Finance & Banking

ICD PROFILE

ICD has an authorised capital of USD4 billion. Currently, the shareholders of ICD are the IsDB (50%), 55 Islamic countries (30%) and five public financial institutions (20%).

The Islamic Corporation for the Development of the Private Sector (“ICD”) is a multilateral development financial institution and is a part of the Islamic Development Bank (“IsDB”) Group.

ICD was established in November 1999 to support the economic development of its member countries through the provision of finance for private sector projects, promoting competition and entrepreneurship, providing advisory services to governments and private companies and encouraging cross border investments.

ICD has an authorised capital of USD4 billion. Currently, the shareholders of ICD are the IsDB (50%), 55 Islamic countries (30%) and five public financial institutions (20%).

ICD mandate and objectives ICD fosters sustainable economic growth in its 55 member countries by:

Financing private sector investment
Mobilising capital in the international financial markets
Providing advisory services to businesses and governments

ICD selects financing projects based on their contribution to the economic development while considering factors such as job creation, Islamic finance development, contribution to exports etc. ICD also provides advisory services to governments and private sector groups on policies designed to encourage the establishment, expansion and modernisation of private enterprises, development of capital markets, best management practices and to enhance the role of the market economy. ICD operates to complement the activities of IsDB in member countries. ICD applies Fintech to make finance more efficient and inclusive.

Financial services institutions in the member countries will benefit the most from fintech innovations using AI, robotics, blockchain, data analytics and cloud service. ICD has set up a platform, built and centred on ICD’s relationship with 119 financial institutions. Through them, the IsDB Group in general and ICD would leverage access to the country and avail financing opportunities. The platform allows like-minded financial entities to collaborate on business opportunities, exchanging market intelligence and laying a foundation for actual financial transactions within the OIC member countries and across borders.

COVID-19 IMPLICATIONS ISLAMIC FINANCE PRESCRIPSION

DR MARIZAH MINHAT & DR NAZAM DZOLKARNAINI EDINBURGH NAPIER UNIVERSITY, UNITED KINGDOM

During the outbreak of COVID-19, the interest rates on both sides of the Atlantic are approaching the base and driving borrowing costs to historic lows. In the United Kingdom, the Bank of England (BOE) has revised the bank rate to 0.1%, its lowest ever, on March 19, 2020. In the United States, the Federal Reserve have maintained the federal funds rate or range at 0-0.25% since March 16, 2020.

Of great interest is the falling trend of the BOE base rate over time. The rate was at a peak at 17% on November 15, 1979 and has since gradually fallen to almost zero as of March 2020. The latest downward revision of the interest rate to 0.1% was intended to limit the economic fallout from COVID-19 – as if the natural law of gravity is showing the world a prescription against the root of all evil.

In a Muslim-majority country such as Malaysia, also proclaimed as a pioneer of Islamic finance, the Overnight Policy Rate (OPR) was reduced to 2% on May 5, 2020. While it is still uncertain whether the benchmark rate will be reduced
further, maintaining such a positive base rate provides little incentive for a zero-interest rate policy.

Although the Muslim-majority population has
learned that interest on lending and borrowing
is prohibited, interest remains a banking norm
and efforts to implement alternative financing
practices seems far from satisfactory. In reality,
real and financial markets have prospered with
the help of credit instruments that are in turn ruled by interest rates. Islamic financial markets
are vaguely distinctive. Walking the talk on
Islamic finance has been a challenging task. A call
to bridging the gap between theory and practice
of Islamic finance can be found in our academic
article entitled ‘Islamic corporate financing: does
it promote profit and loss sharing?’ published in
a renowned journal Business Ethics: A European
Review (2016, Volume 25, Issue 4). This
article essentially questioned whether Islamic
financial instruments that charge profit rates are
entirely different from the interest-based credit
instruments.

Even during the period of calamity due to
the COVID-19 outbreak, where six-month
moratorium for loans was announced by the
government, banks (Islamic and non-Islamic)
in Malaysia seemed initially reluctant to waive
additional interest or profit charges imposed
following deferrals in instalments for hirepurchase loans. This incidence had triggered
public outcry as banks were seen not doing
enough to ease people’s financial burden during
the time of need.

Although it was later announced that the
additional interest or profit charges will be waived
for the moratorium (dubbed as COVID-19
Financial Relief Scheme), such an incidence has
already amplified scrutiny against the interest of
Islamic hire-purchase providers.

In Malaysia, Islamic hire-purchase is commonly
marketed as Al-Ijarah Thumma Al-Bai’ (AITAB).
Interestingly, both AITAB and conventional hirepurchase are regulated through the Hire-Purchase
Act 1967. By implication, the calculation of ‘term
charges’ for both conventional and AITAB adopt
the same formula as set out in the Sixth Schedule
of the Act. The term charges are calculated on
a simple interest basis at a rate specified in the
agreement.

For example, if the term charges calculated as
a rate per centum per annum specified in an
AITAB agreement is 2.44%, the cash price of a
vehicle is RM114,000 and repayment period is
nine years (i.e., 108 months), then the monetary
value of term charges is RM25,034 (i.e., 2.44%
× RM114,000 × 9). Consequently, the total
amount repayable by consumer is RM139,034
(i.e., RM114,000 + RM25,034).

Although an AITAB agreement may state that
term charges are the profit rate that is used to
calculate the rental rate for the Islamic hirepurchase, the use of an identical formula to
calculate the interest rate for conventional
hire-purchase raises eyebrows. One might as well argue that the bank is actually lending
RM114,000 and charging RM25,034 in interest.
The simple interest per month is approximately
RM231.80 (i.e., RM25,034 / 108 months) to be
paid by the consumer to the bank.

From a critical perspective, the ‘aqad’ paperwork
and vehicle can be seen as disguising the moneylending activity of the bank. In reality, the bank
has essentially ‘created’ deposit (money) of
RM114,000 and loaned the money out to a
consumer to buy the vehicle. Furthermore, the
bank could generate profit more than RM25,034
from this money lending activity.

If the bank invests every RM231.80 on the
monthly interest it receives, and reinvests for
every successive month during the repayment
period, the bank will also profit from interest-oninterest. Following the Annual Percentage Rate
(APR) for term charges as calculated in accordance
with the formula set out in the Seventh Schedule
of the Hire-Purchase Act 1967, the effective
annual rate for the investment and reinvestment
of interest income is 4.5%. This yields monthly
reinvestment rate of approximately 0.375% (≈
4.5% / 12).

By implication, using the monthly compounding
concept of interest, the total interest and intereston-interest earned by the bank throughout
the 108 months is RM25,034 and RM5,759,
respectively (Note: RM5,759 is the total interest
earned on reinvesting every RM231.80 in
interest on a monthly basis). This effectively
means that when the bank lends RM114,000 in
money that it had created, it could be receiving
in return RM144,793 (i.e., RM114,000 +
RM25,034 + RM5,759) though the consumer’s
repayable amount is RM139,034.

One could gather from the above illustration that,
by default, banks earn not only interest but also
interest-on-interest (compound interest) through
their money-creating, lending and reinvestment
activities. The calculations of both simple
interest and compound interest are provided in
the Hire-Purchase Act 1967, which regulates
both Islamic and conventional hire-purchase in
Malaysia. According to the Section 4c(1)(c)(viii) of
the Act, every hire-purchase agreement set out
in a tabular form the APR for term charges, shall
be calculated in accordance with the formula set
out in the Seventh Schedule of the Act.

Not surprisingly if, in practice, the APR is not
stated in an Islamic hire-purchase agreement By all means, such concealment (if any) does not
necessarily suggest the absence of compounding
interest practice. A bank is deemed not
efficient if it let money sitting idle not earning
anything. From this perspective, an attempt
to distinguish Islamic banks (as practised) from
their conventional counterparts is feared to
have fraught consumers with confusion, if not
deception.

INTEREST INCOMES AND REMUNERATION

In reality, interest incomes earned by banks
are more than enough to provide lucrative
remuneration to their employees, which are often
a small segment of a population. For example, the
combined net interest incomes of two Domestic
Systemically Important Banks (D-SIB) in Malaysia
for the financial year ended in 2019 was more
than RM22 billion, as reported in their publicly
available annual reports.

Total personnel expenses reported for these
two banking groups, Maybank and CIMB Group,
for the same year was more than RM12 billion,
which is greater than 50% of the combined
net interest incomes cited above. Personnel
expenses include salaries, allowances, bonuses
and pension costs of their employees. These are government-linked entities with about 78,000 staff in combination.

As a benchmark, Malaysia is populated by more
than 30 million people. The mean income of
B40 (bottom 40% income group) was RM2,537
in 2014. If the average pay per employee at the
two government-linked banking entities is more
than RM12,000 per month (i.e. RM12 billion /
78,000 / 12 months), then how do we tolerate
this wide pay gap especially during the outbreak
of COVID-19 that has presumably hit the B40
harder?

Although the above estimation is constrained by limited publicly available information, this simple analysis suggests that the government-linked banks and what can be regarded as their wellpaid workforces are presumably afforded with the financial capacity to share more during these unprecedented financial circumstances than many. This is a particularly serious call to those with socially excessive pay amounts (if any). A bank’s CEO that was awarded more than RM8 million in remuneration last year is no exception.

Socially responsible banks (Islamic and nonIslamic) may consider redistributing at least half (if not all) of their accrued and actual net interest incomes to help people in greater need, though this means halving the remuneration of wellpaid staff and directors. On this note, those on higher pay scales are supposedly taking greater social responsibility to forgo greater amounts from their remuneration packages.

Although pay cuts amongst elites are becoming a new normal, one may argue that taking a temporary salary cut is not enough because perks, benefits and unjustifiable variable pay in combination can form a significant part of their
remuneration packages. More is expected from the banking system and bankers in sharing their prosperity during this time of need. Forgoing or redistributing interest incomes or profits on loans to help those worst affected and in greater need due to the economic implications of COVID-19 should be encouraged. There are abundant opportunities for highly-paid bankers to walk the talk on shared prosperity, which is not inconsistent with the spirit underlying Islamic finance.

Although ‘free lunch’ may not exist but Muslims
are guided by Verse 280 of Surah Al-Baqarah
that states: “If, however, [the debtor] is in
straitened circumstances, [grant him] a delay
until a time of ease; and it would be for your own
good – if you but knew it – to remit [the debt
entirely] by way of charity.” This prescription is
available universally to address the financial and
economic implications of COVID-19.

AUTHORS:

Dr Marizah Minhat holds Master of Laws (LLM) in
Financial Law and Regulation from the London School
of Economics. She is Co-Director of International Centre
for Management and Governance Research (ICMGR),
Edinburgh Napier University.

Dr Nazam Dzolkarnaini is Associate Professor in
Accounting and Finance at Edinburgh Napier University.
Both authors are Governance and Technical Advisers of
Ansar Finance Group, UK.

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button