Bank Negara Malaysia (BNM) plans to explore using its regulatory sandbox to help Islamic banks test new Shariah-compliant financial products.

The proposal forms part of a strategy paper that aims to broaden the use of Shariah contracts and make it easier for Islamic banks to develop new products.

BNM said the sandbox could help banks identify legal, prudential and operational barriers while assessing the commercial viability and customer value of new products.

The central bank sees opportunities for partnership-based, investment-based and asset-based financing to support business expansion and project financing.

These structures could also help micro, small and medium enterprises meet their growth capital needs.

The strategy builds on the existing i-CITA Programme, which enables Islamic banks to pilot risk-sharing contracts such as mudarabah and musyarakah.

A RM100 million government-backed matching fund supports the programme, which helps banks finance climate transition and food security projects.

BNM also plans to review Shariah contract rules to reduce unnecessary operational barriers while maintaining Shariah compliance, sound risk management and financial stability.

The proposed changes include introducing common requirements across Shariah contracts and grouping similar contracts together to reduce overlapping rules.

The central bank also wants to reassess the role of tawarruq, a widely used Shariah-compliant arrangement for financing, deposits and liquidity management.

BNM does not intend to require banks to replace existing tawarruq-based products or set targets for adopting alternative contracts.

It wants banks to consider other Shariah contracts where they better meet customer needs and are commercially viable.

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