Malaysia’s financial landscape is on the verge of a pivotal transformation as Bank Negara Malaysia (BNM) moves to abolish the Rule of 78 through its ‘Exposure Draft on Personal Financing’, issued on 13 December 2024 (BNM, 2024). This amortisation method, applied in both conventional and Islamic personal financing, has long been criticised for disproportionately disadvantaging borrowers by front-loading profit or interest charges (Zainuddin & Harmidy, 2022; Abdullah, 2021, p. 91; Halim et al., 2019). The front-loaded profit allocation under the Rule of 78 contradicts fundamental Islamic finance principles such as justice, transparency, and equitable risk-sharing, raising serious concerns about its ethical compatibility (Muhamad Sori, 2025a).
Originally introduced in the United States in 1935, the Rule of 78 subsequently gained widespread use in consumer lending (Johnson, 1981). However, it became a topic of significant controversy, prompting many regulatory bodies around the world to restrict its use throughout
the 1990s and 2000s. Countries such as the United States, the United Kingdom, Canada, Australia, and various European Union member states have imposed restrictions on their application for long-term loans due to concerns over fairness (Mississippi Department of Banking and Consumer Finance, 2020; Consumer Measures Committee, 2002; European Union, 2008; Muhamad Sori, 2025b). Malaysia’s decision to follow suit demonstrates a regulatory shift toward fairer and more transparent consumer financing. However, the success of this reform depends on more than regulatory intention. The transition must be carefully designed to ensure that borrowers, particularly those in vulnerable groups, are not left behind and that financial institutions have sufficient time and clarity to adjust their systems and product offerings.
