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Why Malaysia must reform
its Islamic home financing
Islamic home financing in Malaysia needs urgent form, as in its current
iteration, it is failing too many buyers when projects stall or collapse.
Nuarrual Hilal Md Dahlan (The Jakarta Post)
OPINION ACADEMIA
The Conversation
Mon, December 8, 2025  
I slamic home finance in Malaysia was introduced in the 1980swith high expectations. It promised to create a system freefrom 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 sharia is now being put to
the test.
Ironically, sharia-compliant home financing has been implicated in the
government’s recent findings as of Sept. 30, which identified 15,553
homebuyers affected by 107 abandoned housing projects comprising
29,587 units.
Some sharia-labeled 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
12/8/25, 2:07 PM Why Malaysia must reform its Islamic home financing - Academia - The Jakarta Post
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unfinished, are delivered long past their promised dates or, in some
cases, never materialize at all.
These perceptions have eroded public trust and confidence in Islamic
home financing instruments, but reforms aimed at enhancing fairness,
transparency and shared responsibility are gaining momentum.
The most common Islamic home financing structures in Malaysia are
Bayʿ Bithaman al-Ājil (BBA; deferred payment sale) and tawarruq
(deferred purchase, followed by 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
installments. While this structure formally avoids charging interest, its
economics are almost identical. Banks lock in fixed returns while buyers
bear the risks of nondelivery, 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 maneuvers 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 maqāṣid al-sharīʿah,
the higher objectives of sharia that uphold justice, welfare and the
protection of wealth.
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.
12/8/25, 2:07 PM Why Malaysia must reform its Islamic home financing - Academia - The Jakarta Post
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These regulations, however, make debt-based contracts such as BBA,
murabaḥah (a cost-plus resale on deferred payment) and tawarruq
more capital efficient, and therefore more appealing to banks.
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 prioritize 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 (SAC) of Bank
Negara Malaysia 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 SCs 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 installments for homes
that are delayed or abandoned, often go unheard. Dispute mechanisms
meanwhile tend to favor financiers, leaving affected families with little
meaningful recourse.
The Gulf Cooperation Council (GCC) countries face similar challenges,
and have taken steps to guard against them.
In Dubai, the United Arab Emirates, 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
12/8/25, 2:07 PM Why Malaysia must reform its Islamic home financing - Academia - The Jakarta Post
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Department or a special tribunal may order refunds or transfer the
project to another developer.
In Bahrain, the Stalled Property Committee is empowered under a 2014
decree to replace failing developers, merge projects or liquidate assets
to protect homebuyers. In Saudi Arabia, the Wafi off-plan sales program
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.
To restore public trust and uphold sharia principles, Malaysia’s Islamic
home financing should prioritize the Build-Then-Sell (BTS) model
offering financing only for completed homes, thereby eliminating
abandonment risks and avoiding gharar. Where the Sell-Then-Build
(STB) model remains in use, developers should be required to provide
insurance coverage and a clear rehabilitation plan within financing
contracts.
Sharia governance should also be strengthened through an independent
consumer ombudsperson, third-party sharia audits and consumer
representation on the country’s SAC and sharia committees.
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 its goal of fully embedding Islamic principles in banking and
finance, Malaysia could expand sukuk-funded housing programs and
create a dedicated rehabilitation fund to revive distressed or abandoned
projects.
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A National Islamic Housing Fund could adopt the BTS 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, zakat and corporate social
responsibility programs.
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 keep eroding without concrete
action. Malaysia’s goal of addressing its deficit of 1 million homes by
2026, through a mix of financing instruments including Islamic options,
could also be at risk.
---
The writer is a law lecturer at Universiti Utara Malaysia. This article is
republished under a Creative Commons license.
12/8/25, 2:07 PM Why Malaysia must reform its Islamic home financing - Academia - The Jakarta Post
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