On interest and bankers’ pay: COVID-19 exit strategy

Despite the prohibition of interest in Islam, charging interest on loans has been a normal practice in some Muslim-majority countries. For example, the combined net interest income of two Domestic Systemically Important Banks (D-SIB) in Malaysia for the financial year ended 2019 was more than RM22 billion.

Total personnel expenses reported for these two banks for the same year was more than RM12 billion, which is greater than 50% of the net interest income cited above. These banks are government-linked banks with about 78,000 staff in combination.

As a comparison, the PRIHATIN package has allocated only RM110 million as the total wages for more than 80,000 employees of some government contractors, as noted from the Ministry of Finance's document dated 27 March 2020. In this case, the estimated average wage per employee is RM1,375 (i.e. RM110 million / 80,000). If the average pay per employee at the two government-linked D-SIB is more than RM12,000 per month (i.e. RM12 billion / 78,000 / 12 months), then how do we tolerate with this wide pay gap?

Although the above estimation is constrained by limited publicly available information, this simple analysis suggests that government-linked banks and what is regarded as their well-paid workforce are presumably afforded with financial capacity to share more during this unprecedented financial circumstances of many. The message here is intended for those with excessive pay amounts. As a benchmark, the CEO of one of the two banks was awarded with more than RM8 million in remuneration last year.

Socially responsible banks may consider redistributing at least half (if not all) of their accrued and actual net interest income to benefit people in greater need, though this means halving the remuneration of well-paid staff and directors. On this note, those on higher pay scales are supposedly taking greater social responsibility to forgo greater amounts from their pay packages.

Although pay cuts amongst elites are becoming a new normal, one may argue that taking a temporary salary cut is not enough because perks, benefits and unjustifiable variable pay in combination can form a significant part of their remuneration packages. Not to mention other benefits such as staff loans reported on the two banks’ balance sheets amounting to RM5 billion in total for the financial year ended 2019 (also noted that loans to some Directors for the financial year ended 2017 and 2016 were RM46 million and RM54 million, respectively). This can be compared to RM6.3 billion funds available up to 15 April 2020 for SMEs’ Prihatin loans, as reported by Bernama on 21 April 2020.

More is expected from the banking system and bankers in sharing their prosperity during this time in need. If the banking system has accumulated adequate buffers as claimed, then kindly forgo or redistribute the interest income on loans to help those worst affected and in greater need due to the economic implications of Covid-19. There are abundance of opportunities for highly-paid elites to walk the talk on shared prosperity in the spirit of Shared Prosperity Vision 2030.

Although ‘free lunch’ may not exist but Muslims are guided by Verse 280 of Surah Al-Baqarah: “If, however, [the debtor] is in straitened circumstances, [grant him] a delay until a time of ease; and it would be for your own good – if you but knew it – to remit [the debt entirely] by way of charity.” This prescription is available universally to address the financial and economic implications of Covid-19.