Believe it or not, a bank loan can turn out to be more expensive than a loan from a moneylender. For one bank the profit rate for its ‘Islamic’ personal loan can be as high as 42% per annum. The profit rate, like the interest rate, ensures profits for the bank on a loan extended to the public. Bank Negara should not condone this ‘Ah Long’-like profit rate.
The profit on this particular loan is advertised as 2% per month or 24% per annum (same as that charged by pawnbrokers) and much higher than the interest rate of 12% per annum and 18% per annum charged by licensed moneylenders for secured loans and unsecured loans, respectively.
As expensive as the advertised 24% per annum is, what the borrower is actually paying is even higher, which is 36.8% to 41.8% to per annum depending on the tenure of the loan. If it is a one- year loan, the profit rate is 41.8% per annum and if it is for five years then the profit rate drops to 36.8% per annum.
In the bank’s product disclosure sheet, it is stated that the effective profit rate of the loan is 36.82%. (The product disclosure sheet gives important information about the loan and a copy must be given to every borrower.) The effective profit rate is the true cost of borrowing and thus the bank has to disclose this information. But at this stage the borrower will have decided to take the loan.
This extremely high profit rate is directed at the poor as one needs only a minimum income of RM800 to sign up for the loan. For a loan of less than RM5,000 no guarantor is needed. This ‘Islamic’ loan is most exploitative and Islamic scholars would consider it ‘unIslamic’.
This problem of two different profit rates or two different interest rates (one rate advertised and the other rate shown in the product disclosure) for one loan is commonly found in hire-purchase and personal loans. One thing they have in common is that the total amount in profit or interest paid by the borrower is the same.
Irrespective of whether it is an Islamic or conventional personal loan, the 24% profit rate or interest rate is actually 41.8% (one-year loan) and 36.8% (five-year loan) when the flat rate basis of calculating profit or interest is used.
For ease of understanding, let us imagine that it is a conventional personal loan.
Under the flat rate-basis, interest is calculated on the total principal. It does not take into consideration that after each repayment the borrower owes the company less each month. When interest is charged on the original principal, the poor borrower is made to pay interest on money that he has already repaid.
Say you borrow RM10,000 at 24% per annum for 12 months. The interest is calculated at 24% of RM10,000 or RM2,400 and your monthly loan instalment is RM1,034. After the first payment of RM1,034 you owe the bank less and interest for the following month should only be charged on the lower new balance.
The fairer method would be for the bank to charge interest on the balance that the borrower owes at the end of each month after the repayment has been made. This is called the reducing balance basis.
Now if the interest of 24% is calculated on the reducing balance basis then the monthly payment will only be RM945.60. Furthermore the total interest charged on the loan is reduced to RM1,347.15, about RM1,000 less.
Since the interest paid on the loan in our example is RM2,400, to arrive at that same amount using the reducing balance basis, the interest rate charged will have to be 41.8% per annum.
This is the actual interest rate the borrower is paying and thus is the effective interest rate. As the higher effective interest rate may put of the borrower, it may appear in smaller print in brochures.
CAP urges Bank Negara to protect borrowers. It should direct banks to :
- To withdraw loans where the rate of profit or interest is unconscionable.
- Calculate all loans on the reducing balance method.
- Only advertise the effective rate of profit or effective interest rate so as not to confuse borrowers and for easy comparison.
SM MOHAMED IDRIS is president of the Consumers Association of Penang.
