The burden of penalty interest begins its toll

First of three parts

The burden of penalty interest- Brian HenryBrian Henry

Amanah KiwiSaver Plan commenced operating on 24th March 2014.

From that time, we had a lot of work to do before the Plan was ready for the public.

The systems behind a KiwiSaver scheme are sophisticated; it does not matter if you are the largest bank in New Zealand or a small privately owned company like Amanah Ethical, all providers have to be registered with the Financial Markets Authority (FMA), hold a licence from Inland Revenue Department (IRD) and appoint a Trustee to hold all the assets.

Stringent Codes

People often do not realise that the only real difference to the KiwiSaver schemes being offered in the market are the fees and where the KiwiSaver manager invests the money.

We held back launching to the public whilst we built a track record to demonstrate to the Islamic scholars at the Federation of Islamic Associations of New Zealand (FIANZ) that we were strictly Sharia compliant.

FIANZ Ulama Council approved our offering as being strictly Sharia compliant and FIANZ took a 10% shareholding in the KiwiSaver Plan in November 2014.

We appointed Sheikh Mohammad Amir to the Islamic Advisory Board along with Dr Ahmed Ruffai and Associate Professor Dr Faruk Balli.

The People

Amanah Ethical is a New Zealand company with Gregory Fortuin as its Chairman.

Gregory was Race Relations Conciliator of New Zealand from 2009 to 2011.

He is very passionate to see Amanah succeed as the Islamic community was ignored by the other providers with their offerings.

Associate Professor Dr Faruk Balli has been involved since the inception.

He is a strict follower of Islam and is very enthusiastic to be part of a new venture that will show the western world that applying the principles of Islamic finance will provide not only a good return but will create a fund that is soundly based inside western economics.

\Director Claude Oberto is a Banker with wide experience having held senior positions with Citigroup, Hong Kong Bank and is currently a Director of Bank of Baroda.

I am the Managing Director and have been a Barrister for 40 years, probably best known for representing Winston Peters in the Winebox and successfully suing the Department of Corrections for Susan Couch.

Comparative Advantages

Amanah is a New Zealand based company and we are not large, yet.

The banks have an advantage due to their size and the ready corporate recognition they have as an established company. The Global Financial Crisis (GFC) removed the view that banks were too big to fail. I remember only too well the failure of the BNZ in the 1990s.

The Reserve Bank of New Zealand (RBNZ) has beefed up the regulatory regime and is mandated to manage the banks’ financial exposures.

I have faith in the new regulatory environment.

The KiwiSaver schemes come under the FMA but, where they invest into banking products that is supervised by RBNZ. We all hope that it will not happen again but some commentators (including me) believe that the GFC is a 10 year event and not yet finished.

Good & Bad Managers

There are no good or bad banks, only good and bad managers of the banks.

They are a mass of money held in the corporate structure who reward the staff for reporting huge profit with bonuses.

European regulators are working to control the management of banks from being greed/bonus focused.  Time will tell whether they succeed. We do not have any equivalent regime here. The banks in New Zealand are of course not Sharia compliant.

Sharia Compliance

Sharia compliance puts a huge discipline onto our team.

The first restraint is, when we select an investment, it has to be approved by the Islamic Advisory Board.  The team believes the investment is Sharia compliant but it is a discipline to report to an independent body who scrutinises the choice.

Islamic financial principles are religious based, however, it is easy to forget that all three of the monotheist religions based on Abraham banned interest based products.

Islam calls it ‘Riba,’ Judaism calls it ‘Rebit’, and Christians called it ‘Usury.’

The wisdom of the past is forgotten at your peril.

I worked through the crash of the late 1980s, a period of consummate greed fuelled by borrowings. The damage these practices wrought upon our society was not pretty, culminating in the Bank of New Zealand failing.

The abuse caused in society by present money lending practices is huge.

Greed impacts

We will soon see the impact on our farmers as the dairy price continues to erode their ability to pay the debt. The problem for borrowers is that when they can no longer pay the interest due then they are faced with a greater interest rate called ‘penalty interest.’

This means the obligation they cannot meet increases. The lender does not participate in the ill fortune of the market with them. Under Islamic financial principles, the renting of money does not occur and if the farmer was financed in a Sharia acceptable way then the provider of the finance would participate in the period of loss with the farmer and as the market recovers both would share in the recovery.

In the next few years we will see suicides and families pushed off the land by their inability to meet the interest rate agreed in good times with the added burden of penalty interest rates imposed due to the market declining and their inability to service the penalty burden.

The key difference is under the present Riba structures, when the borrower has hard times, the lender increases the debt due whereas the Islamic principles require the funder to participate in the bad as well as the good. It is essentially a humanity requirement.

Brian Henry is a well-known Barrister and Managing Director of Amanah Ethnical, the only company to offer KiwiSaver Plan that is Sharia compliant in New Zealand. This is the first part in a series of three articles to appear in successive issues of Indian Newslink.

Brian Henry with FIANZ President Hazim Arafeh at the Eid Al Fitr festival held at Trusts Stadium on July 18, 2015

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