With the long-awaited Royal Commission of Inquiry (RCI) report on Lembaga Tabung Haji (TH) now public, headlines are dominated by investigations, arrests and criminal charges involving allegations ranging from corruption to criminal breach of trust. While the courts will ultimately determine individual accountability, a singular question remains dangerously overlooked: Who ultimately bears the financial cost of the mismanagement of TH’s assets?
While criminal proceedings move forward, the structural bill for fixing TH has quietly been shifted to the state — with long-term implications for future public budgets.
TH traces its origin to the Pilgrims Board established in 1962 which began accepting deposits to enable Muslims to save towards the hajj. Under the Tabung Haji Act 1995, TH was given broad powers to manage and invest depositors’ funds in Shariah-compliant investments. It operated outside the prudential and investment regulatory framework that Bank Negara Malaysia (BNM) and the Securities Commission apply to fund managers. Investment proposals supported by its Investment Panel had to be submitted to the Minister of Religious Affairs for final approval.
Concerns about TH’s financial position emerged in 2015 when BNM highlighted that TH’s reserves were negative with only 98 sen in assets for every ringgit in liability. TH disputed that this represented its financial position but the RCI’s subsequent analysis showed a deterioration of its reserves.
Following the change in government in 2018, a restructuring and rehabilitation plan was introduced by introducing a government-owned special purpose vehicle known as Urusharta Jemaah Sdn Bhd (UJSB). The assets transferred to UJSB had a fair value of RM9.73 billion but were transferred at RM19.9 billion, a premium of approximately RM10.17 billion. In return, UJSB paid RM300 million in cash and issued RM19.6 billion of zero coupon sukuk to TH in two tranches. The first tranche comprised RM10 billion with a nominal value of RM13.2 billion over seven years with a yield-to-maturity of 4.05%. The second comprised RM9.6 billion with a nominal value of RM14.3 billion over 10 years with a yield-to-maturity of 4.10%. Their nominal maturity values totalled approximately RM27.5 billion.
TH exchanged assets worth RM9.7 billion at prevailing values for financial claims of much higher value, restoring its assets to a level above its liabilities. The underlying economic loss was transferred to UJSB and, to the extent that its asset recoveries proved insufficient to meet its obligations, ultimately to the government.
UJSB’s financial position illustrates this continuing mismatch. At the end of 2024, it reportedly had RM11.4 billion in assets against RM23.9 billion in liabilities and accumulated losses of RM12 billion. The first sukuk maturity in May 2026 was discharged through a new RM11.5 billion sukuk, a 10-year sukuk with annual profit payments and a transfer of assets worth RM965 million. RM720 million had been paid in partial cash redemptions to TH. This amounts to refinancing the obligation rather than using the portfolio proceeds to pay it.
This raises an important question about the restructuring plan. Section 24 of the Tabung Haji Act states that where expenditure relating to depositor withdrawals, the amount required is payable out of the Consolidated Fund and becomes a debt owed by TH to the government. The UJSB restructuring operated differently as the government intervened before a liquidity crisis occurred. Waiting until TH could not support withdrawals could have caused a crisis that threatened the stability of the financial system, not to mention a political crisis.
Nevertheless, the restructuring exercise should have addressed moral hazard. Where an institution knows that substantial investment losses can ultimately be removed from its balance sheet and shifted to the state, its incentives to price risk properly, recognise impairment promptly and maintain sufficient reserves are weakened.
A useful comparison is Danaharta’s approach after the 1997-1998 Asian Financial Crisis. It took non-performing loans from banks and restructured them to maximise recoveries. The loans and other assets were valued using methodologies that imposed discounts on selling banks. The institutions had to recognise their losses while surplus recoveries could subsequently be shared after Danaharta’s costs were met. The rescue of the financial system was combined with an element of financial discipline.
The restructuring of TH’s non-performing assets did not address moral hazard. The sukuk could have been issued with a much lower yield-to-maturity and TH should not have been given the first right of refusal for assets, even at market value. These terms allowed TH to benefit on the upside while UJSB, whose obligations are ultimately supported by the government, bore all the downside risk.
TH should be given credit for its post-restructuring reforms. It revised its governance structure and improved its strategic asset allocation, which sets out clear investment strategies and thresholds for fixed income assets, equities, real estate and Islamic money market instruments. However, these improvements and the charges against individuals for alleged mismanagement do not extinguish the cost of restructuring, which has been transferred to future government budgets. Those are resources that could otherwise support other public priorities.
Dr Elsa Satkunasingam is an associate professor and senior director at the Iclif Executive Education Center at the Asia School of Business (ASB)