UPDATE : 30 March 2020 on The COVID-19 Opportunities

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🔴Update 01 May 2020:🔴

Following My Previous Posting on 30 March 2020 : THE COVID-19 OPPORTUNITIES: YOUR LOANS/FINANCING

BNM issued a circular on 30 April 2020 requesting Hire Purchase and Islamic Fixed Rate Financing products to obtain consent from customers to amend the terms of the agreement as required by the Hire Purchase Act and Shariah requirements.

Light at the end of railroad tunnel. Natural lighting.

Update to the above posting especially Item 7 of the previous posting as follows (I did ask the bankers if they have a solution for this, apparently there isn’t so it explains the latest announcement).

✅YES, there is a change for Hire Purchase and Personal Loans with the Rule 78 (Flat rate) calculation. Due to the above requirements, consent for a new agreement needs to be obtained and executed with amended terms for banks to earn the profit for the 6 months moratorium.

This is consistent with the moratorium treatment for housing financing where installment is deferred but profit is accrued until 30 Sept 2020.

Nonetheless the intention of the moratorium remains consistent throughout. The moratorium for 6 months was designed to provide CASHFLOW RELIEF for those who needs it, and the purpose is DEFERMENT on financial obligations. It was never to be meant to be a waiver of profit, although for HP, this happens simply because of the structure of the Flat Rate calculation, unless it is amended (as per the latest instructions).

🔴WHAT DOES IT MEAN IF YOU STAY IN THE MORATORIUM?🔴

So if your car loan installment is RM2,000 per month, that’s a RM12,000 deferment (cash available) compared to an additional cost (profit charged by the bank) of RM240+/- (for simplistic example based on 4% fixed rate) for the 6 months moratorium (RM20+/- per month extra).

✳️ Therefore… RM12,000 available cash for your needs vs an extra cost of RM240+/- in total for the 6 months. Do you need the RM12,000 now? You still have to pay back the RM12,000 but deferred to a later stage. The cost for the deferment is RM240+/-. Or the option allows you to capitalise the extra cost and spread it out for the rest of the tenure, while the overdue instalment will be paid at the end of the extended tenure. You will need to agree to the revised terms to include this amount with the bank, and for the financing to restart for the remaining tenure + 6 months extension. Make sure you understand the cost and the difference between your current obligation and the new ones.

✳️ If RM240+/- is deemed too expensive as a profit addition, please opt-out then continue paying the RM2,000 installment per month. No deferment. No additional profit charged. Simple. People should stop losing their pants over the additional profit if you can afford it.

In short, the Moratorium is to DEFER your financial obligations, and there is a small cost to it, just as was announced for house financing. Ask your bank what the EXACT cost will be and assess your financial requirements to make the right decision. My personal advice still remains; if you can afford it, continue to pay the instalments as per your existing schedule and take advantage of the low rate of financing in the market, which will accelerate the pay-off.

Other than Item 7, the rest remains generally the same. Hope that helps clarify.

THE COVID-19 OPPORTUNITIES: YOUR LOANS/FINANCING

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A lot of people have been asking me to write lots of stuff on my blog on COVID-19’s impact on Islamic Banking. InshaAllah that will come, but many also ask what we should do with the automatic moratorium that Bank Negara have instructed the banks to execute.

Many ask me, if the cost is going to be higher due to the payment delay and whether its fair for the banks to charge profit during the moratorium or not. It is surprising to be asked this: Of course there will be additional charges or profit earned by the bank. If you apply for a financing for 20 years, the profit for 20 years is going to be lesser than the profit if you apply a financing for 21 years. The additional 1 year means additional profit for 1 year. This moratorium gives that SAME effect: The longer the tenure, the more profit is payable.

Screen Shot 2020-05-05 at 2.01.17 AMThis is actually common sense, unless the banks are charitable enough to waive earnings where they have to justify to shareholders and depositors (can banks tell the depositors that their Fixed Deposits are also under moratorium because the income is now delayed for 6-months?).

So, the real question is that: Do you really need this 6 months moratorium? Have your earning abilities been impacted by the COVID-19? Are you able to have enough cash to put food on the table?

If you need the cash now, then really… why are you asking how much extra costs are you going to incur? In desperate times, you would consider going to Ah Long where the cost is high, but that is not the point. The point is: you need the cash. Therefore, your line of decisioning is to establish what you want from the moratorium, and how to take maximum advantage of it.

Please note this is my personal view, not my bank nor is it from the Ministry of Finance.

MY CONCLUSION

  1. The intention for the moratorium is to give BREATHING SPACE, and not for consumer to save money. The key word is DEFERMENT or DELAY IN FINANCIAL COMMITMENT.
  2. If you NEED the breathing space, TAKE the moratorium until things get better. There will be ADDITIONAL COSTS (snowballing of profit) for the deferment. If you need breathing space, then you have to bite the bullet and pay that extra cost later. However for Islamic financing, the additional cost is NOT COMPOUNDING (no additional profit on the snowballed 6-months profit) and MAY be limited to the contracted maximum selling price (depending on which Islamic Banking contract you entered into).
  3. If you DON’T NEED the breathing space, then please ask to continue your payment as it is, since the financing rate is SO LOW now (for floating rate products)
  4. If you have CREDIT CARDS outstanding at 18% pa, and you have car financing at a FLAT RATE, take advantage of the moratorium for the car financing. With the extra cash from the installment for the car financing… PLEASE USE IT TO SETTLE YOUR CREDIT CARDS OR PERSONAL LOANS. Additionally, your Credit Cards will be converted into Term Financing at a rate of 13% (5% cheaper) so by using your cash to pay-off the Credit Card Term Financing, it will accelerate the pay-off more.
  5. If you TAKE the moratorium but didn’t use the cash to pay off a higher rate financing product, then you will be in trouble when the moratorium ends. It is a DOUBLE-WHAMMY where the financing balance of the product with the moratorium will increase (from the snowballing of profit) and the other financing remains the same amount or increase concurrently due to payment holiday (worse if it is a credit card where 18% is compounded). Please use this opportunity to accelerate reducing the debt, otherwise it will accelerate increasing your overall debt.
  6. There is also this silly notion that the cash you have from the moratorium, you should INVEST it and get 2.0% Fixed Deposit income. This is a misguided advice, because profit still accrues for the moratorium financing product. If you take the moratorium cash (which may cost you 4% accrued profit) and invest it in a Fixed Deposit of 2.0%, that is INSENSIBLE. Use it to PAY a financing product that is more than the 4.0% rate you are accruing, then you benefit. If you pay a 13% Credit Card Term Financing using a cash savings product that cost you 4.0%, the nett savings (or income) is 9%. That is definitely more than any FIxed Deposit returns you can get.
  7. The only Zero-profit product that you would have now is the car financing (Hire Purchase) which uses the FLAT RATE calculation (Rule 78), or any other financing products that uses Flat Rate (there is a difference between a Flat Rate and a Fixed Rate). Correct me if I am wrong, but Flat Rate products have a defined FLAT installment calculation where the profit and principal amount is pre-assigned based on tenure. Extending the tenure means it becomes a zero-profit period; trying to adjust the moratorium period into a FLAT RATE calculation will screw up the schedule, so it is easier for banks to keep it zero-profit/zero-interest. Re-Structuring it into a new extended tenure will be unfair to consumer’s profit and principal structure as the profit again becomes the biggest proportion in the installment (its like restarting your loan again). If any bankers have found a way out of this, do let me know on how you treat it.

Have a plan of what you want to achieve from this moratorium. Sit down and think about it. It is a one-time opportunity to manage your financial obligations. Once you have decided, STICK TO THE PLAN. The above moratorium is automatically done by the banks this coming April 2020.

If you are eligible for the moratorium conversion, you should receive notification from your bank on the conversion (email or sms, or even letters). You don’t need to do anything unless you want to change your facilities back to normal, by which you have to respond to the sms or email to decline the moratorium.

If you have not received anything from the bank, most likely you do not qualify for the moratorium.

OK I have given a piece of my mind. Time for sleep. Hope it helps, if it helps. Thanks all.

Kick my own Ass

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Hmmm, looks like there are still a good number of visitors to this blog. My last post was 2010 and it has been quite long since I wrote anything worthwhile. I have been concentrating more on my “other” blog i.e. http://islamicbankers.me/

Seeing the encouraging responses to this blog, especially the CCRIS section, I will try to update this blog more often. Do allow me some time for a new post; this mind is kinda rusty but I am sure, there is always something interesting to write.

Thanks for visiting. Kicking my own ass!!!

The Circle of Debt

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A couple of weeks ago, it was interesting to get caught in a conversation regarding debt, and why most of us just cannot seem to get out of. Despite all the various Bank products introduced to help consumer, why do we keep finding ourselves deeper in debt? And with packages offering below base lending rates, why can’t we seem to pay off our loans?

The answer, is not as straightforward as it seems. Some may put it down to bad money management, unforeseen circumstances and unexpected needs. While it is true that some consumers faced these situations, there are many others who are victims of their own vice. And that vice is greed or even worse… “want”.

I cannot blame you. The credit packages sometimes seems too good to be true. Very low rates for housing loans. Longer period for car loans. Easy applications for personal loans. Excellent rewards for credit cards. While all of these are attractive packages, all of them are designed for one thing and one thing only; increase the credit given to the customers.

We have to remember that Banks are commercials entities in the business of lending money. It is not their fault, it is what they are being set-up for. Consumers play a large part in this, which means there is an existing need for credit from the Banks. While many are still looking at credit as a means of survival, some have started to see credit as a means to obtain a certain lifestyle; and the Banks being good at what they do, takes advantage of this desire.

Beyond traditional banking, the business have recognised that everyone has a lifestyle that they aspire to. A new watch. Brand new car. Furniture. Bigger house. Dream holiday. Shopping benefits. Renovation. Latest TV model. Not in the future, but now. Immediate. Instant. Now. People put in so many hours at work, and at the end of the day, aspire to afford that “want”. I myself fall into that category. A tough day at the office can trigger a retail therapy; I want that new laptop now. Credit card in hand, a quick swipe and now instalments for the next 6 months. Easy.

And credit is really made easy. Instalments are kept low. If you have a good record in CCRIS and a clean CTOS, you can borrow as much as you want, but once the clean records become dotted with delinquent payments, things get more difficult. So now we are stressed at keeping up with the payments, sometimes up to a point that you need to further borrow to ensure that your record is updated. Only with a clean record can ensure you get more and more credit; just in case you need it.

The truth is, we are all under pressure to fit into society; to have brand new things, go to new places, and be seen as overall successful. There pressure will always be there to conform and maintain your image. How else do you explain the high prices of good solid cars, and yet the number of these cars are relatively high in the market? A RM300,000 Mercedes or BMW will surely be out of reach of most people, but have you seen the number of these cars in the market? For an outsider, Malaysia may be regarded as a prosperous nation judging from the number of expensive cars. What is not apparently clear is that most are purchased on easy credit; long term, low interest rate and even lower down payment. Car loans low go for 8 or 10 years tenure, and that is just crazy, when most cars will be in decline after 5 years or 7 years. Re-sale for such cars after 7 years will be pathetic, so why would one borrow 8-10 years?

The sad fact is, we may never be out of debt, and that was never the intention of Banks when they offer you the credit. Banks need your business, and the great packages on offer is not really meant to benefit consumers, but mostly to beat out the competition in securing your business. And the credit amount is sometimes exceeding what consumers can afford; with the introduction of CCRIS, a lot of the risk is mitigated to the track record of the customer via CCRIS, and this allows the Bank to take more risks when approving a loan. In the rush of offering more credit to customers with great track record in CCRIS, the Banks risk to over-lend to the customer, which over time places a burden on their wallets, leading to a stressed CCRIS track record. A good paymaster is finally tipped on the scale towards being an average paymaster, which may one day turn into a bad one once the “free” credits become insurmountable.

The weakness of all of this originates from the huge disparity between the levels of income and the price of essential and basic goods. Forget about food; no matter how high the price goes, people will find ways to eat. I am referring more to the big ticket items such as a house and a car. This is where the huge disparity shows. In general, an average Malaysian earns roughly RM3,888 per month, or lesser (CIA World Factbook listed Malaysia to have a USD$14,800 income per annum per population). Compare that to their basic necessity. A house costs RM150,000, RM200,000, RM300,000 or more. That is roughly almost 40 times the salary of the average Malaysian. That means just to pay off the principal, it will take you 40 months to pay-off, and with the 1/3 rule for lending, you will be paying for 40 months x 3 = 120 months just to clear the principal.

More significantly, a car price in Malaysia is RM50,000 at the lower end, and RM130,000 at the sedan category. I have taken the Toyota Yaris at RM107,591 otr price as comparison with other countries, as this car price is readily available. Against the average income of RM3,888, that translates to 28 times the average income. With the 1/3 rule for lending, this means at minimum, it will take you 28 x 3 = 84 months (7 years) to pay off the principal. Add the interest for it, you could be paying somewhere about RM129,000 over a period of 8 years. 

Compare that to a country like the UK, where the average income is GBP2,900 (RM9,248) but car prices are about GBP7,000 at the lower end and GBP20,000 at the medium/higher end. A Yaris will cost the Brits GBP14,240 (RM70,971). This is effectively 5 times their salary and with the 1/3 lending rule, they can be out of debt within 2 years (5 x 3 = 15 months). The price/income gap for cars (Yaris) are also interesting; Gap of RM27,000 for the US, RM62,000 for the UK, RM68,000 for Thailand, but a whopping RM104,000 for Malaysia. This is a huge disparity.

Some may argue that these calculations are simplistic, but they are reflective of the income gap situation. Even with a Waja for RM59,000 it will mean a 45 months payment (RM59,000/RM3,888 x 3) for the principal. What makes sense is the price range of RM30,000 to RM40,000 that the Saga and the Iswara fall into place. But this is where the “want” comes in. Bigger and better. It is hard when you aspire to have something better, which comes at a higher price. It is even harder to resist when Banks makes the process easier for consumer.

To be out of this circle of debt, real income needs to increase. I feel that the average income of Malaysians has remained stagnant in the past few years, and while prices of houses has remained stable or in case of cars, have improved its value for money, the gap is still huge. Cars are essential for lifelihood, which will afford one a good house. And to indirectly support a car purchase, other credit products are made available easily to the consumers with good credit records. Personal loans and credit cards; these are the main culprits to keeping you in debt, simply due to its ease to access and the high interest rates. Some people use these products too early, while others use it too much.

Circles of debt, like it or not, is what fuels the banking industry. It is based on the needs of the consumers, but as the country grows internationally without any borders, due to media and internet, the “wants” of the consumer becomes more prominent and sophisticated. Lifestyles “wants” now are becoming trendy as they are aggresively fueled by global branding. And due to the low levels of real income, consumers turn to debt to support these “wants”. It is tempting to accumualte more “easy” credit, but what is really important is to be able to realise that the only way to break this circle is to manage these lifestyle wants and also reduce the disparity between price of large items and income. Otherwise, discussions on why Banks continue to make tons of money even in hard economic times are fruitless; the truth of the matter is whether we can afford our “wants” and more importantly, should we finance our “wants” through further borrowings.

Sometimes, all it takes is willpower, but that, as everything else in life, is easier said than done.

Refinancing My House

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Today finally, I submitted my application to refinance my house.

I was surprised to get an email asking me to refinance my house. Of course, I am interested if the package is an attractive one. It has to be, since I will be incurring legal charges and stamp duties and valuation fees for the refinance. Even if it is a package where all the above is paid by the bank, the bank usually recovers it back through its pricing.

I have been holding the house in financing for the past 7 years and really hoping to have a better structure on the house. Now that I have some equity released from the house, I have asked for a small OD line just in case I need it for taking other real estate opportunities. I have been thinking that maybe I should have maxed out the OD line but nevermind, I will start small for now. The beautiful thing about Malaysia is that there is no capital gains tax for the first 5 years, and I hope to take advantage of that with my small OD.

I hope I get a smooth process from application to disbursement of the loan. I am always not in the country, and it will become a bit inconvenient to juggle my signing of documents with my work. Like it or not, I will have to spend time either at the bank or the lawyer’s office for the signing, and I am sure there will be a lot to do. Especially with regards to the title of the property. If I am not mistaken, the title was ready to be changed from a master title to an individual title some years back, but due to work commitments and not being in the country, I have never managed to settle that portion. Hopefully, it gets settled once and for all this time around. I am expecting to pay some penalties for that, but hey, sometimes you win, sometimes you lose.

How is the property market holding on in Malaysia? I guess I will know once I get the property valuation report on my property, and see if there is any equity growth. If there is hardly any growth, then maybe it is time for me to find another property.

Have a great year ahead. Hope I don’t get another reject letter.

Leasehold Properties

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Someone asked me what is leasehold properties and whether it is worth it to purchase one. The answer can be both complicated and not, as freehold properties remains the hot favorites for homebuyers. Why would one want to purchase a leasehold property, and why are there still a lot of leasehold properties on the market? Are consumers on the losing end if they purchase a leasehold property?

I am not a legal expert on definitions of properties, but here is what I know.

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Malaysia Real Estate and what drives it

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Check out this interesting article on the property prices that I found in the Star recently. Gives a good insight of where Malaysian property prices stands in the global and regional market. Happy reading…

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(Excerpt) ……THE Cost of Living (COL) survey by ECA International is carried out twice a year, comparing a basket of 128 consumer goods and services commonly purchased by expatriates in over 300 locations worldwide. Multinational companies use the results to help compensate their internationally mobile staff. Living costs for expatriates are affected by inflation, availability of goods and exchange rates, all of which can have a significant impact on expatriate remuneration packages. They concluded the following on Asian cities: “In Asia, Seoul maintains its position as the most expensive city in Asia for expatriates, moving from 8th to 7th in the global ranking over the past 12 months. During the same period, Tokyo, Asia‘s second most costly city, dropped out of the top ten for the first time moving from 10th to 13th…..

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About « Islamic Bankers

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Know more about Islamic Banking terms, concepts and sources of law.

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Question markFind out more about the various topics available at my I Want To Know… page.

Or, check out the new topics to answer your questions:

Questions You Must Ask Yourself…

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Question mark Many times, homebuyers fail to properly plan when deciding to purchase a property and finding a financing package to SUIT the property purchase strategy. Only later, do homebuyers find that although they have found the best financing package, there is still a mismatch as it is not the RIGHT financing package. If the financing package benefits the homebuyer in the short-term, the homebuyer’s strategy must also be to HOLD the property for a short term. <click here>

Also, be careful of the hidden clauses in your letter of offer, and understand the impact of such clauses. To read more <click here>

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