Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on June 21, 2021 - June 27, 2021

The first nationwide Movement Control Order (MCO) was imposed on March 18, 2020. A week later, Bank Negara Malaysia announced several regulatory and supervisory measures in support of efforts by banking institutions to assist individuals, small and medium enterprises (SMEs) and corporations in managing the impact of the Covid-19 outbreak, including a “blanket” moratorium on all loan and financing repayments for a period of six months with effect from April 1, 2020.

The pandemic continued and the government imposed another total lockdown nationwide from June 1, 2021. So far, there has been no news of another blanket loan moratorium. There have been, however, views on the need for another blanket loan moratorium, similar to the one introduced during the first MCO.

Bank Negara has advocated that a blanket automatic loan moratorium is not necessarily the best solution. More recently, the Minister of Finance indicated his ministry would not be deploying more resources than necessary in curbing the problem, and rationalised that it would be unwise to use “a sledgehammer to crack a nut”.

It is pertinent to note that last year’s blanket loan moratorium had benefited everyone, including the T20, the rich, the elite, big corporates and companies when, arguably, they did not even need it in the first place. Interestingly, there are voices coming from various quarters to impose another blanket loan moratorium à la the one during MCO 1.0, and some have even predicated the potential legal provisions for the enablement of this initiative.

Role and objectives of Bank Negara

A central bank is an institution that governs and regulates the banking system in the country. Central banks are known by different names in different countries — some call them the central bank, reserve bank, national bank or monetary authority. In Malaysia, it is Bank Negara.

Bank Negara and the banking industry comprising the commercial banks, investment banks and Islamic banks make up the components of the Malaysian banking system, and Bank Negara is emplaced at the core of the regulatory framework.

Bank Negara derives this status and position from the Central Bank of Malaysia Act 2009 (CBA). Under the CBA, the roles and functions of Bank Negara have been substantially refined and are specifically defined in Section 5 Pt II. Section 5(1) states: “The principal objects of the bank shall be to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy.”

The objectives of Bank Negara must also be read with the provisions of its primary functions, which are enumerated in Section 5(2), which include the following:

•    To formulate and conduct monetary policy in Malaysia;

•    To regulate and supervise financial institutions, which are subject to the laws enforced by the bank;

•    To promote a sound, progressive and inclusive financial system; and

•    To act as a financial adviser, banker and financial agent of the government.

Section 5(4) of the CBA also provides that Bank Negara, in giving effect to its objectives and carrying out its functions under the Act, shall have regard to the national interest.

The key points to note are that Bank Negara, in carrying out its role and executing its functions under the CBA, is bound to, inter alia, incorporate strategies and policies that do not impede the sustainable growth of the Malaysian economy, having regard to the national interest.

As such, any decisions that Bank Negara makes with regard to any blanket loan moratorium must be tempered with the criterion of ensuring it is beneficial to the long-term prospects of the country’s economy. It is a responsibility that is intertwined with economic and realistic facets of accountability for future generations.

Powers of Bank Negara with regard to loan moratorium

The law requires Bank Negara to exercise its powers in a way that it considers most appropriate for the purpose of meeting its regulatory objectives. More importantly, the issue is not only about having the necessary powers, but also about exercising them appropriately, proportionately and prudently, weighing national interest as a whole.

This was amply demonstrated by Bank Negara in the first moratorium granted by banking institutions on all loan/financing repayments/payments, principal and interest (except credit card balances) by individual and SME borrowers/customers for a period of six months from April 1 to Sept 30, 2020, wherein Bank Negara granted specific prudential flexibilities to the banking institutions in accordance with its available powers under the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) to support the moratorium by the banking institutions. These prudential flexibilities were not without cost to all involved.

In addition, the Minister of Finance highlighted the fact that about 85% of borrowers resumed repayments upon expiry of the loan moratorium in September 2020. It should be noted, however, that even though the banks were able to absorb the losses attributed to the blanket loan moratorium under the first MCO, the ever-evolving uncertainty of the Covid-19 pandemic may result in possible losses to their shareholders, comprising the general populace and public institutions, in the long term.

What are the legal provisions that Bank Negara can leverage in the event of resistance from the banking domain if another blanket loan moratorium is introduced?

Moral suasion

Moral suasion refers to a traditional central bank technique of informally inducing a positive response from the banking system in its policy initiatives. The philosophy underlying moral suasion rests on the premise that the implementation of policies could be made more effective if the banks on their own accord take the necessary action to fulfil the role required of them. In the Malaysian context, experience has shown that moral suasion is most effective when it is supported by specific policy measures involving traditional central banking instruments. It is often mistaken as a legal action; however, it is just a persuasive move whereby general interaction is carried out.

Central Bank of Malaysia Act 2009

Central though Bank Negara’s role in the regulatory system may be, it is not the sole regulatory authority. Its powers are limited in certain important respects. On top of Bank Negara, there is another regulatory authority — the Minister of Finance. This authority is powerful in the sense that the minister is vested with certain important powers that Bank Negara does not have. In having the Minister of Finance as well as the Financial Stability Executive Committee as another authority alongside Bank Negara, it is intended that the possibility of any excesses may be avoided or minimised, and therefore the CBA has readily incorporated a built-in safeguard against possible excesses that may befall the banking sector as a result of having only a single and all-powerful regulatory authority. There is therefore an omnipresent check-and-balance governance process embedded in the Act.

Section 72 provides a mechanism to resolve differences of opinion between Bank Negara and the Minister of Finance with regard to “policies relating to Bank Negara’s principal objects”. Section 72 would not be applicable unless the difference of opinion relates to Bank Negara’s principal objects as stated in Section 5 of the CBA.

The fundamental underpinning of Section 72 is predicated on the fact that there is no consensus between the Minister of Finance and Bank Negara on a specific issue relating to the latter’s principal objectives. Unless there is evident indication that there is any difference of opinion between the Minister of Finance and Bank Negara pertaining to the issue of a blanket loan moratorium, Section 72 will not be applicable in the current situation. Furthermore, it should be noted that Section 72 applies to a difference of opinion between the Minister of Finance and Bank Negara and not between the Minister of Finance and the banks.

Financial Services Act 2013

Section 6 of the FSA states that the principal regulatory objective of the Act is to promote financial stability and, in pursuing this objective, Bank Negara shall, inter alia, foster the safety and soundness of the financial institutions and strive to protect the rights and interests of consumers of financial services and products. Section 7 further states that Bank Negara shall exercise the powers and perform the functions under the FSA in a way that it considers most appropriate for the purpose of meeting the regulatory objectives of the Act.

If Sections 6 and 7 of the FSA are used to implement a blanket moratorium, it appears all the more Bank Negara will need to ensure the safety and soundness of financial institutions as its first consideration for the following reasons:

•    The long title to the Act provides that the purpose of the FSA is “to provide for the regulation and supervision of financial institutions, payment systems and other relevant entities … to promote financial stability and for related, consequential or incidental matters”. This purpose necessarily guides the interpretation and application of the whole FSA;

•    Section 6 provides that the principal regulatory objective of the FSA is to promote financial stability; and

•    Based on this, the actions to be taken by Bank Negara under Section 6 should serve and are bound by this regulatory objective. Therefore, in fostering the safety and soundness of financial institutions and fair and responsible and professional business conduct under Section 6(a)(i) and (iv) as well as in striving to protect the rights and interests of consumers of financial services and products, paramount considerations must be that the actions taken promote, and thus do not undermine, financial stability.

The powers of Bank Negara to compel a blanket loan moratorium under Sections 6 and 7 of the FSA are arguable in that Bank Negara’s duty in carrying out its regulatory objective is financial stability of the country. Use of these regulatory powers may further compel Bank Negara to prioritise the safety and soundness of financial institutions in the interest of financial stability.

The general rule is that, despite the conferment of wide powers under Sections 6 and 7 of the FSA, the exercise of those powers must be reasonable and appropriate. If the underlying economic arguments are sound enough and can be demonstrated, no court will interfere with the decision of Bank Negara one way or the other. The test will be whether the Minister of Finance’s or Bank Negara’s decision is so unreasonable that no reasonable authority would come to that decision.

Emergency (Essential Powers) Ordinance 2021

It has been argued that the government may invoke its powers under the Emergency (Essential Powers) Ordinance 2021 (Emergency Ordinance) to impose a blanket loan moratorium immediately. It should be emphasised, however, that although the Emergency Ordinance does give greater powers to the government, it is improper use of the Emergency Ordinance to impose a loan moratorium for at least three reasons.

First, the Emergency Ordinance is about empowering the government to take temporary possession of properties and demand the use of resources. There is nothing provided here about suspending loan repayment obligations between borrowers and the banks. Second, this Emergency Ordinance targets primarily private healthcare facilities in connection with the testing and treatment of Covid-19 patients or the vaccination programme. So, employing this Emergency Ordinance for any other purpose goes beyond its original intention as declared by the government.

Lastly, and more importantly, the use of this Emergency Ordinance will involve payment of compensation by the government, which will add to the already-heavy burden that the government will need to shoulder. Provisions of Sections 4 and 5 of the Emergency Ordinance override all provisions in the Federal Constitution — of particular relevance is the overriding of the requirement for “adequate compensation” to be paid in accordance with Article 13(2) for compulsory acquisition or use of property. Under Section 5 of the Emergency Ordinance, compensation is whatever is assessed by the authorised person, which shall be final and conclusive and cannot be challenged or called in question in any court on any ground.

It goes without saying that if the existing powers proved insufficient, the government has the option to amend the Emergency Ordinance to include specific additional powers to implement a blanket loan moratorium.

Blanket vs targeted loan moratorium

The raison d’etre of any loan moratorium is to assist segments of the society that are adversely affected by the implications of the MCO. It is undeniable that there are sectors of the population and business community that need a loan moratorium to enable them to survive, especially with respect to their cash flow. Be that as it may, knee-jerk reaction in policy-making is best avoided.

During the first blanket loan moratorium (April to September 2020), the net was cast wider than it should have been. While the moratorium helped support the survival and recovery of SMEs and safeguarded the livelihood of individuals adversely affected by the MCO, it also “enriched” others by increasing their spendable income by such amount, which should have been used to settle loan obligations when they could afford it.

For this reason, it is noted that the government, through the Ministry of Finance and Bank Negara, has implemented several targeted initiatives. The Ministry of Finance has announced a RM40 billion Pemerkasa Plus aid package for affected individuals and SMEs. Furthermore, Bank Negara has established several funds to help SMEs. These are the RM6 billion Targeted Relief & Recovery Facility, RM1 billion High-Tech Facility-National Investment Aspirations, RM1 billion SME Automation and Digitalisation Facility, RM410 million Micro Enterprises Facility, All Economic Sectors Facility, Agrofood Facility, Disaster Relief Fund 2021 and Penjana Tourism Fund.

On top of its targeted funds, Bank Negara and the banking industry have also set up Loan Repayment Assistance (LRA) for individuals and businesses. Under the LRA, eligible individuals may get either a three-month loan moratorium or 50% reduction on loan instalments for six months (for those who lost employment and B40 recipients of Bantuan Sara Hidup or Bantuan Prihatin Rakyat), or a proportionate reduction of loan instalment (for those who suffer reduction of income).

Eligible SMEs may get a three-month loan moratorium or 50% reduction of loan instalment for six months. This is on top of other customised assistance to suit the financial needs and circumstances of individuals and businesses that remain available from banks. According to Bank Negara, 1½ million borrowers have benefited from LRA since October 2020.

The issue therefore is “substance” over “form” — through a targeted loan moratorium approach, a substantial portion of those affected by the MCO is being assisted and offered aid. A blanket loan moratorium looks good in its “form” but, in reality, it has inadvertently helped those that may not require assistance, at the expense of the banks.

The way forward

There is a plethora of legal provisions that may enable the government and Bank Negara to implement a blanket loan moratorium, despite any misgivings of the banking industry. The issue is not whether the government and Bank Negara have the legal authority to do so. What is more important is whether Bank Negara, when exercising its powers, should take into cognisance the fact that its primary role is to ensure financial stability and to act in the “national interest”.

This is an all-encompassing notion and quite subjective. What we must remember is that past governments, working with Bank Negara, have guided Malaysia through economic and global financial crises. Further, the government and Bank Negara are privy to economic information and data that will enable them to articulate fair and sensible policies for the country. It may be prudent for the government and Bank Negara to be given space to implement a targeted loan moratorium as opposed to a blanket one.

Wielders of powers need to be wary when exercising such powers, lest there is abuse. More than 40 years ago, Sultan Azlan Shah, in his seminal Federal Court judgment, reminded us that “every legal power must have legal limits, otherwise there is dictatorship”. So, when the present targeted initiatives from Bank Negara are proven to be effective and have benefited a very large number of beneficiaries, it would be overkill to impose an overlapping initiative à la a blanket automatic loan moratorium. Pressuring the government to use its power to influence Bank Negara’s policy in this regard may also be unwise.

In the more recent case of Melawangi Sdn Bhd v Tiow Weng Theong, the Federal Court said “discretion must, however, be exercised judiciously and sparingly, and only in very limited circumstances in order to achieve the ends of justice. It has to be performed with care after giving serious considerations to the interests of all parties concerned”. The Minister of Finance has to balance the borrowers’ needs, but he balanced against the banks’ interests, the banks’ shareholders’ interests and the national interest affecting investors’ confidence before deciding not to use his “sledgehammer”.

Invoking the emergency powers to promulgate laws on a blanket loan moratorium outside of Parliament, although technically feasible, runs counter to our democratic system, especially when the public has accepted and adjusted to the new norms. So, additional emergency measures may be superfluous.

The main criterion is that there is relief for those affected by the MCO — if this can be attained through a targeted loan moratorium, then this should continue and suffice. Logically, this policy should be reviewed periodically to ensure its effectiveness, and the government and Bank Negara should be flexible enough to review the policy as needed.

The common objective to assist those adversely affected by the pandemic should be a dynamic commitment by everyone and not something pursued en passant for purposes of verisimilitude only.


Datuk Seri Dr Nik Norzrul Thani is chairman and senior partner of Zaid Ibrahim & Co (a member of ZICO Law) and author of Legal Aspects of the Malaysian Financial System as well as co-author of The Law and Practice of Islamic Banking and Finance. He was a Visiting Fulbright Scholar at Harvard Law School and Chevening Fellow at the Oxford Centre for Islamic Studies.

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