How Tabung Haji became an unregulated ‘bank’

The pilgrimage fund announced yesterday that it had recorded RM1.3bil in revenue during the six-month period, generated primarily from fixed-income asset investments (RM663mil), real estate investments (RM292mil) and Islamic money market instruments (RM199mil).

LEMBAGA Tabung Haji (TH) started off with the noble cause of helping the poor perform their haj pilgrimage.

It was given the authority to collect deposits, a privilege accorded only to financial institutions that are tightly regulated by Bank Negara.

To help poor Muslims, TH pays out healthy dividends on the deposits so that the poor can get to perform their haj. No questions are asked on the depositors’ source of funds and there is no limit on how much each depositor can make.

There is no tax on the returns and no zakat obligations.

It was believed there was less scrutiny when depositing money in TH. But Tabung Haji is a reporting institution under the Anti Money Laundering, Anti Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA). Tabung Haji has been required to submit the suspicious transaction report (STR) and to comply with the requirements under AMLA since 2003.

TH has attracted a lot of deposits – amounting to RM70.2bil as of end-December 2017 – which is equivalent or more than selected commercial banks.

Financial review

According to the review on the financial position of TH, 50% of the deposits came from 1.3% of depositors. The fund has a total of 9.1 million depositors, which means that 118,300 contributed to almost RM35bil of the funds.

The single highest account is more than RM190mil.

The deposits are incredulous, considering that the most expensive package to fulfil the Haj is only RM180,000.

However, it is easy to fathom why TH attracts deposits. Apart from the limited scrutiny on the source of funds, it gives out good dividends. The high dividends are particularly conspicuous in the 10 years when banks offered low deposit rates of 3%.

Due to the accommodative monetary policy that was started by the United States, deposit rates fell significantly. At one point in Malaysia, it was less than 3%. In other countries such as Germany, it went into negative territory, meaning depositors had to pay the bank for putting in their money.

However, TH was giving out between 5% and up to 8.25% during this era. And because TH is guaranteed by the government, it offers a high return-low risk proposition.

“High-net-worth individuals could have easily borrowed from commercial banks at 4% or less and placed it with TH for returns of 8%. It is an easy 4% return with low risk,” says an investment banker.

In the last 10 years, the lowest dividend was 5% in 2008, which was the year the world went into turmoil due to the financial crisis in the US.

According to the review on TH’s 2017 financial report, the fund could have taken excessive risk because of the high returns it needed to give depositors.

Going forward, TH’s deposit-taking operations are to come under the purview of Bank Negara. This could mean an added level of scrutiny on its operations, as well as the appointment of directors to its board.

“Appointments of new directors would have to go through Bank Negara, which would impose a “fit and proper” test. Politicians will not be allowed to sit on the board,” says the banker.

Bank Negara imposes a stringent “fit and proper” test on potential candidates to sit on the board of banks. This is because banks collect deposits and have to be regulated. However, this practice was previously not applicable in the case of TH, as it did not come under Bank Negara.

Another proposal that is being considered is to limit the amount of deposits to RM200,000 per depositor.

Permodalan Nasional Bhd limits the deposit of every client. The same is likely to be applied to TH.

The new board that is headed by Tan Sri Mohammed Nor Md Yusof and assisted by the likes of Datuk Seri Zukri Samat and Datuk Zaiton Mohd Hassan are there to set it right once and for all.

“They cannot control what happens in the future or who is appointed to the board. But once the structure is in place, there will be some level of supervision so that there is no abuse,” says the banker.