Comparative Analysis on The Cost of Default Calculation Between Islamic and Conventional Home Financing

Abstract

The sustainability of the Malaysian Islamic banking industry after a few decades of its inception can be seen via proactive initiatives taken by the players, along with a close monitoring system by the Malaysian financial authority. However, one aspect of Islamic banking that has been neglected and received less concern is the calculation of the amount to be claimed 

in the event of default or the cost of default. This paper aims to conduct a comparative analysis of default cost calculations between Islamic and conventional financing in Malaysia. To achieve the objective, this study employs a qualitative research method by analysing related court cases, policy documents issued by Bank Negara Malaysia, and resolutions from the Shariah Advisory Council (SAC) of Bank Negara Malaysia. Based on document analysis, the findings reveal that there is a difference in default cost calculation methods between Islamic and conventional home financing. The amount claimed by Islamic banks in the event of default is considerably higher than conventional banks due to the basis point of total financing calculation, which is based on the types of contracts adopted. This paper discussed the aspect of default cost calculation between the Islamic and conventional banking industry, which has been rarely touched or written about in the last 40 years.