This article first appeared in The Edge Financial Daily, on January 27, 2016.

KUALA LUMPUR: Bank Negara Malaysia (BNM) has issued a warning to Lembaga Tabung Haji (LTH) to further strengthen its risk management practices, after a routine check found that the pilgrims fund has more liabilities than assets.

In a statement yesterday, the central bank pointed out that while LTH is not under its direct supervision, advisories issued by BNM to non-bank financial institutions are not out of the norm, and are part of its surveillance on establishments that have important interlinkages with the financial system.

“[Advisories] are aimed at ensuring the institutions will continue to be well managed and effectively perform the role for which they have been established [for]. This in turn will contribute to financial stability,” said BNM.

“Based on the bank’s surveillance, the bank and the Financial Stability Executive Committee may, from time to time, issue advice to significant non-bank institutions as a pre-emptive measure to promote the sound financial standing of such institutions and avoid any systemic implications on the financial system,” it added.

Nevertheless, BNM said LTH has proactively taken appropriate measures to further strengthen its risk management practices, both on its own initiative and in response to earlier engagements with the bank.

“These will reinforce a sustainable and healthy financial position of the institution going forward,” it said.

The Malaysian Insider yesterday reported that in a letter dated Dec 23, 2015, which was sighted by the news portal, BNM governor Tan Sri Dr Zeti Akhtar Aziz told LTH chairman Datuk Abdul Azeez Abdul Rahim that it had only 98 sen in assets for each ringgit in liability.

Section 22 of the Tabung Haji Act states that it cannot announce dividends and bonuses to its contributors if its assets are worth less than its obligations.

In a separate letter to Minister in the Prime Minister’s Department Datuk Seri Jamil Khir Baharom on the same date, also sighted by The Malaysian Insider, Zeti warned that LTH’s finances could have a financial impact on the government. This was because LTH’s deposits are wholly guaranteed by the government, Zeti was reported as saying.

She also suggested to Jamil Khir that he increases the number of members on LTH’s board, and that they have vast financial experience.

In an immediate response later yesterday, LTH group managing director and chief executive officer Tan Sri Ismee Ismail pointed out that the central bank’s evaluation had not taken into account the pilgrims fund’s investment portfolios, such as the shares of its subsidiaries, its plantation assets and property.

“Throughout the 2014 and 2015 financial years, the value of LTH’s assets was higher than its liabilities, when taking into account all of LTH’s investment portfolios,” said Ismee in a statement.

He added that LTH is in a good financial position and that it is supported by firm assets, including cash amounting to RM10.7 billion as of Dec 31, 2015.

Ismee also assured contributors that their deposits are safe and that the pilgrims fund is not facing any financial difficulty, adding that the fund usually announces its bonuses within the first quarter of the year.

“God willing, LTH will announce the bonus in early February, after going through its usual annual internal processes and interim audits.”

However, he added that the bonus is subject to the current economic climate, including the stock market, the falling prices of oil and the decreased value of the ringgit.

Ismee said 2015 was a difficult year, and that LTH is also forced to prepare for the economic challenges of this year to remain competitive.

And while the pilgrims fund has taken note of BNM’s advice that it should re-examine its reserve policy, Ismee said depositors should not be worried because their deposits in LTH are guaranteed by the government, as inscribed in the Tabung Haji Act.

“LTH also has never strayed from its original mandate of assisting Muslims in Malaysia to complete the fifth pillar of Islam (pilgrimage to Mecca),” he added.

Ismee, however, did not disclose LTH’s surplus of asset value to its liabilities, or the fund’s debt-to-equity ratio.

According to The Malaysian Insider, Zeti has blamed the depleting reserves at LTH on its practice of paying out higher dividends than it could afford since 2012.

“The dividend and bonus payout ratio which has, on average, exceeded its profits [on an average of 107% from 2012 to 2014] caused LTH’s already-low reserves to decline further, to the extent that it is not able to manage the weak equity portfolio performance for 2015.

“This has caused LTH’s reserves to be in the negative,” Zeti was reported as saying in the letter to Abdul Azeez.

Another problem, she said, is that LTH’s deposits are highly concentrated among a small number of contributors — 5% of whom own 75% of the total deposits.

This exposes the pilgrims fund to the risk of a mass withdrawal of deposits, should contributors lose faith in it, she said.

The Malaysian Insider reported that Zeti has also proposed that LTH formulates a comprehensive reserve policy to be presented to the BNM by March 31.