When Bank Negara Malaysia (BNM) announced 25 March 2020 for local banks to grant a moratorium (deferment of repayment of loans or monthly instalments) for 6 months beginning 1 May 2020, the people in particular the average bank customer breathed a sigh of relief as it was estimated that Bank Negara understands the stresses of the people's lives due to the MCO which restricts them from working and earning income to cover life including the burden of bank debt.

However, BNM's statement yesterday sparked confusion when the moratorium apparently was not an absolutely automated nature as customers would have to inform the bank if they did not want a moratorium, and even those who chose to defer payment may face higher repayments after the moratorium period ends in October, due to the value of interest or accrued profits (the accumulated bank profit value that should be earned within a certain period) for a period of 6 months imposed on customers.

Why is this happening?

1. BANKS ARE ONLY FINANCIAL INTERMEDIARIES

Simply, banks are merely financial intermediaries between depositors and customers of various financing products. That means the bank manages other people's money instead of the bank's. The profit earned by the bank is derived from interest charged on various loan/financing products which are eventually channelled back to depositors in the form of dividends (interest on deposits). Therefore, any loan deferment will affect the bank that has to repay the principal value along with the profits to the depositors depositing in the bank.

2. ARE DEPOSITORS PREPARED TO GET NO RETURNS?

When the bank offers a moratorium, this means that the bank is fundamentally prepared not to receive any profit for the deferment of repayments offered to borrowers or customers of financing products for a specified period. This also directly affects depositors as it is the depositor's money used for the bank to provide the financial loan. The question is whether depositors are prepared if for a certain period they will not enjoy the interest rate on their savings as promised?

3. WHAT IS THE REFUND AFTER THE MORATORIUM PERIOD?

On average, banking institutions should take into account the impact on depositors and bank operations within the 6 months moratorium offered. In order to avoid any form of loss including losses arising from legal implications and accounting standards, the bank has to take into account the accrued profit or interest, including the cost of the loss during the 6-month deferment of repayment. This requires each bank to find the best formula for both parties, banks and borrowers to restructure payments.

4. WHAT IS THE PEOPLE'S CHOICE?

 

In BNM's latest statement yesterday, there are simply 3 options for the people.

 

• First, proceed with the repayment as usual (not opting to take a moratorium or defer the repayment of the loan).

 

• Secondly, opt for a moratorium without affecting the loan tenure i.e. start repaying the loan instalments from October until maturity of the loan. However, the total repayment will be higher as the bank takes into account the profit or interest accrued over the 6 months moratorium period granted. That means banks will charge more to customers.

 

• Third, select a moratorium by extending the loan tenure i.e. repaying the loan instalments from October and adding repayment period after the expiry of the loan due date. Customers will also be charged a higher amount as per the second option, only the instalment value may be lower due to the extended repayment period.

 

5. WHAT EFFECT DOES SHARIAH HAVE ON ISLAMIC BANKING CONTRACTS?

 

Shariah principles are clear, if there is any change to the terms and conditions agreed initially between the bank and the customer, then a new agreement between the two parties must be made. For example, changes to the method and rate of payment need to be informed and get clear consent from the customer.

 

Since Islamic banking uses a variety of Shariah contracts such as sale and purchase (murabahah) or rental (ijarah) or a combination of various contracts (ijarah thuma al-bai, tawarruq, musharakah mutanaqisah), the implications of contracts and management procedures to obtain agreements should be refined by taking into account the nature, principles and effects of such contracts.

 

For example, for murabahah contracts that are fixed and clear in terms of the principal price and profit rate. Any changes to the profit rate or refund method for those who opt for a moratorium, require a new agreement and contract (akad).

Based on the above details, my view is as follows:

 

1. The government has good intentions to reduce the burden of the people by proposing that local banks offer moratoriums to borrowers as the covid-19 pandemic and MCO hit. The affirmative actions of this government should be appreciated taking into account the greater people's maslahah. However, mechanisms and approaches need to be planned more neatly, systematically and effectively. Communication must also be neat, clear and fast.

 

2. BNM as an implementer of this Government policy should take into account all factors from the beginning including the short and long term impact on the banking industry and the stability of the country's financial system as a whole. This is because the effect of the moratorium is different from one bank to another depending on the business portfolio of the banks based on various Shariah contracts.

 

3. The explanation of BNM needs to be clearer and more consistent from the beginning to avoid confusion to the people. If there is a mistake, BNM must be bold to acknowledge the error and take the opportunity to improve it by using various communication channels systematically and efficiently.

 

4. BNM also needs to provide a clear guide and explanation on the nature and uniqueness of Islamic financial products so as not to be misunderstood as a burden. It is even worse when the perception that Islamic banking is masked by religion and sharia to allow for burdensome benefits.

 

It is time that Islamic banking must be manifested differently from conventional practices by expressing values of courtesy and a high sense of social accountability especially when the people are affected by disasters.

 

Article prepared by : Mr. Zainal Abidin Ahmad.

Date of Input: 21/06/2021 | Updated: 21/06/2021 | nurmiera