BNM plans broader Shariah contract use in Malaysia

Malaysia’s Islamic finance market is set for broader use of Shariah contracts, with BNM preparing policy documents to encourage their application.

Bank Negara Malaysia (BNM), the central bank, plans to issue a Strategy Paper and Exposure Draft on its Shariah Contract Framework by the end of the year. Abdul Rasheed Ghaffour outlined the plans at the Kuala Lumpur Islamic Finance Forum on 20 October, following a review that began in November 2024.

The reform concerns a substantial financing market. Islamic financing reached 48 per cent of total financing in 2025, according to BNM’s Annual Report 2025, carried by Bernama. The commercial opportunity is to widen the transactions lenders can finance profitably. That requires workable contracts alongside credit decisions that leave businesses with terms they can afford. In 2024, Islamic financial institutions intermediated 148.6 billion Malaysian ringgit into activities aligned with value-based intermediation, including financing for small and medium-sized enterprises, green financing and social finance.

Contract choice has to earn its place

Abdul Rasheed said Islamic finance could provide risk-sharing solutions where broader capital sources, structures and different risk profiles are needed. This gives the review a practical purpose. Greater contractual freedom has value when it helps a lender structure a transaction around a business’s cash generation and allocate the associated risk.

For a business seeking finance, the useful change would be a proposal that fits its operations more closely. A contract that accommodates the timing of revenue can improve the financing proposition. The lender still needs an acceptable return after assessing the chance of loss and the work involved in managing the exposure.

Contract flexibility therefore leaves a separate commercial decision with each provider. A lender can have permission to offer a product and still decline the transaction. Wider access will depend on its willingness to accept the proposed allocation of risk, its capacity to assess the business and the terms the customer accepts.

The year-end milestone concerns policy proposals. Providers face a further task in turning those proposals into products they can price and administer. A commercially attractive reform would give lenders enough room to address different financing needs while keeping documentation and approval processes manageable for the transactions they intend to pursue. Abdul Rasheed placed the proposals within a broader policy programme: “The next Financial Sector Blueprint will carry this broader shift. We want to align the financial sector more closely with Malaysia’s future socioeconomic priorities. Our measure of success must also evolve in tandem.”

Smaller providers face a product-cost decision

For smaller providers, the economics of implementation deserve particular attention. If a revised contract requires fresh legal documentation, Shariah review, technology changes and staff training, a limited customer base would leave fewer transactions across which to recover that spending. Product freedom can become expensive when each variation needs substantial work.

The choice is then how much flexibility to offer. Reusable documentation and repeatable approval processes would help contain costs. More bespoke financing would need enough revenue to pay for the additional judgement and administration. A narrow product range may be a rational response if the expected business cannot support a broader offering.

BNM has already attached funding to experimentation. Its risk-sharing fund i-CITA has 100 million Malaysian ringgit in funding to encourage Islamic banks’ use of risk-sharing instruments. Abdul Rasheed said the initiative, launched in 2025, facilitates industry learning in areas including food security and climate resilience. BNM’s iTEKAD social finance initiative has supported nearly 16,000 participants through entrepreneurship, employment and protection programmes. Its iTEKAD Protection initiative has a 5 million ringgit grant to enhance financial resilience for microentrepreneurs.

That learning has commercial value if providers can turn individual transactions into an approach they can use repeatedly. For food-security and climate-resilience businesses, the strongest proposition would connect the financing terms to the investment’s cash flows. For lenders, repeatability would help justify spending on specialist assessment and product development.

Halal businesses already have another route to capital

Abdul Rasheed also identified financial and technical support for the expansion of halal micro, small and medium-sized enterprises as a priority. Pairing those forms of support is commercially sensible. A better financing contract becomes more useful when a business can also meet the lender’s requirements and manage the money effectively.

Amir Hamzah Azizan said the financing guarantee for halal SMEs had increased to 2 billion ringgit. Under Budget 2026, the government allocated 30 billion ringgit in financing guarantees through the Business Financing Guarantee Scheme to support the growth of small and medium-sized enterprises. Export-oriented mid-tier companies received an allocation of 5 billion ringgit in guarantees, while businesses in the high-value industrial sector also received 5 billion ringgit.

Amir Hamzah said the increased guarantee allocation still required proper loan screening, alongside continued support for SMEs to understand financing structures and the requirements of good financial management.

The largest commercial risk is that broader product permission leaves financing decisions largely unchanged. The picture would improve if lenders can offer acceptable pricing and terms to businesses they previously struggled to serve. Demand also has to support repeat transactions after the initial work of designing and approving a product.

Credit discipline will continue to shape access to funding. Amir Hamzah said financial institutions and scheme implementers carry out loan screening. He put the non-performing loan rate for the guarantee scheme under Syarikat Jaminan Pembiayaan Perniagaan, the business-financing guarantee provider, at around two per cent.