Jangan Buat Pinjamam ASB!

This is an original article from Pengurus Harta entitled Don’t Borrow Amanah Saham Bumiputera Loan!

Referring to my preceeding articles, Amanah Saham Bumiputera (ASB) is indeed a decent unit trust, and gives much better return than saving / education insurance. It is liquid and secured. Its decent return and security make it an income earning platform for financial institutions. This is done via providing loan for ASB acquisition.

This brings back my memory to my late father was killed 10 years ago. He was a senior manager of the largest bank in Malaysia for more than 30 years. A friend of my dad, a high school principal, who is already passed away now, visited my dad when i was teenager. He asked my dad for help because he wanted to borrow a loan from my dad’s bank to buy ASB. I sat beside them, listening the long conversation and watching my dad wrote on a piece of paper to explain. I didn’t understand anything but his friend decided not to borrow and my dad was satisfied.

The local banks of Malay based, are now pushing their sales personnel to sell this product, namely borrowing loan to buy ASB. The mechanism is like this : the Malay person take a loan, however the bank do not give the cash to him.

The cash is used to buy ASB units of equal value as the loan taken. The borrower then pay monthly installment using his own cash to the bank, but cannot resell the ASB for immediate cash. ASB is kept until the borrower fully settles all the installments, which usually up to 25 years. Nevertheless, he can always withdraw the dividend and cash it.

Since the sales people have been actively promoting it, this scheme is well known among Bumiputera. I read their different sales illustrations and listen to their sales approach. I’d say they are not doing something bad. I had seen many unethical or misleading sales tactic of insurance agents. The sales method of ASB loan is nothing.

Below is an example the sales illustration ;

Hi all,
Do you wish to become a millionaire ? You can become millionaire by using ASB !

First, you need to take a Loan to buy ASB
You just need to pay monthly installment of RM1160 for 24 years (Here, the monthly installment is emphasized)

In Year 24, your final ASB value is RM1,121,365 (Look, calculation is very simplified)
Total installments = 1160*12*24 = RM334,080 (Again, simplistic calculation)
Return = Final ASB Value – Total Installments = 1,121,365-334,080 = RM787,285
Return On Investment = 787,285/334080 = 235.66% !

Based on above, the borrower can become a millionaire …. and the Return on Investment is 235% or more than 2 times of money he gives out.

Above is if he borrows, what if he uses his own money to buy ASB bit by bit. See below :

Like above, he sacrifices same amout every month RM1160 say for just 15 years and 4 months, total cash out is RM199,864

After that period, final ASB value is RM1,016,842, so the return is 1,016,842 – 199,864 = RM816,978, Return on Investment is RM816,978/RM199,864 = 408.76% (Here, the salesperson tries to emphasize on how you cannot get RM1 million by saving using own money)
If he doesn’t borrow, if he just use his own money, at 16th year, he may mot be a millionaire yet, but his return is 400% or 4 times bigger. If he continues to save the same amount monthly into ASB, he can become millionaire. So, comparatively, borrowing loan is not good.

Well, there are another sales illustration.

Use this term loan facility to buy ASB units. While you are servicing the loan, you’ll be earning the annual dividends and bonuses from your ASB investment which you can use to partly pay for the subsequent year loan repayments.

It’s an affordable, convenient and smart way to make your money work harder.

Features and benefits:

Maximum loan amount of up to RM200,000.
High financing margin.
Low interest rates.
Flexible loan tenures.
Low handling fees.
Insurance coverage.

And CIMB’s ASB loan offer comes in 2 packages. Package 2 is attractive if you expect the BLR to increase in the 2 years period, since you can locked in the BLR rate.

Package 1: BLR – 1.65% p.a. throughout the loan tenure
Package 2: 4.65% p.a. fixed for the first 2 years, BLR – 1.65% p.a. thereafter

Under this so-called strategy, for the first 2 years, you need to sacrifice, paying the monthly installment. After that, you can start withdrawing the dividend to pay the whole subsequent annual installment. Everytime, you got the dividend, you withdraw it to pay the whole installment for next year. The Point of Sales here is , for 22 years or so, you don’t need to pay anything, after term ends, you get a huge sum of money.

In order to test this theory, I refer to one of the CIMB’s monthly repayment schedule. Say, I borrow a lowly sum of RM10,000. Accordingly, the interest calculation is based on monthly rest, so installment reduces every year since you gradually pay the loan principal via the past installments. So, as per schedule, at Year 5, the monthly installment is RM188, by right, total annual installment is RM2256. Let say ASB can maintain decent dividend of 9% at that time, RM10,000*9%=RM900. So, how are you going to pay annual installment of RM2256 using only RM900 ?? Furthermore, if you keep withdrawing the dividend/bonus, how are you going to benefit from compunding, which is the main way of multiplying your value in ASB.

Above elaboration is for demistifying the myth brought by the salespersons.

Now, for the reasons that this scheme is no good.

Low Return

If you use your own money to buy ASB, you do not need to pay interest, so you get the net dividend. However, if you borrow, there is interest. Basic Lending Rate (BLR) of retail banks usually at 6.6%, risk premium of ASB loan is 1.65%, so 6.6% minus 1.65% = 4.95%. So, interest is 4.95%. Let say ASB can somehow retain the dividend rate of 9%. The return you get is 9% minus 4.95% = 4.05% per year only ! Do you know 1 year Fixed Deposit Rate in Malaysia is around 3.20%. You borrow loan, take risk, sacrifice your money for monthly installment – what you get is a bit higher than Fixed Deposit only !

Uncertain Dividend

Highest dividend is nearly 11% and it got the lowest at 7%. The rare bonus is highest is 6% many years ago, while lowest bonus is 1% which is normal nowadays. Telling people that ASB dividend rate is 9% or 10% consistently until the next 25 years is wrong. It can go up and down, no one can guarantee it (even ASB and banks websites state this)

The able investment analysts will usually adjust the future return with risk. Risk is how much chance that the outcome will differ from expected one. If risk is high, the possibility of retaining the 9% dividend rate is low.
The method is called Expected Value. Sales illustration is usually without Expected Value and based only on single rigid rate. They wrongly assume that the return will be the same no matter what the circumstances are.

Opportunity Cost

This means if you buy ASB while there are other platform with higher rate, you loose the chance for that higher alternative income. If ASB pays you 9%, but a REIT pays you 15%, you miss the chance to get the 15% because you stay with the 9% ASB.

In any financial planner or genuine investment analyst, of in any financial textbook, this is everything. They design a formula to incorporate the above opportunity cost into analysis. This is called Net Present Value (NPV) analysis, or discounted value analysis.

NPV analysis considers rate which is higher than the one being analyzed. Although discount rate for NPV is subjective, there are so many investment which gives a lot higher rate than ASB. Same goes to Life Insurance Fund. There are too many platforms out there that give much higher income than Life Insurance Fund. NPV incorporates other rates into assessing a particular investment.

Sales person and insurance agents, of course, nearly all of them do not know or never even heard of it. Even if there is a handful of them who know it a bit, NPV analysis is something they are so scared of. In layman’s language, if you consider other better alternatives than the ones you are selling, this will reduce the positive image of products you are selling.

Inflation

Price level increases every year. Cost of living rises. This is called inflation. Sales illustration ignore inflation factor. By doing this, they assume that value of RM100 today is the same as value of RM100 25 years from now.