Tawarruq and Musharakah Mutanaqisah Home Financing in Malaysia



Tawarruq and Musharakah Mutanaqisah (MM) are becoming widely practiced Islamic financing products in Malaysia as a replacement for Bay’ Bithaman Ajil (BBA) home financing. Evidently, a statistic from BNM portrayed more than 57% of total financing by Islamic finance institutions consisting of Tawarruq-based financing and this includes Tawarruq home financing.[1]


What is Tawarruq Home Financing?


Tawarruq is a financing arrangement involving three different parties namely the purchaser (mutawarriq), the bank (muwarriq) and the third party (i.e. brokers).[2] The purchaser i.e the customer will be receiving cash at the end of it for the purpose of purchasing a residential property through two sale and purchase contracts which are closely related to each other.

[1] Ahmad, Z.,Zahir, F,, Usman, A. M., Muneeza, A., and Mustapha, Z., "An Exploratory Study On The Possibility Of Replacing Tawarruq Based Islamic Banking Products Using Other Alternatives", International Journal of Management and Applied Research 7, No. 2, (2020): 147. [2] Hanudin Amin and Mohammad Rizal Abdul Hamid, “Patronage Factors of Tawarruq Home Financing in Malaysia”, International Journal of Business and Society 19, No. 3 (2018): 661.



  1. First contract: The sale of an asset by the bank to the purchaser on a deferred basis.

  2. Second contract: The purchaser of the first contract will sell the same asset to a third party on a cash and spot basis.[1]

Tawarruq and Bay’ Innah are similar in terms of the number of contracts normally involved. However, what makes Tawarruq and Bay’ Innah different from each other is the parties involved in the second contract. In Tawarruq, the second contract is made with a third party whereas in Bay’ Innah, there is no involvement of a third party in the second contract.


What is Musharakah Mutanaqisah?


Musharakah Mutanaqisah (MM) literally means “Diminishing Partnership”. The concept of MM home financing is based on a diminishing partnership where it consists of three different contracts which are Musharakah (partnership), Ijarah (leasing) and Bay’ (sale). There are three steps to execute this home financing[2].

[1] Bank Negara Malaysia, ‘Tawarruq’, Policy Document, 2018, p. 5, https://www.bnm.gov.my/documents/20124/938039/pd_reissuancetawarruq_dec2018.pdf/bcc4b359-381c-5035-f9f0-3908faebb92a?t=1592249563244 [2] Subky, K. H. Liu, J. Y., Abdullah, M. Farhan Mokhtar, Z. and Faizrakhman, A, "The Implication of Musharakah Mutanaqisah in Malaysian Islamic Banking Arena: A Perspective on Legal Documentation'', International Journal of Management and Applied Research. 4, No. 1, (2015): p. 17-30.





1. ‘Shirkat-al Milk’ or joint ownership contract:

The customer will need to determine the house and both parties i.e the Islamic bank and the customer will contribute a certain value as his share and the bank will contribute the balance as their share.


2. Ijarah contract:

The bank will lease the house to the customer.



3. Bay’ contract:

The customer gradually buys back the asset shares of the bank based on pre-agreed tenure of repayment and subsequently, the ownership of the house will be transferred to the customer.[1]


In Malaysia, Tawarruq and Musharakah Mutanaqisah can be considered as the most acceptable and common products in Islamic home financing.

[1] Ibid.

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