Tawarruq Home Financing: Risk Mitigation or Overconcentration?

Home financing today has played a vital role in banking and contributing a great amount of percentage in the growth of the economy not only in Malaysia but also elsewhere across the international borders. The evidenced of growth in Islamic banking and finance in Malaysia give no exception to Islamic home financing. Many of these products are being accused to replicate and mimicking the conventional products, thus alleged of not living to the spirit of Shariah. Debt-based products offered by Islamic financial institutions (IFIs) was usually viewed as mimicking conventional products rather than offering profit and loss sharing products. There are also concerns that many of the products offered by the IFIs are concentrated on the Tawarruq products. Often, concerns received from the regulator are referring to the usage of this product and the associated risks as a result from its utilisation. The purpose of this study is to investigate the usage of Tawarruq contract and the types of risk associated with it when it is being used as the basis for home financing products offered by IFIs in Malaysia in 2020. Further investigation was done to study the evolution of the home financing for each bank. The methodology used in this study is through content analysis (website, brochures, Product Disclosure Sheet (PDS), and annual report). The finding shows that around 63% of the Islamic banks offer Tawarruq for home financing in 2020. The study also revealed that many banks prefers to use Tawarruq in the recent years due to its arrangement that is less risky to the IFIs when it concerned financial risks and Shariah non-compliant risk (SNCR).