Bank Negara Must Stop Banks from Using Unfair Methods of Calculating Interest


Banks should be stopped from taking unfair advantage of borrowers with personal loans or fixed rate hire-purchase loans (of either the conventional or Islamic financing variety. )

These borrowers lose twice over because interest on the loans are calculated on a flat rate basis and rebates are calculated based on the Rule of 78.

The flat rate method charges interest on money which has already been repaid whilst the Rule of 78 penalizes those who repay early.

Calculating interest on 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.

Take for example a 5 year personal loan for RM30,000 at an interest rate of 10% per annum.

When interest on the above loan is calculated on a flat rate basis, the total interest charged is RM15,000 (RM30,000 X 10% X 5 Years) and the monthly payment is RM750. Total cost of the loan comes up to RM45,000. (RM30,000 +RM15,000)

On the other hand if the reducing balance method is used, interest will be charged on the outstanding amount at the end of each month after the monthly instalment has been repaid.

Under the reducing balance method total interest charged works out to be RM8,244.68 and the monthly payment comes down to RM 637.41. Total cost of the loan is RM38,244.68.

It is easy to see why banks prefer the flat rate method of calculation as it enables them to make more profits. In this case they can make an extra profit of RM6,755.32 (RM45,000 – RM38,244.68)

Calculating rebate for early settlement


It is to the banks advantage to use the Rule of 78 to calculate the amount of rebate that has to be refunded in cases of early repayment of personal loans and hire-purchase loans.

The Rule of 78 works by apportions the total interest payable under a loan in accordance with an arithmetic formula. Under the formula the early instalments include a surprisingly larger interest components than the later ones.

For example, you choose to settle your 60 months loan after paying 30 instalments. Under the Rule of 78, at 30 months the interest paid so far has already reached RM11,188.55. At 30 months you are only half way through the loan but the interest you have already paid on it is 74.6 % of the total interest of RM15,000. This means that you get only a rebate or savings of only RM3,811.45 (RM15,000- RM 11,188.55) or 25.4% by paying off the loan early. 

You would have expected to save RM7,500.00 as this half of the RM15,000.00 interest charged on the loan.

Because the Rule of 78 is unfair to borrowers, it has been abolished in the UK since 2005.

On the other hand if the reducing balance method is used, after 30 months the total interest that you have paid on the loan is RM5,979.99. That is a about half of the RM11,188.55 interest that you had paid under the Rule of 78.

Again the difference of RM5,208.56 (RM11,188.55 – RM5,979.99) is why the banks the flat rate interest calculation on top the use of Rule of 78. It gives the bank added profits on top the already unfair profits from the use of Rule of 78.


When the consumer takes out a personal or fixed rate hire-purchase loan, the bank overcharges him interest (via flat rate calculation) and then proceeds to penalize him should he repay the loan early (via Rule of 78). Thus this is a classic case of “heads I win, tails you lose” The borrowers loses either way.

It is time Bank Negara direct banks to use the reducing balance method of calculation for all types of loans and stop using the Rule of 78.

Press release, 26 November 2014


Concerns Regarding Our Cyber Security And Electronic Banking Still Unanswered

The Associations of Banks in Malaysia (ABM) has endeavoured to address the Consumers Association of Penang’s (CAP) concerns regarding Malaysia’s cyber security but unfortunately have left many queries unanswered. CAP believes it is necessary that we spell out our concerns clearly and in detail once more, so that they may be addressed appropriately; and we hope that relevant parties are able to explain things in a plain manner.

 We would much appreciate it if those in charge could explain to us very specifically, what new measures will banks take to ensure our cyber security is iron clad. After all, vague explanations accompanied by declarations of repeating the same old security measures to combat new threats do not exactly incite consumer confidence.

CAP is curious if all relevant parties are studying countries that are already primarily using e-banking and e-payment and have a high percentage of cyber fraudulent activities? Are banks tapping into the experiences of other countries that predominantly use e-payment to minimize cyber fraud incidents in Malaysia?

ABM has stated that fraudsters will forever device new ways to exploit weaknesses in the system and take advantage of unsuspecting consumers. This is unacceptable as it is clearly just an excuse to pardon the shortcomings of banks. If what they say is true, then why push consumers towards something that is doomed to be flawed forever?

They have also articulated that consumers fall victim to fraudsters due to their lack of awareness and knowledge regarding recent scams and to us this sounds very much like consumers are being blamed for successful fraudulent activities. ABM is also saying that it is the consumers’ responsibility to protect their assets and devices. Is it not the responsibility of institutions, such as banks, to protect consumers and their assets? Please stop putting the onus on consumers and be responsible instead.

Since ABM is of the opinion that consumers fall victim to fraudsters because they are unaware and unknowledgeable when it comes to recent scams; can we then assume that banks in Malaysia are unaware and unknowledgeable as well since they themselves were unable to detect the latest major fraud activity where nearly RM 3 million was taken from our ATMs until it was too late. We believe it is important that the institutions safeguarding our assets be on their toes at all times and that they equip themselves with vital knowledge and information.

In addition, the not so subtle herding of consumers towards full online banking shows insensitivity on the part of banks. Many people in Malaysia are still technologically stunted; they do not own smartphones and/or have not subscribed to data plans and rely on the availability of Wi-Fi. It is irresponsible to assume that everyone can afford to have a smartphone equipped with a data plan as a significant number of consumers can only afford the conventional way of banking. To add insult to injury, this bullying of consumers to use e-payment and e-banking assumes that everyone is tech literate, which is not the case.

What’s more, if indeed consumers are not knowledgeable enough on the latest scams and how to protect themselves when conducting online banking, all banks and related parties should be doing more to educate consumers. Posting “do’s and don’ts” on your website is not enough; ABM cannot expect that consumer know where to go looking for such information. There is an awareness campaign that has been featured in the news but anywhere else you look it is non-existent. What are banks, Bank Negara Malaysia (BNM) and ABM doing to increase awareness among consumers?

ABM has declared that in relations to e-banking and e-payment, “fraud incidents only accounted for 0.0054% of total transaction volume and 0.0011% of the transaction value of electronic payment transaction” and the pay-off of “affordability, convenience and speed, far outweigh the risks given the low level of fraud”. Thus, CAP believes that banks should have no issues monetarily compensating victims of cyber fraud without going through any red-tape since banks seem to consider such a “small” sum of money negligible.

We reiterate our view that Bank Negara Malaysia and all banks should stop pushing consumers towards e-banking and e-payment until we can be sure that our cyber security is not so easily compromised. Furthermore, since such an abrupt change will no doubt cause much anxiety to the technically illiterate, perhaps it would be wise to approach e-payment and e-banking gradually; customers can slowly migrate to this form of payment over the span of a few years.

Letter to the Press, 19 November 2014

Is Our Cyber Security Non-Existent?

The issue of the Latin American gang that hacked into some of Malaysia’s ATM’s (automated teller machines) and absconded with a little over RM 3 million is both frightening and eye-opening. It should be an indication to us that our cyber security is grossly lacking and perhaps our money and personal information are not as safe as we once thought them to be.

If you have been following the news, you will know that the people who carried out this heist did it in a very simple manner, so much so that it is quite a shock that they were able to get away with so much of our money. In short, the criminals installed a malware onto the ATMs that allowed them to withdraw money from the ATMs every time they inserted a code into the ATMs. They were able to install the malware by way of the CD slot under the ATMs top panel which they simply popped open. All this was done out in the open and still nothing was discovered amiss until much later.

All the news reports of the investigation highlight certain aspects that led to the criminal’s success which include:

> Most ATMs still use Windows XP (up to 95%). It is an unprotected operating system as it has been discontinued by Microsoft and is no longer receiving security updates.

> Old models of ATMs (NCR5587) that can be easily tampered with.

> Most Machines have not been updated in five years.

> There is nothing stopping unauthorised access to ATMs beyond what the standard customer should be capable of.

To top this off, there is also a possibility that online banking and any monetary transactions carried out online could be very unsafe. With online banking comes the danger of phishing sites that collect personal information and hacking – money and personal information can be stolen if a compromised device such as a laptop or a mobile phone is being used for online transactions.

It is an emerging trend among Malaysians to conduct many of their monetary transactions online such as bill payments, shopping, money transfers and investments. This trend is a little worrying as according to the Sophos Security Threat report 2013, Malaysia ranked fifth most vulnerable country to cyber attacks.
Nevertheless, despite our obviously lax cyber security, citizens are being encouraged to conduct more and more of their transactions through online banking and e-payments; which is honestly a mind –boggling notion. Proof of this includes the topic earlier this year where there was talk of banks charging a 50 sen processing fee per cheque starting April 1, 2014, which was then postponed to January 2, 2015 as many banks were still not equipped to accept e-payments.

As the issue of cyber security concerns both our money and personal information when it comes to the banking industry we have to ask, what is being done to increase Malaysia’s cyber security and make our online banking safe? How can we conduct e-payments with confidence when even our ATMs are easily tampered with? How many of us have already suffered because we have been rushed into online banking without looking at the possible repercussions and have not prepared for them?

 One thing is for sure, the “basic layer” of protection that banks provide for their online and mobile banking is no longer enough. Its seems the only options we have until responsible parties decide to strengthen our cyber security are to cower in fear of the cyber criminal; to be constantly looking over the virtual shoulder or to spend hefty sums on bank processing fees for physical transactions that are sure to increase the more we are “encouraged” to use e-payment. Until our cyber security is not compromised, Bank Negara Malaysia should defer the implementation of any mandatory online banking and e-payments systems.

Press release, 8 Oct 2014

Response to Inceif‘s Accusation of CAP

We refer to the Global University of Islamic Finance (Inceif) accusation that CAP’s claim that Islamic personal loans offered by banks are a rip-off is baseless. On 16th December 2013, CAP had made a press statement that a loan with an effective profit rate of 42% was a rip-off.

We   regret that Inceif has itself made a baseless statement against CAP for it has not refuted any   of the statistics and facts raised in our press statement.  Inceif’s accusation is based on its belief that Bank Negara would not have approved a loan with such a high rate of profit. . But the undeniable fact is that the loan exists.  We too were shocked when it was brought to our attention by a concerned citizen.

We are more than willing to provide Inceif with the name of this loan and the bank involved.  The bank’s own product disclosure sheet given to the borrower, also states that the effective profit rate of the loan is 36.8% (which is correct when the loan tenure is for 5 years). Does Inceif consider an effective rate of profit of 36.8% acceptable?

Not all Islamic personal financing charge such high effective rates of profit.  What we have pointed out in our press statement is that such high rates are unacceptable whether for Islamic financing or for conventional loans.  There is also a need to protect consumers who have placed unquestionable trust on loans labeled” Islamic”.

Press  Statement – 16 January 2014

Banks charging 42pct per annum for personal loan

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.

Press Statement – 16 December 2013