The rapid urbanization across Asia has led to many cities seeing massive shortages in affordable housing. The large cities of Indonesia and Malaysia are no exception to this trend. Recently, Islamic home financing has gradually become an alternative to mortgage loans among Muslims. However, in a country such as Malaysia and Indonesia where Islamic banking system is operating side-by-side with the conventional banking system, Islamic banks are exposed to competition with conventional ones. In many cases, the competitiveness of Islamic banks has been secured by flexible interpretation of Sharia, which causes the convergence of two different banking systems. This study aims to critically investigate the gap between the theory and practice of Islamic home financing in Malaysia and Indonesia. First, the study examines the Islamic financial principles that are applied to Islamic home financing contracts in Malaysia and Indonesia and the similarities and differences between the two countries. Second, it also investigates how Islamic banking system enhance its operational efficiency and reduces costs. Finally, the study traces the trajectory of Islamic home financing development from the initial stage to the current stage and how Islamic financial market and the both governments have responded to the criticism on the practice of Islamic banking raised by the Islamic scholars and Muslim customers.