| Danial Norjidi |
THE recently announced deregulation of profit rates on residential property financing, which allows Islamic banks to freely price these kinds of products within a reasonable range, means that home financing is much more accessible to more people, in more forms and in more ways.
This was said by Javed Ahmad, the General Manager of Bank Islam Brunei Darussalam (BIBD) in a phone interview yesterday, in response to the recent announcement by Autoriti Monetori Brunei Darussalam (AMBD) pertaining to residential property financing.
The AMBD made this announcement through a notice, which reads, “The Annualised Profit Rates on Residential Property Financing are by this Notice deregulated and all Islamic banks are free to price their Residential Property Financing products within a reasonable range.”
Sharing his thoughts on this with the Borneo Bulletin, the BIBD General Manager said, “For customers, deregulation means that financing is now available for home purchases.
“It means that there is now a broader spectrum of financing available for customers, particularly with regards to the percentages of financing,” he shared, adding that this is all, of course, subject to customers’ financial situations, ie their income, savings, risk etc.
Home financing, he said, is very long term financing, and most people borrow for periods of 20-25 years, though some banks have 10-year repayment periods. He explained that deregulation means banks can now potentially offer more flexibility with regards to the percentage of financing provided, and the repayment period.
“Financing is now available to more people, and not just to a privileged few,” he said. “When financing is available, it’s good news for real estate agencies and developers, customers new and old, and it is good news for banks.
“In my view, deregulation is basically going to a normal economy where the issue is that demand and supply determine the price,” he added. “For example, if you have no customer demand, banks will be free to lower the price, and if there is too much demand for supply, then there is more incentive to adjust the prices accordingly.”
The AMBD notice states that with the deregulation, Islamic banks are required to ensure a number of factors. Before doing so, it should be noted that “Annualised Profit Rate” pertains to the profit rate calculated in accordance with a previous notice on Financing Facilities issued pursuant to Section 66 of the Islamic Banking Order, 2008 dated June 8, 2009.
It should also be noted that “Residential Property Financing” means any financing extended for the purposes of purchasing, improving, constructing or altering of immovable property in Brunei Darussalam, where such property is solely used for personal purposes and not business purposes and shall be secured by a charge of the property.
With that, the notice highlights that “all Islamic banks shall ensure that the Annualised Profit Rate charged to customers is not excessive and reflects a reasonable risk premium over their cost of funds”. They are also to ensure that “the value of Residential Property Financing reflects a prudent valuation of the residential property charged and is supported by a professional valuation report prepared not more than three years from the date of financing application”.
In addition, Islamic banks must also ensure that the counterparty risk of the borrower is carefully assessed to ensure that the borrower has the repayment capacity to service the financing so that the repossession risk of the property financed is minimised.
They must also ensure that the existing charges or fees for Residential Property Financing are reasonable and shall not be increased.
“No new or additional charges/fees, in whatever form, shall be imposed on the borrower,” reads the notice. “This paragraph is without prejudice to the Authority’s right to regulate Islamic bank charges/fees in the future.”
Fifthly, Islamic banks must ensure to provide maximum publicity to the Annualised Profit Rates applicable, including on Islamic banks’ websites and relevant published materials.
The notice goes on to assert that all Islamic banks are required to submit to the AMBD’s Regulatory Department on a monthly basis, commencing October 2014, the Residential Property Financing rates charged to customers.
“The Authority will closely monitor lending to this sector and reserves the right to intervene from time to time to ensure a healthy competitive market for Residential Property Financing in the country,” AMBD said in the notice.