Hiwalah Agreement (Malaysia)

A Hiwalah Agreement in Malaysia sets out the rights and obligations the parties agree to be bound by.

Bank Negara Malaysia regulates Islamic financial products including hiwalah under the Islamic Financial Services Act 2013 (IFSA 2013). The Shariah Advisory Council (SAC) of BNM, established under the Central Bank of Malaysia Act 2009, has issued rulings on hiwalah that bind all licensed Islamic financial institutions in Malaysia. The IFSA 2013, Section 29, requires all Islamic financial institutions to confirm that their products and services comply with Shariah principles as interpreted by the SAC.

In the Malaysian Islamic finance market, hiwalah is widely used as a mechanism for debt settlement in trade financing, supply chain finance, and interbank settlements. It is structurally similar to a bill of exchange assignment — the muheel (original debtor) directs the muhal alayh (a third party who owes money to the muheel) to pay the muhal (original creditor) directly, thereby extinguishing both the muheel's debt to the muhal and the muhal alayh's debt to the muheel simultaneously.

For a valid hiwalah under Shariah principles recognised by BNM's SAC: (1) the muhal alayh must consent to accept the transfer; (2) the debt being transferred (the mahl) must be a confirmed, established debt (dayn thabit) of the same currency and quantum; (3) neither debt may be a speculative or contingent debt (dayn muajjal bil-gharar); (4) the parties must be legally competent; and (5) the muhal must release the muheel from further liability upon completion of the hiwalah (hiwalah al-muqayyada). If the muhal alayh defaults, the muhal may only revert to the muheel in limited circumstances under Maliki and some Shafi'i positions — BNM's SSOR on Hiwalah specifies the applicable position for Malaysian Islamic financial institutions.

Hiwalah is distinct from hawalah money remittance — while the word shares an Arabic root, the Islamic finance concept of hiwalah involves the transfer of an existing debt between identified parties, whereas hawalah in the money services context refers to informal cross-border value transfer. In Malaysia, hawalah remittance businesses are regulated by BNM under the Money Services Business Act 2011 (MSBA 2011), and must not be confused with the Islamic finance instrument documented here.

A Hiwalah Agreement in Malaysia is needed whenever a debt obligation is to be transferred from one party to another under Shariah-compliant terms.

A Hiwalah Agreement is required when an Islamic bank or financial institution transfers a customer's financing obligation to a guarantor or security holder under a supply chain financing arrangement, and the transfer must be documented as a Shariah-compliant hiwalah rather than a conventional novation to maintain the transaction's Islamic finance classification under IFSA 2013.

A Hiwalah Agreement is needed when a Malaysian company (the muheel) owes payment to a supplier (the muhal) and the company is itself owed money by a third party (the muhal alayh), and all three parties agree to settle the obligation through a hiwalah rather than through separate payments — creating a more efficient three-way settlement that is Shariah-compliant.

A Hiwalah Agreement is required when an Islamic bank accepts a hiwalah from a customer as part of a trade finance or documentary credit facility, directing the customer's overseas buyer to pay the bank directly as settlement of the customer's murabahah or commodity murabahah financing.

A Hiwalah Agreement is needed when a takaful operator or Islamic fund manager transfers an obligation under a structured product to an Islamic bank under an interbank settlement arrangement that must comply with BNM's SSOR on Hiwalah.

A Hiwalah Agreement is required when a Malaysian company participating in a Sukuk programme needs to document the transfer of periodic profit payment obligations between special purpose vehicles (SPVs) in a manner compliant with the Securities Commission Malaysia's Guidelines on Sukuk and IFSA 2013.

Parties in Malaysia should prepare a Hiwalah Agreement (Malaysia) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.

A valid Hiwalah Agreement in Malaysia under BNM's Shariah Standards must contain the following essential elements to be enforceable and Shariah-compliant.

Party Identification — Muheel: Full legal name, NRIC or SSM registration number, and address of the muheel (the original debtor who transfers the debt obligation). For corporate muheel, include SSM number, registered address, and authorised signatory details.

Party Identification — Muhal: Full legal name, NRIC or SSM registration number, and address of the muhal (the original creditor to whom the debt is owed). The muhal's consent is implicit in accepting the hiwalah.

Party Identification — Muhal Alayh: Full legal name, NRIC or SSM registration number, and address of the muhal alayh (the third party accepting the debt transfer). The muhal alayh's explicit consent is a Shariah requirement for a valid hiwalah under all four madhahib and BNM's SAC rulings.

Original Debt Description (Dayn Muheel): A precise description of the original debt owed by the muheel to the muhal — including the amount in Malaysian Ringgit (RM), the nature of the obligation (trade receivable, financing repayment, service fee), the original transaction reference, and the due date.

Transferred Debt Description (Dayn Muhal Alayh): A description of the debt owed by the muhal alayh to the muheel — including the amount, nature, and due date — which must be equivalent to or greater than the original debt being transferred for a hiwalah al-muqayyada (conditional transfer).

Shariah Conditions Confirmation: A statement confirming that the hiwalah meets BNM SAC requirements — both debts are confirmed (dayn thabit), the amounts are equivalent, no riba (interest) or gharar (uncertainty) is involved, and the muhal alayh has provided informed consent.

Release of Muheel: A statement that upon execution of the hiwalah, the muhal releases the muheel from all further liability in respect of the original debt (hiwalah al-muqayyada release), consistent with BNM's SSOR on Hiwalah.

Settlement Instructions: Payment instructions specifying how, when, and where the muhal alayh shall make payment to the muhal in satisfaction of the transferred obligation.

Signatures and Date: Signatures of the muheel, muhal, and muhal alayh confirming their respective roles, consent, and obligations — and the date of execution of the hiwalah.

Additional compliance elements for a Hiwalah Agreement (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.