TH’s accounting shenanigans hurt ‘face’ of Islamic finance

There is nothing wrong to be ambitious or aspiring to become a leading IFI globally. But such a ‘beauty contest’ may have taken its toll on integrity

By MARIZAH MINHAT & NAZAM DZOLKARNAINI

In our previous article published by The Malaysian Reserve on Aug 27 this year, we questioned whether the Islamic finance (IF) industry has prospered with integrity. Apparently, we do not have to wait long for an answer with Lembaga Tabung Haji (TH) in the spotlight.

TH, or the pilgrims savings fund, is one of the seven commonly cited government- linked investment companies (GLICs) in Malaysia. At the end of financial year 2017 (FY17), TH effectively owned 53% of BIMB Holdings Bhd that retained Bank Islam Malaysia Bhd as one of its subsidiaries. TH and BIMB, taken together, have been previously trumpeted around the world as the “face” of the IF industry in Malaysia.

Unfortunately, that “face value” of pride is currently at risk as a result of the latest revelation by Minister in the Prime Minister’s Department (Religious Affairs) Datuk Seri Dr Mujahid Yusof Rawa, of TH’s accounting shenanigans. While the public is cautiously waiting for the truth to be enlightened by evidence, news reported in the media is suggesting a case against TH.

TH’s “face value” of pride is currently at risk as a result of the latest revelation by Mujahid (Pic by Ismail Che Rus/TMR)

Whether such a revelation was politically motivated is irrelevant, if evidence suggests that TH’s accounting profits were “window-dressed to impress” stakeholders with (unlawful) distributable profits.

TH is regulated by the Tabung Haji Act 1995 (Act 535). Section 22(3)(a) of the Act states that “no distributable profit shall be declared in any year unless at the end of that year the assets of the fund were not less than the aggregate liabilities of the fund; amounts due to depositors being calculated as if immediately payable”. The recent scandal poses a doubt whether this rule has been adhered to by TH.

As at the end of FY17, total assets reported for TH was RM70.3 billion. The total liabilities was RM888.3 million. Total depositors’ savings fund stood at RM70.2 billion. The latter is fundamentally a form of liabilities, too that should be treated as if immediately payable following the rule specified in the Act.

Therefore, TH’s aggregate liabilities was RM71.1 billion which exceeded its total assets. Interestingly, the corporation still honoured a payment of RM3.3 billion “bonus” to depositors despite the short-fall in its total assets.

In addition, it was reported by the auditor-general (A-G) that TH did not record an impairment of RM227.81 million against investments in three subsidiaries and three associates, particularly an investment in TH Heavy Engineering Bhd, an associate company, amounting to RM164.58 million. According to the A-G, that company’s financial statements received a disclaimer of opinion by an external auditor.

It was also reported elsewhere that PriceWaterhouseCoopers found that TH failed to recognise a total of RM549 million in impairment losses of investments in several associate companies and subsidiaries, as well as fair-value losses in investment properties and impairment of investment in available-for-sale debt security. This findings suggested as if TH’s total assets were overestimated.

TH’s accounting shenanigans as described above unveil another ugly episode in the reality of IF as practised today. The position of TH as the premier Islamic financial institution (IFI) that manages a pilgrimage fund for the Malaysian public is exemplary to many institutions and governments around the world, but it is now falling short of expectations.

There is nothing wrong to be ambitious or aspiring to become a leading IFI globally. But such a “beauty contest” may have taken its toll on integrity.

Perhaps, TH needed to signal a good performance outlook on a constant basis, even artificially through distributable profits, failing which may discredit its reputation as well as the interest of the previous administration. That said, the reluctance to let depositors share the actual state of sub-standard performance, if that was the case, is a deviation from the Islamic profit/loss/risk sharing principle.

The competency or integrity of the previous administration is suspect, if the peculiarity in TH’s operation and bookkeeping had gone unnoticed during the period in question. TH’s board of directors, as well as the minister and deputy minister in the Prime Minister’s Department who were entrusted to oversee TH, could have exercised prudence and instituted fit and proper governance mechanisms to avoid unlawful distribution of profits, if any.

It is unfortunate that the integrity and governance at the global leader of IFIs are now being questioned. Masking itself with the slogan “Helping Towards Achieving Mabrur Hajj” would not enhance the “face value” of TH, if the GLIC was abused by those in power.

An exemplary IFI must “walk the talk” to earn such a respect — otherwise, the IF industry would remain tainted as an integrity-difficult institution.

Bank Negara Malaysia, which will soon oversee TH,  is better up to this challenge in the wake of increasingly sophisticated stakeholders. — Bloomberg

  • Dr Marizah Minhat is assistant director of International Centre for Management and Governance Research, and Dr Nazam Dzolkarnaini is associate professor in accounting and finance at The Business School, Edinburgh Napier University, UK. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and its editorial board.