The Development of The Practices of Islamic House Financing Contracts

Islamic finance and banking presents an alternative to interest-based conventional model in the financial services sector in Malaysia. Islamic financial system is free from the elements of riba (usury), gharar (uncertainty), maisir (gambling) and all other non-halal activities. Every aspect of Islamic banking model - operations, products, services, even its existence - must be based on Islamic Shariah principles in order to achieve Maqasid Shariah. Daruriyyat (essentials) is one of the three areas of Maqasid Shariah, and is segregated into five basic elements, namely Din (maintenance of religion), Nafs (human life), Nasl (children), Mal (wealth) and ‘Aql (intellectual). House ownership is necessary to protect these basic elements. Islamic banks offer Islamic house financing contracts to build or purchase residential properties. This study explores the development of the practices of Islamic house financing contracts by selected Islamic banks in Malaysia. This is a qualitative research and the data gathered through face-to-face interviews with respondents from five banks offering Islamic house financing. Islamic house financing contracts have progressed from Bay’ BithamanAjil and MusharakahMutanaqisah to Tawarruq, which is the current practice at most Islamic banks in Malaysia. Tawarruq is deemed more transparent and in line with the spirit of Islamic financing that promotes justice, fairness and transparency, with no hidden cost. The evolution and innovation in Islamic house financing contracts are not just to conform to the banks’ Shariah advisory councils or boards and to comply with the rules and guidelines from Bank Negara Malaysia, but also to consider the international practices and the appeal to the global markets. The innovation in Islamic banking industry led to the development of better contracts for Islamic house financing.