CAP: Islamic bank loans are a rip-off – A Must Read esp for PM-cum-MOF!

Lest you, like me, have missed it……

Athi Shankar (FMT)

December 16, 2013

Islamic personal loans offered by banks are a rip-off because the profit rate is much higher than even moneylanders, said CAP president SM Mohamed Idris.

GEORGE TOWN: Consumers Association of Penang (CAP) president SM Mohamed Idris said Islamic personal loans offered by banks are the most exploitative and should not be condoned.

Idris slammed banks for profiteering from Islamic personal loans given to unwitting people, by implementing a flat-rate repayment and not using the capital balance reduction method.

He said CAP’s study said a bank’s profit rate for Islamic personal loans could be as high as 42% per annum.

“An Islamic loan can turn out to be more expensive than from a moneylender.

“Bank Negara should not condone this Ah Long-like profit rate,” Idris told newsmen in office here today.

Also present were CAP vice-president Mohideen Abdul Kader and research officer Saw Pick Won.

Idris said the interest for an Islamic personal loan could be advertised as 2% per month or 24% per annum.

He said this would be the same rate charged by pawn brokers and much higher than the interest rate of 12% per annum and 18 % per annum charged by licensed moneylenders for secured and unsecured loans respectively.

For a 24% rate per annum, Idris said the borrower was actually repaying higher interest between 36.8% and 41.8% per annum depending on the loan tenure.

CAP calls on Bank Negara to protect borrowers by enforcing the following steps:

• Direct banks to withdraw loans where the rate of profit or interest is unconscionable;

• All loans should be calculated on the reducing balance method; and

• All loans should only advertise the effective rate of profit or effective interest rate so as not to confuse borrowers and for easy comparison.

CAP will be submitting an official letter to Bank Negara.

Idris said the discrepancy in the different interest rates – one advertised and the other shown in the product disclosure – was common in hire-purchase and personal loans.

But, he said, profit or the interest amount paid by the borrower was still the same.

Irrespective of whether it is an Islamic or conventional personal loan, he said the 24% interest rate was actually 41.8% (one-year loan) and 36.8% (five-year loan) when the flat rate of calculating profit was being used.

Under the flat rate, 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.

Idris argued that the fairer method would be for the bank to charge interest on the balance that the borrower owed at the end of each month after the repayment had been made.

“Bank Negara should compel banks to implement this method to protect borrowers, who are now short-changed,” he told newsmen


4 thoughts on “CAP: Islamic bank loans are a rip-off – A Must Read esp for PM-cum-MOF!

  1. Let’s be reminded of the basics in Islamic Finance….where is the benevolent spirit or the ihsan aspect of the system..ripping huge-insane profit cant be right-Islamic..obliteration of the element of ‘Sa’ar al-‘Adil’ ….’Just Price’- ‘Harga Yg ‘Adil’…hence that’s why Middle Eastern Scholars have been wary and cautious of the financing of Murabahah and Bai’ Thami ‘Ajil of the Malaysian products…it’s Conventional in thinking (Calculationof profit) with only Islamic Coating in term of ‘Contract’….Sorry i have to call a Spade A Spade!

    1. The ihsan aspect has been all but forgotten for the sake of arrogance and misplaced boast in the profits of the Islamic Financial Institutions (IFI) and Bank Rakyat too.

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