Sustainable alternatives to Tawarruq-based debt financing for SMEs in Malaysia

Phei Wen Ooi and Obiyathulla Ismath Bacha

Chapter 12 in Islamic Finance and the Pursuit of Sustainable Prosperity, 2025, pp 255-290 from Edward Elgar Publishing

Abstract: Islamic banks in Malaysia offer financing products for small and medium enterprises (SMEs), predominantly using debt-based contracts like Tawarruq, which not only adds leverage but also increases cash flow volatility and macro-economic vulnerability. Given the huge debt overhang globally and within emerging markets, debt creation is simply not sustainable over the long term. This chapter proposes three risk-sharing alternatives: Salam Wakalah, Modified Mudarabah, and Musharakah Mutanaqisah, tailored to SMEs’ various growth stages. Salam Wakalah suits short-term working capital needs during the introductory phase; Modified Mudarabah is ideal for productivity-enhancing projects in the growth stage; and Musharakah Mutanaqisah supports equipment and machinery purchases during the expansionary stage. Our models also incorporate the Investment Account Platform (IAP) for trading of the securitized papers, thereby enhancing financial inclusion and enabling Islamic banks to move away from Tawarruq by providing risk-sharing contracts.

Keywords: Tawarruq; SME financing; Bai Salam; Modified Mudarabah; Musharakah Mutanaqisah (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035349678
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