BNM Extends Moratoria in Response to COVID-19 Crisis
BNM issued a notice on measures to provide a targeted extension of the moratorium and repayment flexibility to individuals and small and medium-size enterprises (SMEs), which continue to be affected by COVID-19 outbreak. Ahead of the blanket moratorium ending on September 30, 2020, BNM has been working closely with banks to ensure that assistance continues to be provided to the affected borrowers. In addition, the Shariah Advisory Council of BNM, at a special meeting on July 14, 2020, has made a ruling on the practices of restructuring of Islamic financing facility during the COVID-19 crisis. This ruling comes into effect immediately upon publication.
Targeted extension of moratorium and repayment flexibility
The banking industry will provide a targeted moratorium extension and provision of repayment flexibility as follows:
- Individuals who have lost their jobs in 2020 and have yet to find a job will be offered an extension of the loan moratorium for a further three months by their bank.
- Individuals who are still in employment but whose salaries have been affected due to COVID-19 will be offered a reduction in loan installment in proportion to their salary reduction, depending on the type of financing. Banks will offer the flexibility for a period of at least six months. Banks will also consider extending the flexibility at the end of that period, bearing in mind the salary of the borrower at that time.
- For hire purchase financing, affected borrowers will be offered revised installment schedules that are consistent with the Hire-Purchase Act 1967.
In addition, banks have committed to provide repayment flexibility to other individuals and SME borrowers affected by the COVID-19 outbreak. The flexibility offered by each bank will take into account the specific circumstances of borrowers. This includes allowing borrowers to pay only the interest portion of the loan over a period of time; lengthening the overall period of the loan to reduce monthly installments; or providing other forms of flexibility until a borrower is in a more stable position to resume repayments in full. To avail this flexibility, borrowers need to apply directly to their respective banks beginning from August 07, 2020. In recognition of these exceptional circumstances, the flexibility provided to borrowers during this period will not appear in the Central Credit Reference Information System (CCRIS) reports of borrowers. BNM will monitor the progress of banks in assisting borrowers that may continue to face temporary financial difficulties.
Restructuring of Islamic financing facility
Pursuant to section 52 of the Central Bank of Malaysia Act 2009, the Shariah Advisory Council has made a ruling on practices of restructuring of Islamic financing facility during the COVID-19 crisis.
- Restructuring of an Islamic financing facility based on original Shariah contracts—This type of restructuring may be undertaken using a supplementary agreement that is cross referred to the terms and conditions of the original agreement. No new agreement is required. This is intended to reduce the cost and challenges to customers and operational burden on Islamic financial institutions. A new agreement is required if the restructuring involves the application of a different Shariah contract; or a combination of multiple financing based on various Shariah contracts into a new single Shariah contract as part of a debt rationalization exercise.
- Restructuring of an Islamic financing facility into a conventional loan (or vice versa)—Islamic financial institutions are allowed to restructure a conventional loan into an Islamic financing facility. However, restructuring of an Islamic financing into conventional loan is not allowed. In cases where the customer chooses to restructure the existing Islamic financing facility to a conventional loan, it is the customer’s prerogative and choice to do so. In this situation, the customer’s choice is beyond the responsibility and control of the Islamic financial institution.
- Compounding profit on restructuring—Islamic financial institutions are not allowed to include and account for any accrued profit on an original financing as the new principal amount for the restructured facility. Such practice aims to avoid multiplying of profits charges on debts (compounded profits). Therefore, in implementing a restructuring the new principal amount for the restructured facility is equivalent to the outstanding principal amount of the original facility, provided there is no additional financing. Islamic financial institutions are allowed to charge a new profit rate on the new principal amount. Also, amount of accrued profit and late payment charges (where applicable) on the existing financing can be carried forward and added to the total debt obligation, but this amount cannot be capitalized in the calculation of new profit.
- Press Release on Repayment Flexibility to Borrowers
- Notice on Restructuring of Islamic Financing Facility
- Overview of Shariah Advisory Council Meeting (PDF)
Keywords: Asia Pacific, Malaysia, Banking, COVID-19, Credit Risk, Islamic Financing Facility, Loan Moratorium, Payment Moratorium, Islamic Banking, BNM
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
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