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Everything You Need To Know About Borrowing : Understanding The Banking System

The most common reason why people borrow money is because they want to purchase something which they would otherwise be unable to pay cash upfront for which can include big ticket items such as house and car purchases.

An individual who has monthly income can apply for his desired bank loan and later pay a monthly instalment over an extended period of time should he wish to own the items without having to save up a large lump sum at a go.

This is both bene cial for the individual buyer and the lender – as the former would be able to receive an item upfront and make affordable monthly payments to the bank, while the latter receives interest on the money loaned.

Therefore, it is essential to know what the two main banking systems available in Malaysia are and what types of loans are

being offered. Most importantly is what the borrower should take into consideration before applying for the loan.


In Malaysia, we have the opportunity to choose between the Conventional banking system and Islamic banking system.

There are banks in our country that are solely Islamic. However, conventional banks have also set up divisions that specialise in Islamic banking.

Islamic banking is a banking system that follows Shariah (Islamic law) principles. Guided by Islamic economics, it prohibits riba (the collection and payment of interest), usury, trading with nancial risks and haram (unlawful) business ventures.

The purpose of Islamic banking is similar to Conventional banking, except that Islamic banking operates according to Shariah rules on transactions that is known as Fiqh Al-Muamalat.

The basic principles of Islamic banking include the sharing of pro t and loss and the prohibition of riba.

Amongst the common Islamic concepts used in Islamic banking are profit-sharing (Mudharabah), safekeeping (Wadiah), joint-venture (Musharakah), cost-plus (Murabahah) and leasing (Ijarah).

Islamic banking in Malaysia is monitored by the National Shariah Advisory Council set up by Bank Negara Malaysia (BNM). In addition, Islamic banks and conventional banks that offer Islamic banking products and services are required to establish their own Shariah advisory committee or appoint consultants to advise them and ensure that their operations and activities comply with Shariah principles.


Borrow for productive purposes only and for something that you really need but do not have enough cash to pay for. These include buying a house or car, sending your children for further education or meeting emergency needs.

Also, borrow within your means. You should only borrow the amount that you can pay back comfortably. It is recommended that your total monthly repayments should not exceed 40% of your net monthly income (after statutory deductions such as tax, EPF and SOCSO).

A borrower has a moral obligation to repay as there should be no excuses for not repaying your debts. Always bear in mind that your creditworthiness will be affected if you do not repay your loans according to the terms of repayment.

Once you have decided to apply for the loan, the next step is to nd out whether the loan applied for is a secured or unsecured loan.


This topic is an introduction to the banking system in Malaysia. When we need to apply for a loan, it is advisable to apply for productive purpose. Next month’s article will focus on what the lender is looking for in terms of loan application and the methodology used to measure the capability of the borrower.

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