many products and services to particularly
Muslim in Malaysia, even the products and services are to all Malaysian.
After the Central Bank of Malaysia (BNM) introduced the ‘Interest-Free Banking Scheme’
at 1990, many banks are interested to explore further the implementation of Islamic banking and
finance. Later the government also introduces the concept of ''Islamic Window'' which allows the

existing conventional banks to offer Islamic banking products and services. Moreover, Malaysia
aimed to be among the countries that introduced a comprehensive dual banking system.
2.1 The development of MMP products at Maybank Islamic Berhad
Maybank as the largest Islamic financial services provider in the Asia Pacific region choose
to set further its leadership with the creation of its Islamic subsidiary. Since 1993, Maybank had
used an Islamic window rather than an Islamic subsidiary to offer Islamic financing. But on January
1st 2008, Maybank’s Islamic Banking began to operate under a new subsidiary of Maybank known
as Maybank Islamic Berhad (MIB). In addition, later at 1 July 2002, Takaful business was launched
by Maybank Takaful Berhad, which is licensed under the Takaful Act 1984. All these reflect the
understanding that Islamic banking is a viable alternative to its conventional counterparts.
Currently, Maybank has 12 full fledged Islamic banking branches in addition to 376 branches and
20 private banking centers locally offering Islamic banking products and services (Maybank2u,
2009).
Among the aims of MIB, they wanted to introduce financing facilities based on Musyarakah
Mutanaqisah (MM) concept as an improvement over BBA concept. MIB offering HomeEquity-i
and ShophouseEquity-i that based on the Shariah concept of Musyarakah Mutanaqisah
(diminishing partnership). This is to differentiating it from their previous products namely Home
Financing-i which applied under the concept of Bai Bithaman Ajil (BBA). According to its web site,
Maybank Islamic launched Musharakah Mutanaqisah Term Financing-i (MMTF-i) on 16
December 2008. MMTF-i is Maybank Islamic’s seventh latest mainstream banking product
introduced since it commenced operations on 1 January 2008.

Even BBA is the most predominant concept of home financing in Malaysia, Islamic banks
including MIB are tend to migrate their home financing from BBA since the BBA products rises
many criticism from the jurists or scholars and the academicians. BBA has drawn many criticisms
and deem as not to be in compliance with the Shariah principle as the bank does not take the risk of
ownership and liability on the property (Rosly, 2005).
BBA which has been under increasing scrutiny over the years lead many Islamic banks in
Malaysia signals a shift in the local Islamic home financing front away from BBA in order to adopt
globally accepted Shariah principles. After BNM gives 3 licenses to foreign banks, mainly to Al
Rajhi Banking and Investment Corporation (Malaysia) Berhad, Kuwait Finance House (Malaysia)
Berhad, and Asian Finance Bank Berhad to operate in Malaysia, these banks offers MMP contracts
and started to influence the local banks as well since the local banks sees opportunity from its
unexpected market demand. These foreign Islamic banks basically offer globally accepted Shariah
compliance products and services. Less controversial products like MMP tend to create a higher
demand from the market compared to BBA. From economics simple theories shows that, the higher
demand lead the Islamic banks to compete in offering the products demanded by the customer.
Especially in the July 18, a written judgment by High Court judge made by Justice Datuk
Abdul Wahab Patail trigger the Islamic banking industry to move away from BBA. The judgment, a
collective ruling on 12 cases, sent shock waves in the local Islamic banking fraternity as they began
deciphering its impact. The judge had ruled that the application of the BBA contracts in those cases
were contrary to the Islamic Banking Act 1983 (IBA) when he consider it as a not ‘’bona fide’’ sale.
According to Habhajan Singh (2008) in his column in Malaysian Reserve, not long after that, BNM
sent a circular dated Sept 8 to heads of Islamic financial institutions to "strongly advice" them to

review their heavy reliance on the BBA concept in their transactions. All these marked an important
history towards the development of the MMP products to be slowly accepted from time to time in
Malaysia.
2.2 Modus operandi of MMP at Maybank Islamic Berhad
Musharakah in Arabic means "partnership", so a diminishing Musharakah is a diminishing
partnership. This is a unique contract in which the partners purchase an asset, with one of the
partners gradually reducing the equity portion of the other. It is a combination of Shirkah Al-Milk
and Ijarah. This contract is fundamental in an Islamic economic system as they provide financing
on a profit/loss sharing basis something unique.
As what mentioned by Taqi Usmani (2005), the arrangement is simply a Musharakah
whereby two partners invest different amounts of capital in a joint enterprise. This is obviously
permissible subject to the conditions of Musharakah.
There are two portions to the contract:-
(i) First, the customer enters into a partnership (Musharakah) agreement with the bank. The
customer pays, for example, 20% of the initial share to co-own the house while the bank
provides the balance of 80%. The customer then gradually redeems the bank’s 80% share at
an agreed portion until the house is fully owned by the customer.
(ii) Second, the bank leases its 80% to the customer under the concept of Ijarah, i.e. by charging
rent. The customer agrees to pay rental to the bank for using its share of the property. The
periodic rental amounts will then be shared between the customer and the bank according to
the percentage shareholding at the particular time which keeps changing as the customer

redeems the bank’s share. With each payment, the bank’s share in the property will be
reduced while the customer’s share increases.
The structure of the Musharakah Mutanaqisah practiced by MIB in its HomeEquity-i and
ShophouseEquity-i 2 simply can be explained as:
1. The customer and the bank enter into a “partnership” relationship by forming a joint venture
to raise the capital to acquire a property.
2. The customer and the Bank becomes joint owner of the property and each will have its
respective shares based on the ratio equivalent to the capital contribution.
3. The bank leases it share to the customer and by making monthly payments over an agreed
period of time, the customer will gradually acquire the bank’s ownership.
4. Gradually, the bank’s share “diminishes” and the customer becomes 100% owner of the
property.
2.3 Pricing Methodology of MMP by Maybank Islamic Berhad
Musyarakah Mutanaqisah practiced by MIB in its HomeEquity-i and ShophouseEquity-i
uses rental rate in determining financer return (See Appendix I). Basically, the Musharakah
Mutanaqisah arrangement involves three steps:
1. The first step is to create a joint ownership in the property under partnership agreement
(shirkah al-milk), wherein the client will pay 10% down payment from the total amount of
asset that is considered the initial share and the financer will provide the balance (90%).
2. The second part of this arrangement is that the financier leases his share in the asset under
Ijarah contract to his client and charges rent from him. Basically, the Annual Percentage
2
Available from the Internet :
http://www.maybank2u.com.my/maybankislamic/products_services/personal/home_equity.shtml
Rate (APR) is determined by the rental rate by dividing the annual rent with the original
price of the asset. APR formula is stated as shown below:
APR  Monthly rental  12 months  Asset price  100%

The annual rental rate is determined from similar asset in the particular location. In this
paper, RM 1000 is the monthly rental payment to be used in MM calculation. Each rental
payment is jointly shared between the customer and the bank according to the respective
shareholding, at that point in time, and it will keep changing as the customer redeems the
financier’s share. The customer’s share ratio will therefore, increase after each rental
payment until eventually fully owned.
3. The third step in the above mentioned arrangement is when the client wishes to redeem the
share of the financier by adding extra monthly payments at a specified time. The monthly
redemption payment can be determined in the Mathematical Derivation equation as below:
A

x P  1  x  C 0
n

1  x 
n
1
A = Monthly redemption amount
x = Rental rate3 (rental charge divided by asset price)
P = Asset Price
n = Redemption period
Other equations can also be used for computing total monthly payments which are similar to the
normal annuity formula excluding the interest rate and replacing it with the rental rate. The formula
is stated as below:
n
x 1  x  B0
M 
1  x n  1
M  Total monthly payment
x  Rental rate
B0 
Financer’s contribution into the partnership
n = Redemption period
3
According to Meera and Razak (2005), rental rate is the rate of return (IRR) for the financer.
3.0 Benchmark to determine profit in MMP
It is noted that Monthly installments are calculated using the standard amortization
mathematical model. Moreover, similarity between interest and profits on the home finance is the
rate for Base Lending Rate (BLR) and the Islamic Base Floating Rate (BFR). This is proven by
Radiah and Leong (2009) that parallel movements as well as positive trend of conventional and
Islamic residential property financing in the base lending rate from the period of May 1999 until
June 2007.
Sources: Radiah and Leong (2009)
According to MIB, the monthly payment may vary in the event of any change in the
Monthly Rental Payment. MIB also reserves the right to vary the Monthly Rental Payment when
they think appropriate as well as having the right to review the Monthly Rental Payment as and
when required by them. Any change or variation in the Monthly Rental Payment amount shall be
notified by MIB to the clients in writing and shall take effect from the effective date as stated in the
agreement or notice given to the clients. However it is clearly shown in the Letter of Offer that MIB
margin of profit and/or the duration may be varied at any time at the Bank’s discretion, and it is
referring to the BLR as their benchmark.

Thus the Monthly Rental Payment charge by MIB to the clients can be seen to be mapped
with the equivalent conventional products at all times because of the inter-related of MIB products
that follows Base Lending Rate (BLR) as per existing conventional practice. The MMP contracts
use the interest rate of a particular country (e.g LIBOR,KLIBOR) as a benchmark for determining
the periodical increase in the rent.
Due to this finding, theoretically, any changes in the interest rate would lead to a shifting
effect between MIB and conventional banks if the clients are guided by the profit motive. This is
consistence with the finding made by Radiah and Leong (2009) where by Islamic banks are exposed
to interest rate risks despite operating on interest free principles.
3.1 Re-appraisal over benchmarking use by MIB
Ribh-al-mithl (matching rate of profit) used by the MIB are clearly parallel with
conventional banks which solely dependent on one benchmark or reference rate, that is the interest
rate or basically Base Lending Rate (BLR). According to Ayub (2007), using any interest-based
benchmark for the pricing of goods and their usufruct in trade and Ijarah-based activities of Islamic
banks does not make their operations un-Islamic so long as other rules of trade and Ijarah are
applied. A simple analogy could be illustrate to the practices above is when a seller wanted to price
his product based on his neighbor or market price, he may charge higher or lower depend on his
strategy of competing with the market price. Thus there is not much Shari’ah issue over it.
Therefore it is argued that as far as other requirements of Shari’ah for a valid lease are
properly fulfilled, the ijarah contract may use any benchmark to determining the amount of rental.
There is no harm to earn the same profit as what done by the competitors as we are in a free market

economy. It is also reasonable that if the Islamic banks fixed the rental rate upfront, the appreciation
of the rental rate due to internal or external factors may deem injustice to the parties (particularly
the banks) involved in the ijarah contract.
In contrast with the first opinion, adopting BLR as the benchmark raises some critiques by
some of the scholars like what Shaikh Nizam Yacuby and Muhammad Taqi Usmani mentioned in
their 1998 fatwa (Meera & Razak, 2005 p.13; Chong, 2009 p.10). Taqi Usmani (2005) further
criticize those who hold the view of benchmarking the Islamic banks products over interest based
system argues on two fundamentals ground where as it can be concluded that it may affect the
ijarah contract when there would be a major possibility in existence of the elements of gharar
(uncertainty) and jahalah (ignorance). Thus in other words, the transaction is rendered akin to an
interest based financing.
The elements of gharar (uncertainty) and jahalah (ignorance) come into picture when the
variations of the rate of interest being unknown. Taqi Usmani (2005) argues that:
“If we tie up the rental with the future rate of interest, which is unknown, the amount
of rent will remain unknown as well. This is the Jahalah or Gharar which renders
the transaction invalid” (Taqi Usmani, 2005, p.8).
The third opinion regards to this benchmark issue is deemed to be more moderate, in order
to mitigate the risk involves in such possibilities, there are some contemporary scholars that allowed
the usage of tie up rental rate and the interest rate subjected to limit or ceiling rate. This view is
being practice by Islamic banks in Malaysia regards to products and services under what they call as
floating rate.

However, it is important to be noted that the use of the rate of interest merely as a
benchmark does not render the contract invalid as an interest-based transaction. It just that it is
advisable at all times to avoid using interest even as a benchmark, this is because according to
Muslim scholar’s view, it is good for Islamic transaction is to be distinguished from an un-Islamic
one, without having any resemblance of interest whatsoever in it (Gamal; 2004 & 2006; Taqi
Usmani, 2005,p.8;).
3.2 Benchmark over MMP: An alternative
Due to the controversial issue addressed regarding the benchmark to determine the margin
of profit used by Islamic banks, particularly in this case the MIB in its MMP contract namely
HomeEquity-i and ShophouseEquity-i, it is advisable that the MIB to work on alternative
benchmark in order to differentiate the products and services offered by MIB with other
conventional banks. The home financing facilities are suffixed with a label “-i” to make them easily
recognized and differentiated with conventional products as Islamic banking products and Shariáh-
based home financing.
There are many literatures suggested Islamic banks to avoid conventional rate used in
pricing Shariáh products in the absence of a benchmark Islamic rate. This is due to the
benchmarking that will expose it products to the volatility in conventional financial markets. Iraj
Toutounchian (2009) once suggested that the weighted average of the internal rate of return is uses
as benchmark in determining the Islamic banks margin over profit. Besides that, Taqi Usmani
(2005) also commented on this issue with his idea of alternative which is:

The Islamic banks and the financial institutions should strive for developing
their own benchmark. This can be done by creating their own inter-bank market base
on Islamic principles. The purpose can be achieved by creating a common pool
which invests in asset-backed instruments like musharakah, Ijarah ect. If majority of
the assets of the pool is in tangible form, like leased property or equipment and
shares in business concerns etc. its units can be sold and purchased on the basis of
their net asset value determined on periodical basis. These units may be negotiable
and may be used for overnight financing as well. The banks having surplus liquidity,
they can purchase these units and when they need liquidity can sell them. This
arrangement may create inter-bank market and the value of the units may serve as
indicator for determining the profit in murabahah and leasing also (p.120).
But in HomeEquity-i and ShophouseEquity-i that uses MMP contract, the review of
Monthly Rental Payment by MIB uses BLR as their benchmark over margin profit of rate may use
purely housing price index as their alternative instead of referring to the interest-based system.
Below are table and diagram showing the changes of BLR from the year 2006 until 2009 (2nd
Quarter). Table 1: Maybank Base Lending Rate (BLR)
Effective Date of BLR Maybank Base Lending Rate (BLR)4

28 February 2006 6.50%
28 April 2006 6.75%
1 December 2008 6.5%
3 February 2009 5.95%
2 March 2009 5.55%
4
Available from the Internet : Maybank2u.com
Figure 2: Maybank Base Lending Rate (BLR)
Hence, unlike the interest rate, a house price index is directly linked to the usufruct of the
asset. Below are the graphs and table showing the House Price Index (HPI) changes yearly and
quarterly.
House price index (2000=100)
Q1 Q2 Q3 Q4
2008 1.85 -0.13 2.33 -1.51
2007 -0.20 -0.04 1.55 0.89
2006 0.37 0.35 0.58 3.65
2005 0.56 1.47 -0.34 0.99
% change over a quarter
Source: Bank Negara Malaysia5
5
Available from the Internet : http://www.bnm.gov.my/files/publication/msb/2009/9/pdf/5.15.pdf
Housing price index (HPI) or rental rate as the benchmark give the banks opportunity to
adjust with a more just rental price, property price is obviously a significant variable in determining
the rent. As we seen in above graphs, it shows that the house price index or basically the house price
changes annually. The banks are able to charge the clients a fair rental value according to the
logistic fairly. The rental range per month at Kuala Lumpur is totally different than some other area
in Rawang6. Hence the rental component is a function of a fair rental value of the property as
determined by both the company and home buyer’s research on rental values in the specific area of
the financed property.
The suggestion of using real estate index such as housing price index after adjusted for
inflation can be easily refer to the Valuation & Property Services Department, Ministry of Finance
Malaysia. This is in order to have a justifiable pricing charge towards the parties involved in the
contract since the index value differs according to locality. However, since the Based Lending Rate
(BLR) charge is the same for all branches of Maybank, we will only take in this case all houses
changes percentage (including terrace, high-rise, detach and semi-detach) to make a comparison
between the Maybank Based Lending Rate (BLR) and the Housing Price index changes from the
year 2006 until 2009 (2 nd Quarter).
6
Available from the Internet : http://www.jpph.gov.my/V1/pdf/1%20Kuala%20Lumpur.pdf
Table 2: Comparison between Changes in Maybank BLR and HPI
.
House Price
Maybank BLR Index7
Quarterly 1-Yr % Change 1-Yr % Change
2006 Q1 4 2.5
2006 Q2 3.8 1.3
2006 Q3 0 2.2
2006 Q4 0 4.8
2007 Q1 0 4.5
2007 Q2 0 4
2007 Q3 0 5
2007 Q4 0 2.3
2008 Q1 0 4.3
2008 Q2 0 4.3
2008 Q3 0 5.1
2008 Q4 -3.7 2.5
2009 Q1 -8.46 0.8
2009 Q2 -0.672 0.4
Average -0.359428571 3.142857143
Thus it is advisable that if the bank wanted to peg their margin of profit towards house price
index, the bank can create their own benchmark against HPI in order to have more or less the same
level of playing field between the BLR and the HPI. This is due to the cost charge to the client will
not be so expensive or too cheap if compared to the conventional bank that are clearly
interdependent on the BLR rate. What can be done by the Islamic bank is come out with a formula
that will lead the benchmark used to be as competitive as the BLR rate. For example, taking the
average changes between BLR and HPI above, it is suggested that the formula could be: Percentage
changes of HPI minus 3 (⌂ % HPI – 3) or Percentage changes of HPI plus 3 (⌂ % HPI + 3) depends
on the market condition of houses at that particular time in determining its selling price.
4.0 Conclusion
7
Available from the Internet : http://www.jpph.gov.my/V1/pdf/Indeks%20Q1Q2%202009.pdf
A holistic application of the Shariah, both ex-ante and ex-post, shall warrant Islamic banks to
ensure the products are Shariah -compliant particularly in view of the inherent reputational risk in
Islamic transactions and governance. Benchmarking against interest based system may be
considered as a small matter to some practitioners, but it is understandable that theoretically, any
change in the interest rate would lead customers who are guided by the profit motive to substitute
Islamic financing for conventional bank loans and vice versa.
Against this backdrop, in order for the Islamic banking institutions to become leaders in the
industry, compete effectively and at the same time preserve their niche, there is a need to re-
evaluate their marketing strategies, especially their pricing strategy. Bank Negara Malaysia (2001)
in its ‘The Financial Sector Masterplan’ stated in its recommendation toward Islamic banking and
Takaful that to:
“Introduce a benchmarking programme: Benchmarking is essential for IBIs to be at
par with international best practices. Hence, a benchmarking programme will be
introduced to facilitate IBIs in evaluating their relative efficiency, identifying the
performance gaps and formulating strategies to improve and deliver the best results.”
The index suggested may just a suggestion to diverge Islamic banking industry
from imitating conventional way of pricing its products. Hence, it is essential for IFIs to
intensify research and development efforts in Islamic financial product innovation. This
will involve Islamic banking institutions to consider the possibility of forming strategic
alliances to tap the research and development expertise developed outside the banking
industry to create the range of Islamic financial products capable of meeting the customer
requirements.

It is important to note that according to Radiah and Leong (2009) that the uses of
interest based system as benchmark expose Islamic bank financing in the dual system to
interest rate risks despite operating on interest free principles. BLR in Malaysia has been
falling or remained at low levels during that period. This implies that Islamic bank
financing has been relatively more expensive than conventional loans during falling of
interest rates. It follows that the demand and growth of Islamic financing would have been
slower relative to conventional loans during the period. Through the market index
suggested, it can be revised periodically to reflect real market conditions and lead Islamic
bank to a better position to mitigate the interest rate risks.

Appendix I
Home Financing-i
Completed Properties & Properties Under Construction
Type Non – ZEC ZEC
Effective Rate Year 1 : Fixed at BFR – 3.50% Year 1 : Fixed at BFR – 2.12%
Year 2 : Fixed at BFR – 1.00% Year 2 : Fixed at BFR – 1.00%
Year 3 : Fixed at BFR – 0.50% Year 3 : Fixed at BFR – 0.50%
Yr 4 – 10 : Fixed at BFR + 1.50% Yr 4 – 10 : Fixed at BFR + 1.50%
Financing Tenor Up to 10 years
Margin of Financing • Up to 90% without MT & HBT

• Up to 99% with MT & HBT
Selling Price Rate Based on the highest effective rate
ZEC : Zero Entry Cost

MT : Mortgage Takaful
HBT : Home Building Takaful
All terms and conditions apply
ShophouseEquity-i
PRIME AREA
(minimum financing amount of RM100,000 for ZEC and RM150,000 for ZEC & EPA)
Type Non – ZEC ZEC ZEC & EPA
Effective 2.38% 3.88% (with MT) BFR - 1.20% (with MT)

Year 1 :
Rate (with 4.88% (w/o MT) BFR - 1.10% (w/o MT)
MT) Thereafter : BFR – 1.40%
Year 1 :
3.38%
(w/o
MT)
BFR
Thereafter : –
1.70%
Financing  Normal - Up to 20 years or age 60 whiever is earlier

Tenor

Margin  Up to 80% of property value

of
Financing
Selling Based on the prevailing BFR +4.0% or 10.0%, whichever is higher

Price
Rate
OTHER AREAS
(minimum financing amount of RM100,000 for ZEC)
Type Non – ZEC ZEC
Effective Rate 2.38% (with MT) 3.88% (with MT)

Year 1 : Year 1 :
3.38% (w/o MT) 4.88% (w/o MT)
Thereafter : BFR – 1.40% Thereafter : BFR – 1.10%
Financing Tenor  Normal - Up to 30 years or age 60 whichever is earlier
Margin of Financing  Up to 80% of property value
Selling Price Rate Based on the prevailing BFR + 4.0% or 10.0%, whichever is higher.
• ZEC : Zero Entry Cost

• EPA : Exit Penalty Absorbed
Sources:Maybank2u.com

References
Ayub, Muhammad. (2008). Understanding Islamic finance. Hoboken, NJ: John Wiley &
Sons.
Bank Negara Malaysia. The Financial Sector Masterplan: Islamic banking and takaful.
Chapter 5 p. 83.Reterived 13 September 2009, at http://www.bnm.gov.my
Chong Kok Loong. (2009) Differences between Musharakah Mutanaqisah and al-Bay’
Bithaman Ajil. Paper presented at The 3rd Islamic Economics Conference 2009.
(Unpublished).
Gamal, Mahmoud A.(2004). Interest and the Paradox of Comtemporary Islamic Law and
Finance. Fordham International Law Review. p.108-149.
Gamal, Mahmoud A.(2006). Islamic finance: law, economics, and practice. Cambridge:
Cambridge University Press.
Habhajan Singh. (Dec 09, 2008) RHB Islamic phases out ‘disputed’ BBA financing. The
Malaysian Reserve. p1.
Iraj. Toutochian. (2009). Islamic Money & Banking; Integrating Money in Capital Theory.
Singapore: John Wiley & Sons (Asia) Pte. Ltd. Islamic Banking Act 1983 (IBA)
Maybank web site. (2009). HomeEquity-i and ShophouseEquity-i. Reterived 13 September

2009, at http://www.maybank2u.com.my
Meera, Ahamed Kameel Mydin and Abdul Razak, Dzuljastri. (2005). Islamic Home
Financing through Musharakah Mutanaqisah and Al-Bay’ Bithaman Ajil Contracts: A
Comparative Analysis. Review of Islamic Economics. 9(2). p.5-30.
Radiah Abdul Kader and Yap Kok Leong. (2009). The Impact of Interest Rate Changes on
Islamic Bank Financing. International Review of Business Research Papers. 5(3). p.
189-201.
Saiful Azhar Rosly. (2008). Critical issues on Islamic banking and financial Markets.
Kuala Lumpur: Dinamas Publishing.
Usmani, Muhammad Taqi. (2005). An introduction to Islamic finance. (Special ed.).

Karachi, Pakistan: Maktaba Ma'ariful Qur'an.
Valuation & Property Services Department. (2009). The Malaysian House Price Index by
House Type. Reterived 20 October 2009, at www.jpph.gov.my


Investigating Into Alternative Pricing Mechanisms For Maybank Islamic Products MMTF-i

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Ezry Fahmy Bin Eddy Yusof

Investigating into Alternative Pricing Mechanisms for Maybank Islamic

loan regardless of the social and financial implications of the business.

Investigating into Alternative Pricing Mechanisms for

1.1 Appraisal between housing loan and home financing

65, either one of these condition meet first.

riba which is totally prohibited in Islam.

Investigating into Alternative Pricing Mechanisms for

there is no compounding effect on non-payment.

In contrast, Musyarakah Mutanaqisah Partnership (MMP) is a diminishing partnership. It is

Mutanaqisah is Musyarakah Muntahiyah Bi Tamlik. It is a form of partnership contract whereby the

Investigating into Alternative Pricing Mechanisms for

sector and the real economy.

2.0 Islamic banking: an overview

mortgages, investment instruments and even large-scale project financing.

Investigating into Alternative Pricing Mechanisms for

2.1 The development of MMP products at Maybank Islamic Berhad

understanding that Islamic banking is a viable alternative to its conventional counterparts.

and ShophouseEquity-i that based on the Shariah concept of Musyarakah Mutanaqisah

Maybank Islamic launched Musharakah Mutanaqisah Term Financing-i (MMTF-i) on 16

introduced since it commenced operations on 1 January 2008.

Investigating into Alternative Pricing Mechanisms for

ownership and liability on the property (Rosly, 2005).

Investigating into Alternative Pricing Mechanisms for

2.2 Modus operandi of MMP at Maybank Islamic Berhad

Musharakah in Arabic means "partnership", so a diminishing Musharakah is a diminishing

on a profit/loss sharing basis something unique.

As what mentioned by Taqi Usmani (2005), the arrangement is simply a Musharakah

permissible subject to the conditions of Musharakah.

There are two portions to the contract:-

an agreed portion until the house is fully owned by the customer.

Investigating into Alternative Pricing Mechanisms for

reduced while the customer’s share increases.

ShophouseEquity-i 2 simply can be explained as:

to raise the capital to acquire a property.

respective shares based on the ratio equivalent to the capital contribution.

2.3 Pricing Methodology of MMP by Maybank Islamic Berhad

Musyarakah Mutanaqisah practiced by MIB in its HomeEquity-i and ShophouseEquity-i

Mutanaqisah arrangement involves three steps:

price of the asset. APR formula is stated as shown below:

APR  Monthly rental  12 months  Asset price  100%

payment until eventually fully owned.

redemption payment can be determined in the Mathematical Derivation equation as below:

3.0 Benchmark to determine profit in MMP

Sources: Radiah and Leong (2009)

referring to the BLR as their benchmark.

Investigating into Alternative Pricing Mechanisms for

the periodical increase in the rent.

to interest rate risks despite operating on interest free principles.

3.1 Re-appraisal over benchmarking use by MIB

Investigating into Alternative Pricing Mechanisms for

the banks) involved in the ijarah contract.

interest based financing.

the transaction invalid” (Taqi Usmani, 2005, p.8).

Investigating into Alternative Pricing Mechanisms for

3.2 Benchmark over MMP: An alternative

HomeEquity-i and ShophouseEquity-i, it is advisable that the MIB to work on alternative

based home financing.

Investigating into Alternative Pricing Mechanisms for

on Islamic principles. The purpose can be achieved by creating a common pool

which invests in asset-backed instruments like musharakah, Ijarah ect. If majority of

Quarter). Table 1: Maybank Base Lending Rate (BLR)

Effective Date of BLR Maybank Base Lending Rate (BLR)4