Credit recovery has always been an issue. IFIs (Islamic Financial Institutions), however, face the issue in some different way with few add-ons. Due to non-existence of penalties against late deposition of repayments and installments, debtors do not fret to pay their installments on time or within the due dates.
People usually delay their installments as a habit. Even where terms of sale make repossession of asset easy and confiscation can be used as a threat, debtors wait for the deadline to come instead of respecting the due date. The demeanor is vigorously increasing day on day, month on month and year on year. Although IFI's are investing considerable resources to resolve the issue, results are not very encouraging. Of course, the approach was not myopic, but experts need to get to the bottom of the issue for a better solution. Islamic Finance, if not the only, then is one of very few businesses being managed religiously. Here we are focusing on delinquency not default.
Q: WHAT IS DELINQUENCY?
A: "Intentional or unintentional delay or failure to repay obligation within due date".
After analysis of delaying factors in various lending portfolios of different classes of society, experts have agreed to a hypothesis that the delays are normally due to human behavior.
Summarizingly, we can define behavior as actions, reactions or gestures created by individuals or systems according to an environment in relevance to other parts of the whole system. Like others, repayment behavior is also an outcome of fraternity of societal components. When we want to change it, the whole society cannot be changed in one go. Any coterie however, may set trends of religiously complying obligations.
Delay in repayments is not just a delay in itself or a disorder in timeline for cash flows. Let's see it in another way; every dollar involved in a loan, in any way has an opportunity cost associated with it.
Delays and delinquencies make loans more expensive and leads towards losses. The delays not only disturb projected cash flows but also result in deviation in IRR, management efficiency and profitability from projections, which are used as basis for decisions of whether to invest or not.
Ensuring well-timed repayments is always a difficult task. Conventional banks along with other tools impose late payment charges to avoid delinquencies and delays in repayment. Shariah, however, prohibits imposing late payment charges.
There are some instances where LPC (late payment charges) have been allowed but the amount is not supposed to be recorded in a P&L Account. Such charges collected with approval of a Shariah Board go to a charity fund; they do not neutralize or minimize losses incurred in terms of opportunity cost.
To promote Islamic Banking, we require effort en masse to unanimously prevent delaying behavior and develop societal behavior to enforce compliance with moral obligations, rather than caused by fear of penalties and financial impositions or otherwise.
Timely receipt of installments is a big challenge for all financial institutions. Changing the delaying behavior is not a pang but rather an acknowledged need at any point in time.
Being Muslims, we are bound to fulfill our promises. Repayment is also a promise which should be complied in true terms. Instead of making unnecessary delays and leaving banks to bear the financial costs alone, repayment should be ensured in time. Only repayment is not the issue; timing is also of substantial importance to adhere to core religious beliefs of "Ahsan Muamalat". The Concept of "Ahsan Muamalat" leads to a status where every act of life is performed in the best way possible and the requirements of Shariah are complied with in true letter & spirit.
Delays in installments or recovery issues are a big hindrance in the progress of the Islamic Financial Sector. In Islam, financers are not allowed to charge interest, late payment charges or any form of such penalties or fees. They can only sell goods on agreed higher prices in case of deferred payments. These prices are fixed considering all monetary and non-monitory factors in which opportunity cost is an integral part. Higher prices may mount if risk of delays increase and sellers will seek to compromise more in terms of opportunity costs and face more uncertain cash flows.
We always say "Islamic products are comparatively expensive". The issue discussed above is one of the major contributors in making products expensive. However, the issue may be resolved very easily by complying to financial obligations, which is also our religious duty. Financial Institutions should also channel client relationships. Clients at the time of the agreement should be educated about their obligations and be provided with the understanding of becoming part of a system rather than having a banker & client relationship. It is a bilateral relationship and only joined efforts can resolve the issue in a favorable manner.
About The Author
Syed Mehboob is an MBA graduate and holder of a PGD in Business Administration from IBA-Lahore and PGD in Islamic Banking & Issuance from IIBI-London. Mehboob has 10+years professional experience in the fields of audit, credit and business management, serving United Bank Limited for four years at various management levels with his last posting as Regional Manager in the credit initiation department. He previously joined a leading micro finance bank, and launched a branch in one of the major commercial areas in the city. mehboob.zaman@gmail.com
© Business Islamica 2013
