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Malaysia plans US$4.8 billion rescue of Islamic pilgrimage fund

  • An earlier audit reportedly found that the fund’s financial statements were massively overstated as the value of its investments had declined
PUBLISHED : Tuesday, 11 December, 2018, 8:30pm
UPDATED : Tuesday, 11 December, 2018, 8:29pm

Malaysia’s finance ministry has approved a plan to revive a state fund tasked with helping Muslims save for a pilgrimage to Mecca.

The government will form a special purpose vehicle to take over as much as 19.9 billion ringgit ($4.8 billion) of Lembaga Tabung Haji’s underperforming assets, its managing director Zukri Samat said in Kuala Lumpur on Tuesday. The move will allow the fund to balance its books by year-end and enable it to keep paying out dividends to finance haj journeys, he said.

The plan allays immediate concerns over Tabung Haji’s finances but it shifts the burden onto the government, which already has a widening budget deficit. The fiscal gap is set to reach 3.7 per cent of gross domestic product in 2018, the largest in five years.

The decision to rescue the fund underscores Prime Minister Mahathir Mohamad’s focus on securing support from Malay Muslims, who make up most the population. On Saturday, he faced the largest protest since returning to power this year. Opposition parties led an estimated 55,000 Malay Muslims to rally in the capital to voice concerns over threats to Islam’s position as the official religion and erosion of the Malays’ special privileges.

A state-commissioned audit had found that Tabung Haji’s financial statements were overstated as it failed to record impairments when the value of its equity investments declined, according to The Star newspaper, which cited a PwC report presented to parliament. The fund had a 1.43 billion ringgit (US$342 million) loss in 2017, instead of the 3.41 billion ringgit (US$815 million) net income that it reported, the newspaper said.

Between 75 to 80 per cent of the assets transferred to the finance ministry’s special purpose vehicle will be equities, especially those with unrealised losses of 20 per cent or more, Zukri said. The rest will be made up of property with less than 2.5 per cent yield, he said.

These assets will be exchanged for 10 billion ringgit (US$2.39 billion) of Islamic bonds and 9.9 billion ringgit (US$2.37 billion) of Islamic redeemable convertible preference shares – with the former to mature in seven years after being sold at a discount to yield 5 per cent, while the shares will have no maturity and no dividend.

Tabung Haji is reviewing its investments and may exit unfavourable sectors, as well as look into cutting the cost of performing the haj, Zukri said.