The Effectiveness of Ta'zir and Ta'widl in Preventing Moral Hazard of Islamic Bank Customers in Indonesia and Malaysia

Abstract

The paper examines the comparative implementation of ta'zir and ta'widl, two key Shariah-compliant mechanisms for addressing default and moral hazard in Islamic banking. Through regulatory analysis and empirical evidence from Indonesia and Malaysia, this study clarifies the philosophical, legal, and operational distinctions between these mechanisms. While both countries follow the Syafii jurisprudential tradition, implementation differs significantly due to varying regulatory frameworks and operational contexts. Ta'zir functions as a disciplinary instrument targeting capable customers who deliberately delay payment, whereas ta'widl operates as a compensatory mechanism recovering documented losses from default. The analysis reveals that both mechanisms serve critical functions in protecting depositor interests, enforcing contractual discipline, and maintaining systemic stability. However, implementation inconsistencies, particularly in Indonesia's discretionary approach, create potential market fragmentation. The study concludes that while ta'zir and ta'widl represent sophisticated Islamic legal responses to moral hazard, their effectiveness depends fundamentally on clear regulatory mandates, transparent communication with stakeholders, and careful balance between disciplinary enforcement and customer protection.