UUM Repository

Md Dahlan, Nuarrual Hilal

Academic rigour, journalistic flair
Nuarrual Hilal Md Dahlan
School of Law, Universiti Utara Malaysia
  
Languages
Bahasa Indonesia
English
DOI
https://doi.org/10.64628/AAN.jrqt9cc9g
https://theconversation.com/justice-trust-and-sharia-why-malaysia-must-reform-its-islamic-home-financing-268366
Islamic home finance in Malaysia was introduced in the 1980s with high expectations. It promised to
create a system free from riba (usury), gharar (harmful uncertainty), and ẓulm (injustice) for 20.6 
million Malaysian Muslims.
Four decades on, the original vision of Islamic home finance as an ethical, risk-sharing alternative
compliant to Islamic law Sharia is now being put to the test.
Ironically, Sharia-compliant home financing has been implicated in the government’s recent findings,
which identified 15,553 homebuyers affected by 107 abandoned housing projects comprising 29,587
units as of 30 September this year.
Image of a abandoned property project at Bukit Beruntung Malaysia. Provided by author, CC BY
Justice, trust and Sharia: why Malaysia must reform its Islamic
home financing
Published: December 6, 2025 10.02am GMT
 
Some Shariah-labelled home financing products closely resemble conventional loans, highlighting the
need for clearer and more substantive differentiation to better guide and protect consumers — a 
concern that has already prompted calls for reform.
Consequently, many families continue to make monthly payments for homes that remain unfinished,
are delivered long past their promised dates, or — in some cases — never materialise at all.
These perceptions have eroded public trust and confidence in Islamic home-financing instruments.
Reforms aim at enhancing fairness, transparency, and shared responsibility are gaining momentum.
Read more: The government wants more of us living in high rises. Here's why 
Australians don't want to
Form over substance: The problem with contentious contracts
The most common Islamic home financing structures in Malaysia are Bayʿ Bithaman al-Ājil (BBA, or 
deferred payment sale) and tawarruq (a deferred purchase followed by a quick resale for cash).
Both are designed to avoid the direct payment of interest. Yet, their financial outcomes often resemble
those of conventional loans.
In a typical BBA arrangement, for instance, the bank purchases the property and resells it to the buyer
at a marked-up price to be paid in instalments.
17 projek perumahan terbengkalai di Kelantan dengan lebih 1,00…
While this structure formally avoids charging interest, its economics are almost identical. Banks lock
in fixed returns, while buyers bear the risks of non-delivery, delays, or even project abandonment.
This goes against the principle of al-ghunm bi al-ghurm — that profit should come hand in hand with
risk.
Prominent scholars, including Justice Taqi Usmani, have warned that such contractual manoeuvres
risk undermining the ethical foundations of Islamic finance.
Many homebuyers continue to service loans for projects that are severely delayed, partially
abandoned, or unlikely to be completed.
Such financial and emotional burdens run counter to the maqāṣid al-sharīʿah — the higher objectives
of Shariah, which uphold justice, welfare, and the protection of wealth.
Read more: Turning houses into homes: Community land trusts offer a fix to Canada’s 
housing crisis
Pressures from the Basel Accord and investor expectations
Islamic banks are under growing pressure from global regulations and investor expectations. The 
Basel Accord enforces stringent capital, liquidity, and risk-weight requirements to maintain financial
stability.
These regulations, however, make debt-based contracts such as bayʿ bithaman al-ājil (BBA),
murābaḥah (a cost-plus resale on deferred payment), and tawarruq more capital-efficient — and
therefore more appealing to banks.
Soaring demand and scarce affordable supply continue to leave many Malaysians without accessible
housing. Source: marketresearchmalaysia.
By contrast, genuine risk-sharing models such as mushārakah mutanāqiṣah (diminishing
partnership) and ijārah (Islamic leasing contract) typically demand more capital and appear less
profitable on paper.
This dynamic forces banks to prioritise balance-sheet “safety,” often shifting delivery risks onto
homebuyers. In doing so, Basel inadvertently reinforces the “form over substance” dilemma that
continues to shadow Islamic finance.
At the national level, neither the Shariah Advisory Council of Bank Negara Malaysia (SAC) nor the
Shariah Committees (SCs) of individual Islamic banks are legally required to include consumer
representatives.
To enhance fairness, Malaysia’s Islamic finance sector should ensure that Shariah Committees are
appointed and remunerated independently — a move that would reduce potential conflicts of interest
and strengthen public trust.
As a result, borrowers’ hardships — such as paying instalments for homes that are delayed or
abandoned — often go unheard. Dispute mechanisms, meanwhile, tend to favour financiers, leaving
affected families with little meaningful recourse.
Lessons from the Gulf
The Gulf Cooperation Council (GCC) countries face similar challenges — and have taken steps to
guard against them.
Dubai, United Arab Emirates (UAE): A 2007 law mandates all buyer payments be placed in
regulated escrow accounts to safeguard funds and ensure transparency.
Funds can only be released in line with verified construction progress. If a project stalls, the Dubai
Land Department or a special tribunal may order refunds or transfer the project to another developer.
Bahrain: Established under a 2014 decree, the Stalled Property Committee is empowered to replace
failing developers, merge projects, or liquidate assets to protect homebuyers.
Saudi Arabia: The Wafi off-plan sales programme and SAMA’s escrow regulations ensure that buyer
payments are ring-fenced, with any liquidation handled through the Infath Centre.
Nonetheless, property development oversight and consumer protection in these GCC countries still
require stronger safeguards and more consistent enforcement.
Read more: The hidden costs of building a home: what every family should know
Pathways to reform
To restore public trust and uphold Shariah principles, Malaysia’s Islamic home financing should
prioritise the Build-Then-Sell model — offering financing only for completed homes, thereby
eliminating abandonment risks and avoiding harmful gharar (uncertainty).
Where the Sell-Then-Build model remains in use, developers should be required to provide insurance
coverage and a clear rehabilitation plan within financing contracts. Shariah governance should also be
strengthened through an independent consumer ombudsperson, third-party Shariah audits, and
consumer representation on the country’s Sharia advisory council and committees.
Malaysia’s Islamic financial system is among the largest and most comprehensive in the world. Uwe 
Aranas/ Shutterstock.com
Thousands of consumers have suffered long-term losses as a result of the stalled Forest City project.
Sebastian Castelier/Shutterstock
Malaysia should also reform the Housing Development (Control and Licensing) Act 1966 (Act 118) to
make financiers partially accountable when projects fail — creating a fairer balance of responsibility
among banks, developers, and homebuyers.
To advance Malaysia’s goal of fully embedding Islamic principles in banking and finance, the country
could expand sukuk-funded housing programmes and create a dedicated rehabilitation fund to revive
distressed or abandoned projects.
Read more: To end chronic homelessness, we must stop evictions
A National Islamic Housing Fund could adopt the Build-Then-Sell model and the profit-and-risk-
sharing principle of al-ghunm bi al-ghurm, offering stronger protection for homebuyers.
Capital could be drawn from Khazanah Nasional Berhad, the Employees Provident Fund (EPF), the
Retirement Fund (KWAP), Permodalan Nasional Berhad (PNB), and Tabung Haji. This could be
reinforced through government guarantees, musharakah-based sukuk, and targeted contributions
from waqf (Islamic endowments), zakat (mandatory almsgiving), and corporate social responsibility
programmes.
If Malaysia and the GCC fail to reform Islamic home financing to make it more equitable and aligned
with the principles of maqāṣid al-sharīʿah, the consequences could be severe.
Public trust in Islamic finance may likely to keep eroding without concrete action. Malaysia’s goal of
addressing its one-million-home deficit by 2026 — through a mix of financing instruments including
Islamic options — could also be at risk.
Real estate properties in Selangor, Malaysia. Wisnu Gareng/ Shutterstock.com


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