WHEN Bank Negara Malaysia (BNM) announced on Mac 25 that local banks will provide a 6-month moratorium (deferment of loan servicing or monthly installment) beginning May 1st 2020, it was a relief for the rakyat since they had the impression that BNM were with them during the hard times of Movement Control Order (MCO).
However, the central banks’ statement yesterday led to confusion as the moratorium is not automatically given to customers or borrowers since they have to alert the bank should they refuse it. For those who chose to defer payment will be subjected to higher repayments when the moratorium ends in October when the accrued interest for six months is calculated and imposed on them.
Why is this happening?
- BANKS ARE JUST FINANCIAL INTERMEDIARIES
In simple words, banks are only financial intermediary between depositors and customers in providing financing products. It means, banks manage other peoples’ money. Profit derived from interest on various products which is loans/financing which go back to depositors as dividend (interest on deposit).
Hence, any loan deferment will have negative bearing on the banks since they have to service depositors with their net tangible asset (NTA).
2. DO DEPOSITORS READY FOR NON-PROFITABLE RETURNS?
When banks offer a moratorium, it means they are ready not to make any profit from postponement of loan servicing from customers in a stipulated period. It also give direct impacts to depositors since it was their money used to give out loans and other products.
The question is, are the depositors ready for such a situation?
3. WHAT WILL BE THE MODE OF REPAYMENT AFTER MORATORIUM?
Generally, banks will have to weigh its impacts on the depositors and its operation during the 6-month moratorium. To avoid any losses, legal implication and accounting standard, banks are forced to impose the accrued interest, including the 6-month losses.
This is where banks need to find the best formula for both, namely the banks and borrowers.
4. THE PEOPLES’ OPTIONS
In its latest statement, BNM is giving us three options.
(i) First, continue with current loan repayment (not opting for moratorium or loan deferment).
(ii) Second, opting for moratorium which only requires them to resume repayment in October. However, it will be much higher since banks will accumulate accrued 6-month interest on the amount of loans given. This means that banks will overcharge customers.
(iii) Third, accepting the moratorium with extended repayment period starting October. Customers will have to pay more as in (ii) but the installment could be lower after period of repayment is extended.
5. SHARIAH BEARING ON ISLAMIC BANKING
The Shariah principle is clear. Should there be changes to the initial terms and conditions with customers, a new agreement is the answer. For instance, adjustment to methods and quantum of payments must be made clear and endorsed by the customers.
Since Islamic banking subscribe to various shariah contracts which are hire-purchase modul (murabahah) or lease (ijarah) or the combination of various methods (ijarah thuma al-bai, tawarruq, musharakah mutanaqisah) then the product implication and its managing procedure must get full endorsement and fine-tuned to the elements above.
For instance, a permanent murabahah product must have a clear notion on its principle pricing and profit. Any changes will require a new contract (akad).
On that note, I am of the opinion that:
- The government has a noble intention to address our predicament when it requested local banks to give a moratorium to borrowers during this Covid-19 pandemic and MCO. The affirmative measures must be appreciated. However, its mechanism and methods need further fine-tuning and made practical. The communication methods must also be fast and clear.
- BNM as the executing body must take into account all factors, including the short and long-term impacts to the banking industry and the stability of the country’s financial system. This is so since the impact of variable sets of moratorium imposed by banks on business portfolio based on their shariah contracts.
- BNM methods in informing the public must be consistent to avoid confusion. In case of error, BNM must have the gut in admitting its mistake and take liberty to resolve it.
- BNM must also provide clear guidelines and information on the Islamic products as to avoid deception. Worse still is when Islamic banking is perceived as a religious tool to permit the burdensome interest rates.
- This is the right time for Islamic banking to prevail over the conventional practice by promoting good values and readiness in facing any difficult times
Datuk Dr Asyraf Wajdi Dusuki
Ketua Pergerakan Pemuda UMNO Malaysia