Customers’ legal awareness and legal understanding on the contract of adhesion for Islamic home financing in Malaysia

Purpose The legal documentation for Islamic home financing is considered a contract of adhesion, as it is pre-prepared by Islamic banks, leaving customers with a take-it-or-leave-it choice. Hence, this study aims to examine the level of customers’ legal awareness and understanding of specific clauses in the contract of adhesion used for Islamic home financing in Malaysia. Design/methodology/approach This study adopts a quantitative, descriptive correlational survey design to investigate customers’ understanding and awareness of the legal documentation for Islamic home financing. Self-administered questionnaires were distributed to 384 Islamic bank customers in Malaysia and were analysed using SPSS to obtain the results. Findings The findings indicate that the level of legal awareness and legal understanding of the customers towards the standard form contract is satisfactory. The majority of the customers agreed that they have an average understanding of the legal documentation, but have inadequate legal awareness of the contract of adhesion. This finding is not in line with the theory of contract of adhesion that suggests that the standard form contract compels the customers to make a bounded rationality, even when the contract is hard to understand and hard to read. Research limitations/implications This current study is limited to Malaysia and does not extend to Islamic banking products in other jurisdictions. However, this study could be a stepping-stone that provides a foundation for further research into customers’ rights and legal awareness in other regions. Practical implications The findings in this paper could guide policymakers, such as Bank Negara Malaysia, in implementing the Financial Sector Blueprint 2022–2026, which emphasizes financial inclusion, digitalization and ethical governance. In particular, efforts to standardize Islamic home financing documentation should align with the Shariah Governance Framework, ensuring documents are transparent, accessible and supportive of customer protection goals. Originality/value This paper is one of the earliest empirical legal studies to examine the need for standardisation of legal documentation used in Islamic home financing in Malaysia. It offers a practical solution for policymakers and future researchers to enhance current legal practices further.