Bank Negara Malaysia Policy Document on Ijarah and its Role in Governing the Practice of Islamic Hire-Purchase in Malaysia

Islamic Hire-Purchase (IHP) also known as Al-Ijarah Thumma Al-Bai’ (AITAB) is a widely used method of vehicle financing in Malaysia and serves as a Shariah compliant-alternative to interest-based conventional hire-purchase. However, the absence of specific legislation governing IHP creates challenges in the practice of IHP in Malaysia. As part of the development of Islamic banking regulations, Bank Negara Malaysia (BNM) has issued the Policy Document on Ijarah (Ijarah PD) as a Shariah standard that govern the practice of all Ijarah-based products in Islamic banking institutions in Malaysia, including IHP. However, questions remain as to whether the Ijarah PD is sufficient to address the unique features of IHP transactions. Therefore, this study aims to examine the role of the Ijarah PD in governing the practice of IHP in Malaysia. The study employs a qualitative research methodology using the doctrinal method. Data were obtained through library research by analyzing the BNM Ijarah PD and other secondary sources including books, journals, reports and online publications. The collected data were then analyzed using content analysis. The study finds that the Ijarah PD plays a significant role in governing the practice of IHP in Malaysia by strengthening legal enforceability, enhancing Shariah compliance and promoting ethical business conduct among Islamic financial institutions. Nonetheless, certain areas could benefit from further clarification, particularly regarding standard documentation, disclosure timing, risk allocation and repossession procedures. The findings highlight the need for a more comprehensive and harmonized regulatory framework. This study provides insights for policymakers and practitioners on areas where regulatory improvements may be necessary in the governance of IHP transactions.