Bank Negara Nudges Islamic Banks Beyond Tawarruq, Offers Sandbox to Test New Products
Bank Negara Malaysia (BNM), the country’s central bank, wants Islamic banks to rely less on one familiar contract and use a wider set of Shariah-compliant structures. In a strategy paper released on 3 November 2026, it said it will modernise its rules and may let banks test new products in its regulatory sandbox before they reach customers.
Key facts
- BNM published a strategy paper on advancing the use of Shariah contracts on 3 November 2026.
- It sets three priorities: modernising the Shariah contract framework, enabling more varied uses of Shariah contracts, and recalibrating the role of tawarruq.
- BNM said it does not intend to force banks to replace existing tawarruq-based products, and it will not set targets for alternative contracts.
- The central bank will explore using its regulatory sandbox so banks can test new financing ideas and spot legal, prudential and operational barriers.
- The plan builds on the i-CITA programme, which lets Islamic banks pilot risk-sharing contracts backed by a RM100 million government matching fund.
What the paper changes
Tawarruq is a commodity buy-and-sell arrangement used to give customers cash financing: the bank buys a commodity and sells it to the customer on deferred payment, and the customer then sells the commodity for cash. Because it is flexible and easy to standardise, it has become a workhorse product for Islamic banks.
BNM is not banning it. Instead, the paper says tawarruq should keep serving real market needs where other options are not available or practical, while banks should consider other contracts where those add meaningful value for customers. It names mudarabah and musyarakah, two profit-sharing and partnership contracts in which the bank shares in the risk and return of the activity it funds.
The central bank also plans to cut overlapping rules. It wants common requirements that apply across Shariah contracts and to group similar contracts together, so that banks face fewer operational hurdles when they design a new product, without weakening Shariah compliance, risk management or financial stability.
The rollout is phased. BNM will first update the regulatory framework, then support market testing and product development, and only then encourage wider adoption of structures that prove they offer customer value, are commercially viable, manage risk soundly and meet Shariah objectives. Earlier, at the Kuala Lumpur Islamic Finance Forum in October, BNM said it would issue both a strategy paper and an exposure draft on the Shariah contract framework this year.
What it means for Malaysians
- Consumers: nothing changes for existing home, car or personal financing. Over time, customers may see more product choice, including partnership-style home financing or investment accounts that share profits more directly.
- SMEs: the paper highlights partnership-based, investment-based and asset-based financing for business expansion, project financing and growth capital for micro, small and medium enterprises. That could mean funding that is linked to how a business actually performs, rather than a fixed repayment schedule alone.
- Banks and fintechs: the sandbox route lowers the cost of trying something new. Islamic digital banks and Shariah-focused fintech platforms could use it to pilot products that would be hard to launch under today’s rules.
Profit-sharing contracts are harder to run than tawarruq. Banks must assess the underlying business, monitor it, and accept that returns can fall. That is why BNM is pairing the strategy with tools that reduce early risk, such as the i-CITA matching fund, which supports financing for climate transition and food security projects.
What to watch
- The exposure draft on the Shariah contract framework, which will show the detailed rule changes and invite industry feedback.
- Which banks bring the first risk-sharing products into the regulatory sandbox, and whether Islamic digital banks are among them.
- How these changes feed into BNM’s next Financial Sector Blueprint, which follows the current 2022–2026 plan.
Related on FinDeskAsia: PayNet and the regulators · How Malaysia’s payment system works
Sources: The Star (Nov 2026) · Fintech News Malaysia (Nov 2026) · The Sun (Nov 2026) · The Edge Malaysia (Oct 2026)
