Islamic Financial Services

1. Introduction

One of the most common misconceptions in capital markets is that a ṣukūk is simply the Islamic equivalent of a conventional bond. Both instruments can achieve a similar funding outcome for issuers, and both provide investment returns to investors. Yet this surface-level resemblance conceals a fundamental divergence in their legal and structural foundations. A conventional bond is generally a debt obligation: the investor lends money to the issuer and, in return, receives periodic interest payments and the repayment of principal over the life of the instrument. A ṣukūk, by contrast, is typically structured around ownership or beneficial interests in assets, usufructs, investments, or business ventures. Rather than representing a pure debt claim, ṣukūk structures are designed to comply with Sharīʻah principles by linking investors to an underlying asset or economic activity.

This distinction is not merely theoretical. It carries profound implications for how ṣukūk ought to be classified, regulated, taxed, and treated in the capital adequacy frameworks of financial institutions. If a ṣukūk genuinely embeds risk-sharing, links returns to the performance of real assets, and avoids guaranteeing the return of capital, then it may more accurately be characterised as an equity investment rather than a debt obligation.

Can ṣukūk be properly treated as equity investments? Drawing on the AAOIFI’s evolving standards, the proposed exposure draft SS ED 62, the International Accounting Standard 32 (“IAS 32”) classification framework, and recent proposals for mushārakah-based infrastructure ṣukūk in Malaysia, it does appear that certain ṣukūk structures—particularly those built on muḍārabah and mushārakah contracts—can and should be recognised as equity or quasi-equity instruments. The barriers to this recognition are institutional and behavioural, not technical or Sharīʻah-based.

2. The Debt–Equity Spectrum: Where Do Ṣukūk Sit?

Conventional financial taxonomy operates along a binary axis: instruments are either debt or equity. Bonds, loans, and notes sit firmly on the debt side; ordinary shares and partnership interests sit on the equity side. Ṣukūk, however, do not fit neatly into either category. They are, by design, hybrid instruments whose characteristics straddle the debt–equity divide.

A muḍārabah ṣukūk, for example, involves one party providing capital and another providing entrepreneurial expertise. The investor’s return is a share of the profits generated by the venture, not a fixed coupon. If the venture generates no profit, the investor earns nothing. If the venture incurs losses, the investor bears those losses to the extent of the capital contributed. This structure carries unmistakable equity-like features: residual, participatory claims on performance rather than a fixed, unconditional right to repayment.

A mushārakah ṣukūk takes this further. Here, multiple parties contribute capital to a joint venture and share both profits and losses in agreed proportions. The certificate holders become co-owners of the underlying venture or assets. Their returns are linked directly to the venture’s performance, and their exposure extends beyond the creditworthiness of any single originator.

Yet both muḍārabah and mushārakah ṣukūk also carry features associated with debt instruments. They typically have a defined maturity date, a terminal redemption mechanism, and—in practice—structures that provide investors with a degree of capital protection through purchase undertakings or liquidity facilities. The hybrid character of these instruments, combining features of both debt and equity, makes them susceptible to the agency problems associated with both financing forms simultaneously.

Some scholars have suggested that this taxonomic ambiguity could be resolved by adopting an alternative designation. The term “Islamic Investment Certificates” (IICs) has been proposed to signal that the instruments are fundamentally equity-like and risk-sharing in nature, rather than fixed-income obligations dressed in Islamic nomenclature.

It is important to note the regulatory context. Under Malaysian law, a ṣukūk is generally included within the statutory definition of a “debenture.” This means that, for certain legal and regulatory purposes, ṣukūk and conventional debt securities may be treated similarly. However, as the Securities Commission Malaysia has itself acknowledged, this regulatory treatment does not make a ṣukūk a conventional bond. The inclusion is a matter of administrative convenience and investor protection, not a determination of economic substance.

3. The Case for Equity Treatment

The strongest case for treating ṣukūk as equity investments arises from structures built on mushārakah (joint venture) contracts, particularly where the ṣukūk are deployed in infrastructure projects.

Academic proposals for Mushārakah-based sovereign sukuk structures suggest that equity characteristics can be embedded through the instrument's risk-sharing architecture and governance design, rather than through nomenclature alone.

3.1 Genuine Co-ownership, Not a Debt Claim

The proposed mushārakah structure establishes genuine co-ownership in infrastructure assets rather than a debt claim against the originator. Certificate holders acquire undivided proportional ownership interests in the underlying project assets—toll roads, power plants, water treatment facilities—and their returns flow from the economic performance of those assets. This is fundamentally different from a conventional bond, where the investor's claim is against the issuer's general creditworthiness.

The AAOIFI's proposed exposure draft, SS ED 62, reinforces this distinction. Clause 2/1 defines ṣukūk as:

Equal-value investment securities representing undivided common ownership interests in underlying assets, whether tangible assets, usufructs, rights, debts, cash, or any combination thereof, that give rise to rights and obligations for certificate holders arising from their proportional ownership share.

This definition places ownership—not lending—at the centre of the ṣukūk relationship.

3.2 Five Distinguishing Characteristics

SS ED 62 Clause 3 enumerates five characteristics that distinguish ṣukūk from conventional bonds:

• Not based on interest-bearing lending (Clause 3/1). Ṣukūk returns derive from asset ownership or venture participation, not from the time value of money lent.
• Principal and profit are not automatically obligations of the originator (Clause 3/2).Unlike a bondholder, a ṣukūk certificate holder does not have an unconditional right to demand repayment of capital or a guaranteed return.
• Certificate holders share both the rewards (ghunm) and the burdens (ghurm) (Clause 3/3).The Sharīʻah maxim of al-ghunm bi al-ghurm mandates that entitlement to profit must be accompanied by exposure to loss.
• Issued pursuant to Sharīʻah contracts (Clause 3/4). The governing contracts determine the nature and extent of the certificate holder’s rights, which may differ materially from conventional fixed-income instruments.
• Risks are not confined to the originator's credit risk (Clause 3/5). Certificate holders are exposed to the performance risk of the underlying assets or venture, not merely to whether the originator can service its debts.

3.3 Elimination of Fixed Financial Obligations

A defining feature of the proposed mushārakah structure is the elimination of fixed financial obligations. There are no fixed profit payments. There is no guaranteed return of principal. Returns are linked entirely to the actual performance of the underlying infrastructure project.

SS ED 62 Clause 11/2/3 prohibits separating the profits of the ṣukūk from the returns of its underlying assets, reinforcing the requirement that ṣukūk returns must be genuine and performance-linked rather than predetermined.

The structure further provides that any purchase undertaking must be at fair market value determined at the time of the transaction, and must not be mandatory. This avoids the capital guarantee mechanisms that have historically rendered many ṣukūk debt-like in substance. The government's in-kind contribution—land, concession rights, or existing infrastructure—constitutes a capital contribution to the mushārakah venture rather than collateral securing a debt obligation.

3.4 Quasi-Equity Recognition

The AAOIFI has recognised the quasi-equity nature of these instruments in its accounting standards. Both muḍārabah and mushārakah ṣukūk should be understood as quasi-equity instruments: their returns are linked to the performance of real underlying assets rather than to a contractual obligation to pay a fixed amount. They do not fall within the category of fixed-income securities.

AAOIFI has introduced a quasi-equity classification in financial reporting, acknowledging that these instruments integrate characteristics of both debt and equity. This classification is significant because it provides a formal accounting framework that recognises the hybrid nature of risk-sharing ṣukūk without forcing them into the binary debt-or-equity taxonomy of conventional finance.

4. The IAS 32 and Accounting Perspective

The accounting classification of a financial instrument as equity or liability is governed by IAS 32, Financial Instruments: Presentation. Critically, IAS 32 requires classification based on the economic substance of the contractual arrangement, not its legal form. The label attached to an instrument—whether “ṣukūk,” “bond,” “note,” or “certificate”—is irrelevant to its accounting treatment. What matters is the nature of the rights and obligations created by the contract.

The key test under IAS 32 is whether the issuer has a contractual obligation to deliver cash or another financial asset to the holder. If such an obligation exists, the instrument is classified as a financial liability. If it does not, the instrument may be classified as equity.

In the context of the proposed mushārakah-based ṣukūk, three features are determinative:

• No fixed repayment obligation. The government does not contractually undertake to return the investors' capital at a fixed amount. Redemption, if it occurs, is at fair market value.
• No fixed return obligation. Returns to certificate holders are a share of the project's actual performance, not a predetermined coupon.
• Non-binding purchase undertaking. Provided the purchase undertaking is drafted as a non-binding option rather than a binding obligation, the issuer is not contractually compelled to repurchase the ṣukūk at maturity.

If these conditions hold, the instrument may be classified as equity or as a hybrid instrument without a liability component under IAS 32. The IFRS classification decision tree confirms this analysis: where there is no contractual obligation to deliver cash, the instrument falls on the equity side of the classification.

The government's in-kind contribution—land, concession rights, or existing infrastructure asets—should be recognised as an equity investment inthe mushārakah venture rather than as a debt obligation. This treatment reflects the economic reality of the arrangement: the government is contributing capital to a joint enterprise, not borrowing money that must be repaid.

Classification as equity rather than debt directly affects the government's balance sheet, its debt-to-GDP ratios, its fiscal headroom, and the capital adequacy treatment of institutions holding the ṣukūk. If the instrument is properly classified as equity, it does not increase the sovereign debt burden—a significant advantage for governments seeking to finance infrastructure without expanding their liabilities.

5. Regulatory and Capital Adequacy Challenges

Despite the strong Sharīʻah and accounting arguments for equity treatment, regulatory frameworks remain stubbornly debt-centric. In Malaysia, once an instrument is labelled a “ṣukūk,” it is often automatically treated as debt or fixed income, regardless of the nature of the underlying contract. This regulatory presumption creates a self-reinforcing cycle: issuers structure ṣukūk to behave like debt because regulators classify them as debt, and regulators classify them as debt because issuers structure them to behave that way.

Capital adequacy requirements compound the problem. Under the standards issued by the Islamic Financial Services Board (IFSB), capital requirements of 300 to 400 per cent are imposed on mushārakah exposures under certain approaches. These charges are disproportionately high relative to the actual risk profile of well-structured, revenue-generating infrastructure partnerships. The result is that financial institutions face a punitive capital cost for holding risk-sharing ṣukūk, which in turn depresses demand and discourages issuance.

Bank Negara Malaysia (BNM) assigns a credit risk weight of approximately 150 per cent to certain mushārakah and muḍārabah exposures. However, BNM’s Capital Adequacy Framework for Islamic Banks (CAFIB) also provides for a supervisory slotting approach, under which the risk weight is determined by the quality of the underlying exposure rather than its contractual label. A well-structured, revenue-generating sovereign infrastructure partnership could credibly attain a “strong” or “good” slotting classification, attracting a risk weight of 70 to 90 per cent—significantly lower than the standard mushārakah charge.

Importantly, BNM’s CAFIB requires the regulatory capital treatment of any ṣukūk to follow its economic substance and actual risk profile rather than its legal form. This is a critical principle. It means that, in theory, a mushārakah ṣukūk structured with genuine risk-sharing and backed by revenue-generating infrastructure assets need not attract the punitive capital charges that deter banks from holding such instruments.

The regulatory challenge, then, is not one of principle but of practice. The principle of substance over form is well-established in both accounting and prudential regulation. The difficulty lies in translating that principle into consistent regulatory practice, particularly when the default taxonomy treats all ṣukūk as debt. As the IERIF report observes, regulatory classification as “debt” is a matter of regulatory taxonomy rather than economic substance. From both Sharīʻah and accounting perspectives, what is determinative is the underlying structure and allocation of risk, not the terminology applied by regulators.

6. Market Resistance and Behavioural Barriers

Even where the legal, Sharīʻah, and accounting arguments for equity treatment are compelling, market practice has consistently resisted the shift. The barriers are deeply embedded in the institutional culture of Islamic capital markets.

The entrenched mindset that equates ṣukūk with debt is perhaps the most formidable obstacle. For decades, market participants—issuers, arrangers, investors, rating agencies, and regulators—have operated on the assumption that ṣukūk are the Islamic equivalent of bonds. Pricing conventions reflect this: ṣukūk are typically priced off a benchmark yield curve, with a fixed or floating "profit rate" that mirrors a conventional coupon. Purchase undertakings at fixed redemption amounts are commonplace, providing investors with effective capital protection that renders the instruments debt-like in economic substance, whatever their Sharīʻah characterisation.

Investor preferences have been shaped by decades of experience with capital-guaranteed products. Institutional investors—pension funds, insurance companies, sovereign wealth funds—are mandated or accustomed to investing in instruments that provide predictable cash flows and capital preservation. A genuinely risk-sharing ṣukūk, where returns fluctuate with project performance and capital is at risk, does not fit comfortably within these investment parameters.

Historical episodes have reinforced these behavioural patterns.

A frequently cited example is the pre-2008 generation of Mushārakah sukuk, many of which incorporated purchase undertakings requiring the originator or managing partner to repurchase the sukuk assets at face value upon maturity or dissolution. Although labelled as Mushārakah and therefore ostensibly equity-based, the fixed-price repurchase mechanism effectively guaranteed investors' capital and substantially reduced their exposure to partnership losses, leading scholars and the AAOIFI Shari'ah Board to criticise such structures as debt-like in economic substance

A notable example is the US$1 billion 2007 sukuk issued by Dana Gas PJSC, which utilised a Mudarabah structure accompanied by a purchase undertaking requiring the obligor to acquire the sukuk holders' interest upon dissolution for a predetermined exercise price. Although the instrument was structured as a profit-sharing investment, the purchase undertaking substantially mitigated investors' exposure to capital loss and rendered the transaction economically closer to a debt instrument than a true risk-sharing venture. The structure exemplifies how the legal and economic substance of a sukuk may diverge from its formal characterisation as an equity-based instrument. The Dana Gas ṣukūk required a Sharīʻah ruling acknowledging non-compliance after payment difficulties emerged, highlighting the tension between stated Sharīʻah structures and actual market practice.

These examples illustrate a persistent pattern: ecosystem pressures consistently push issuers, arrangers, and rating agencies towards fixed-income conventions even where contracts are nominally structured as profit-sharing. The result is a market in which the form of Islamic finance is maintained—mushārakah contracts are used, assets are identified, Sharīʻah boards provide approvals—but the substance remains indistinguishable from conventional debt.

Rating agencies contribute to this dynamic. Their methodologies are calibrated for fixed-income instruments, assessing the issuer's ability to make scheduled payments and repay principal. A genuinely equity-like ṣukūk, where the certificate holder’s return depends on project performance rather than the issuer's credit strength, does not map well onto existing rating frameworks. Without a credit rating, many institutional investors cannot or will not invest, regardless of the instrument's underlying quality.

7. The Path Forward

If ṣukūk are to fulfil their potential as genuine equity or quasi-equity instruments—and if the Islamic capital markets are to move beyond the replication of conventional debt—a coordinated programme of policy and market reform is required. This could include:

• A formal national framework recognising risk-sharing ṣukūk as non-debt financing. An explicit regulatory classification that distinguishes risk-sharing ṣukūk (built on mushārakah and muḍārabah) from asset-backed or debt-replicating structures could be introduced. This framework could recognise that instruments with genuine risk-sharing, no capital guarantees, and performance-linked returns are equity or quasi-equity instruments, not debt obligations.
• Pilot implementation with brownfield infrastructure projects. Initial deployment should prioritise brownfield and upgrade-type projects—existing toll roads, power plants, or utilities with established revenue histories. These projects offer observable cash flow track records, reducing the information asymmetry that deters equity investors and enabling more confident valuation.
• Recalibration of capital adequacy charges. Regulators should ensure that the supervisory slotting approach is applied consistently to well-structured mushārakah ṣukūk, so that capital charges reflect the actual risk profile of the instrument rather than the punitive default weights for equity exposures. A sovereign infrastructure mushārakah with stable revenue streams should not attract the same capital charge as a speculative equity position.
• Tax neutrality between debt and risk-sharing instruments. Tax asymmetries that favour debt—such as the deductibility of interest payments but not profit-sharing distributions—must be corrected. Without tax neutrality, issuers will continue to prefer debt-like structures for purely fiscal reasons, regardless of Sharīʻah considerations.
• Introduction of an "Islamic Investment Certificates" classification. The adoption of a new classification, such as Islamic Investment Certificates, would signal to the market that these instruments are fundamentally different from conventional bonds. Nomenclature matters: as long as ṣukūk are labelled and categorised alongside bonds, the market will treat them as bonds.
• Phased implementation roadmap. Reform should proceed incrementally. A pilot programme with a limited number of well-structured issuances, supported by regulatory guidance and investor education, would build the evidence base and market confidence needed for broader adoption.

These reforms are not utopian. Each builds on principles already embedded in law, AAOIFI standards, and international accounting frameworks. What is required is the institutional will to apply those principles consistently and to resist the gravitational pull of debt-centric conventions.

8. Conclusion

A ṣukūk built on a mushārakah or muḍārabah contract, with genuine risk-sharing between issuer and investors, no capital or return guarantees, returns linked to the performance of real underlying assets, and natural exit mechanisms at fair market value, possesses the essential characteristics of an equity or quasi-equity instrument. The AAOIFI's proposed SS ED 62 standards confirm this. The IAS 32 classification framework supports it. The Sharīʻah principles of al-ghunm bi al-ghurm (reward accompanies risk) and the prohibition of ribā demand it.

The barriers to equity treatment are not technical. The legal structures exist. The accounting frameworks accommodate them. The Sharīʻah scholarship supports them. The barriers are institutional and behavioural: entrenched market conventions, debt-centric regulatory taxonomies, misaligned capital charges, tax asymmetries, and investor preferences shaped by decades of capital-guaranteed products.

Malaysia, as the world's largest ṣukūk market and a leader in Islamic finance innovation, is well-positioned to lead this transition. By introducing a formal framework for risk-sharing ṣukūk classification, piloting mushārakah-based structures in brownfield infrastructure projects, recalibrating capital adequacy requirements, and restoring tax neutrality, Malaysia can demonstrate that ṣukūk are not merely bonds with an Arabic name—they are a distinct class of investment instrument, capable of delivering the risk-sharing, asset-backed, real-economy financing that Islamic finance has always promised.

The shift from debt replication to genuine equity participation will not happen overnight. But every regulatory reform, every successful issuance, and every investor who accepts performance-linked returns over guaranteed coupons moves the market closer to what ṣukūk were always intended to be: instruments of shared enterprise, shared risk, and shared reward.

This article is for general informational purposes only and does not constitute legal advice. Please contact us if you require advice on how these developments may affect your business.

This is a significant Court of Appeal decision — SA Puncak Management Sdn Bhd v KL Petrogas Sdn Bhd (25 August 2026) — that raises several important and, in some respects, provocative points for Islamic finance in Malaysia. Below is my analysis of the key issues from an Islamic finance perspective.

The Core Holding on the Moneylenders Act

The Court of Appeal reversed the High Court on all four questions, holding that the Islamic Pre-Factoring Facility did not breach s 5(1) of the Moneylenders Act 1951 (MA). The Court drew a critical distinction: s 5(1) MA prohibits the business of moneylending, not a mere activity of moneylending, and criticised the High Court for conflating the two. This was grounded in Federal Court authority from Ngui Mui Khin v Gillespie Bros and Yeep Mooi v Chu Chin Chua, both of which held that the MA targets moneylenders as a class of business, not isolated lending transactions.

The Court further held that whole turnover agreements (receivables purchase agreements) are a recognised form of debt financing, not moneylending, relying on the New Zealand authority of Commercial Factors Ltd v Maxwell Printing Ltd. It also held that even if the MA were engaged, SAPM was exempt under the Exemption Order (P.U.(B) 219/2005), a point the High Court had erroneously restricted to "legitimate factoring" only.

The Treatment of Shariah Non-Compliance — A Critical Point

The most consequential aspect of this judgment for Islamic finance practitioners is the Court of Appeal's treatment of the Shariah compliance question in Section F of the judgment. The Court declined to consider KLP's allegation of exorbitant profit and potential breach of Shariah principles for three reasons:

1. Pleading deficiency — KLP's Amended Statement of Claim did not plead that the Islamic Pre-Factoring Facility had breached Shariah principles.
2. Scope of the questions — The four questions before the Court did not concern the exorbitant profit allegation, much less a breach of Shariah principles.
3. Substantive position — Even if there were a breach of Shariah principles, such a breach in itself does not invalidate the Islamic Pre-Factoring Facility.

On the third point, the Court relied heavily on the Court of Appeal's earlier decisions in Tan Sri Halim bin Saad v Amanah International Finance Bhd [2026] 2MLJ 570, and within that, the judgment of Rohana Yusuf JCA in Maybank Islamic Bhd v M-IO Builders Sdn Bhd [2017] 2 MLJ 69. The M-IO Builders line of reasoning holds that:

• The validity of an Islamic finance contract must be assessed under the general law governing contracts (principally the Contracts Act 1950), not solely by reference to Shariah principles.
• Section 24 of the Contracts Act 1950 exhaustively lists the grounds on which a contract may be void or unlawful, and non-compliance with Shariah is not among them.
• Neither the Islamic Banking Act 1 983 (now repealed) nor the Islamic Financial Services Act 2013 (IFSA) provides that a breach of a Shariah principle perse invalidates a financing facility.
• If Parliament had intended Shariah non-compliance to void a contract, it would have expressly added such a ground to s 24 of the Contracts Act 1950, but it has not done so.

Observations and Critique

1. The "Shariah-blindness" concern

The judgment reinforces a well-established but highly debated position in Malaysian law: that Islamic finance contracts are, at bottom, governed by civil law, and Shariah compliance is essentially a regulatory and institutional matter (policed by Bank Negara Malaysia's Shariah Advisory Council and institutional Shariah committees) rather than a contractual validity matter. This can be traced back to Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corporation Sdn Bhd [2003] 2 MLJ 408,which the Court expressly endorsed.

From an Islamic finance purist's perspective, this is troubling. It effectively means that a financier can label a facility as "Islamic," charge profit rates exceeding 100% per annum, and the court will enforce the contract so long as it passes muster under the Contracts Act 1950 — even if the pricing mechanism is functionally indistinguishable from usurious interest (riba). The judgment leaves open the question of what remedy, if any, a customer has when an "Islamic" facility is Shariah-non-compliant in substance.

2. The role of IFSA and the Shariah Advisory Council

The Court noted that neither the IBA nor IFSA provides that a Shariah breach invalidates a financing facility. This is technically correct but arguably incomplete. Section 29 of IFSA requires licensed Islamic financial institutions to ensure that their aims and operations, business, affairs, and activities comply with Shariah. Sections56–58 of IFSA establish the role of the Shariah Advisory Council (SAC) of Bank Negara Malaysia as the authority for the ascertainment of Islamic law for the purposes of Islamic financial business, and s 56(1) provides that the ruling of the SAC shall be binding on arbitral tribunals and courts. The judgment does not engage with this regulatory architecture at all, likely because SAPM is nota licensed Islamic bank but rather a scheduled institution under BAFIA (now a prescribed institution under FSA/IFSA). This is a significant gap: the Shariah governance framework under IFSA may not have applied to SAPM directly, but the Court's broader pronouncements on Shariah compliance and contractual validity have implications well beyond this particular factual matrix.

3. The exorbitant profit issue

The Court declined to address the allegation that profit exceeded 100% per annum because it was not pleaded as a Shariah breach and was not within the four questions. This is procedurally sound, but it sidesteps a substantive concern that goes to the heart of Islamic finance: the prohibition of riba (usury/interest). A profit rate exceeding 100% per annum on a facility labelled "Islamic" raises serious questions about whether the arrangement is, in economic substance, a loan at interest rather than a genuine sale-based or agency-based financing. The Court's characterisation of SAPM's business as "Debt Financing" rather than moneylending does not address the Shariah dimension of this concern.

4. Policy implications for whole turnover agreements

The Court's robust endorsement of whole turnover agreements as lawful debt financing instruments is commercially significant. The reasoning that Malaysian businesses should not be deprived of this financing tool, and that prohibiting such agreements would drive financing offshore, is pragmatic and commercially sensible. However, this pragmatism sits uneasily with the Islamic labelling of the facility. If the structure is endorsed purely on civil law grounds, one might question what the "Islamic" label adds — or whether it creates a false assurance of Shariah compliance for customers.

5. The closing reminder

The Court's final observation is telling: "unless it is abundantly clear that a genuine financing agreement or transaction is prohibited by our written law, either expressly or by necessary implication, courts should uphold and enforce the Financing Agreement/Transaction". This is a strong pro-enforcement, pro-commercial certainty statement that aligns with the principle in Lori Malaysia Bhd v Arab-Malaysian Finance Bhd that courts should be slow to strike down commercial transactions. For the Islamic finance industry, the message is clear: the courts will not use Shariah principles as as word to invalidate otherwise lawful contracts.

Summary

This judgment is a significant reaffirmation of the M-IO Builders/Emcee Corporation line of authority. It will be welcomed by financiers and the factoring industry for its commercial certainty and its validation of whole turnover agreements. However, it does leave a gap in the protection available to customers under Islamic finance arrangements, particularly where facilities carry the "Islamic" label but impose pricing that may be inconsistent with the prohibition of riba. The judgment essentially directs Shariah compliance disputes away from the courts and towards the regulatory framework —but without engaging with whether that framework adequately addresses the customer's position. This tension between contractual enforceability under civil law and substantive Shariah compliance remains one of the most live issues in Malaysian Islamic finance jurisprudence.

This article is for general informational purposes only and does not constitute legal advice. Please contact us if you require advice on how these developments may affect your business.

New Regulatory Framework for Consumer Credit Industry Now in Effect

The Consumer Credit Commission (Suruhanjaya Kredit Pengguna, "SKP") has today, 5 June 2026, issued its Authorisation Standards (Version 1.0) pursuant to section 123 of the Consumer Credit Act 2025 ("CCA"). The Standards take immediate effect and establish the licensing and registration framework for entities carrying on credit businesses and credit service businesses in Malaysia.

Who is affected?

The Standards apply to entities carrying on or intending to carry on the following regulated activities:

• Credit business (requiring a licence): buy now pay later schemes, factoring, and leasing, including their Islamic equivalents.

• Credit service business (requiring registration): impaired loan or financing acquisition, debt collection, and debt counselling and management.

Entities already engaged in these activities, as well as new entrants to the market, must familiarise themselves with the authorisation criteria and ensure compliance.

Key requirements at a glance

The Standards prescribe minimum financial thresholds of RM2 million in shareholders' funds or total equity for credit businesses, and RM500,000 (or RM250,000 with professional indemnity insurance of RM250,000) for credit service businesses. Applicants must be companies incorporated in Malaysia under the Companies Act 2016 and must demonstrate organisational competence, sound business management, and the fitness and propriety of their key persons, including controllers, directors, and senior management.

All applications must be submitted via SKP's new digital regulatory platform, the Consumer Credit Commission Online Regulatory System ("CORE System"), together with the prescribed processing fee of RM2,000 per type of business.

Islamic credit business

The Standards include dedicated provisions for Islamic credit providers, who may operate either as full-fledged Islamic entities or through an Islamic window model. Key obligations include end-to-end Shariah compliance, establishment of an Islamic Credit Business Fund for window operators, prohibition on commingling of Islamic and conventional funds, and the appointment of a qualified Shariah adviser or Shariah committee.

Post-authorisation obligations

Authorised entities face ongoing compliance obligations, including periodic data submissions to SKP (annual audited financial statements, quarterly operational data, and monthly complaints data), notification requirements within 14 calendar days of specified events, and the obligation to submit credit consumer data to a credit reporting agency within 12 months of authorisation. Prior approval from SKP is required for matters such as changes in control, appointment of the chief executive, and addition of new business types.

Fees

Inaugural authorisation fees are RM8,000 per licence (credit business) and RM5,000 per registration (credit service business), with a 50% reduction for approvals granted in the second half of the calendar year. Annual fees are tiered by revenue, ranging from RM8,000 to RM100,000 for credit businesses and RM5,000 to RM50,000 for credit service businesses.

Entities not serving credit consumers

Entities carrying on a credit business or credit service business that does not involve credit consumers are not subject to the licensing or registration requirement. However, they must submit an annual declaration to SKP under section 79(2) of the CCA confirming their noninvolvement with credit consumers.

What should affected entities do now?

Entities currently carrying on or planning to carry on any of the regulated activities should review the Authorisation Standards in full, assess their readiness against the authorisation criteria, and take steps to prepare their applications via the CORE System. Particular attention should be given to ensuring that key persons meet the fit and proper criteria and that the requisite policies, procedures, and financial resources are in place.

We are available to assist clients in navigating the new framework, including advising on authorisation applications, corporate structuring, Shariah governance arrangements, and ongoing compliance obligations.

The full text of the Authorisation Standards is available on SKP's website at www.skp.gov.my.

If you have any questions or require any additional information, please contact Sharifah Shafika Alsagoff or the partner you usually deal with in Zaid Ibrahim & Co

This alert is for general information only and is not a substitute for legal advice.

Bank Negara Malaysia (“BNM”) (Central Bank of Malaysia) has recently proposed standards and guidelines for sell and buy back agreements (“SBBA”) and collateralized commodity murabahah (“CCM”) transactions used as Islamic financial instruments in the Islamic Interbank Money Market (“IIMM”).  

BNM’s exposure draft of 2 October 2023 sets out these proposals. Industry players have been asked to provide feedback by 31 October 2023, after which BNM will formalize a policy document on 1 January 2024.

The objectives of the policy document are to:

1. outline the scope of the SBBA and CCM transactions;
2. provide the regulatory requirements and BNM’s expectations for such transactions;
3. promote sound risk management practices for the conduct of such transactions; and
4. ensure compliance with Shariah principles.

Policy document will supersede previous guidance notes on SBBA

When it comes into effect, the policy document will supersede the Guidance Notes on Sell and Buy Back Agreement (“Guidance Notes”), previously issued on 28 June 2013.

The Guidance Notes provided best practices governing the conduct of the SBBA transaction. The SBBA, which is akin to the conventional repurchase (“Repo”) agreement, was modified to comply with Shariah principles and approved by the Shariah Advisory Council of BNM as an Islamic financial instrument.

A Repo agreement is guided by the Repurchase Agreement Transactions Policy Document issued by BNM in 2019. The policy document defines a Repo as a transaction which involves the sale of securities with a simultaneous agreement to repurchase them on a future date and at a higher price. The repurchase price consists of the original price plus an interest rate on the cash leg of the transaction.

In the SBBA, there are two distinct contracts which are concluded at two separate times, namely, the sale of securities in the first contract and the repurchase of the securities in the second contract. In addition, there is no stipulated condition to repurchase the securities by the seller in the first contract. The Wa’d or promise to repurchase and/or to sell the securities in the SBBA overcomes the inter-conditionality issue in the Repo, as the promise is only made upon the conclusion of the first contract.

The SBBA is thus the answer to a Shariah compliant repurchase agreement.

Policy document will enhance features and provide clarity in SBBA

The proposed policy document enhances the features of the existing SBBA transaction, namely by providing clarity to its definition and transaction sequence as follows:

The element of promise or Wa’d in the SBBA arrangement prevents inter-conditionality between the sale and purchase transactions entered by the SBBA buyer and SBBA seller.

Key differences between the policy document and previous guidance notes

The key difference between the policy document and the Guidance Notes is the introduction of CCM as an alternative Islamic financial instrument for the IIMM. The CCM is an arrangement based on the Shariah principle of murabahah where a CCM pledgor buys commodity from a CCM pledgee on deferred payment terms. The CCM pledgor then pledges Shariah compliant securities as collateral for the deferred payment obligation under the murabahah contract.

Other salient differences between the Guidance Notes and the policy documents are set out below:

Conclusion

In 2014, the International Islamic Financial Market issued a Master Collateralized Murabahah Agreement (“MCMA”) which is a standard template used as an alternative to the Repo. The MCMA is based on the Shariah principles of murabahah and rahn and aims to address the issues and diversity in practices around the buying and selling of securities by the same counterparties at a future date.

Since then, international banking institutions, especially in the United Arab Emirates, have used the MCMA as a liquidity management tool.

Therefore, the introduction of CCM in this proposed BNM’s policy document may be more appealing to banking institutions that are less favourable towards the SBBA.

If you have any questions or require any additional information, please contact Lily Adelina Hashim, Raihan Naseeha Rafidi, or the Zaid Ibrahim & Co partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.