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INCEIF CAMPUS, 22Jan 2025 – INCEIF University today hosted the ID@INCEIF panel discussion on “Towards Financial Fairness: Why It’s Time to Remove Rule 78,” focusing on the impact of the Rule of 78 on Malaysia’s financial system and the need for reform.
The session, organised by the Centre of Excellence for Research and Innovation in Islamic Economics (i-RISE) under ISRA Institute, was moderated by Dr Mohd Zaidi Md Zabri, Interim Director of i-RISE.
The panel brought together industry leaders and academics, including Mr Rafe Haneef, Group Chief Executive Officer of MBSB Holdings; Mr Amir Alfatakh Yusof, representative of the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM); and Prof Dr Zulkarnain Muhamad Sori, Associate Dean and Senate Member of INCEIF University.
The discussion began with Prof Dr Zulkarnain explaining the mechanics of the Rule of 78—a method of interest calculation developed in the 1930s. This approach, still in use in Malaysia, has been criticised for front-loading interest payments, creating a heavier financial burden for borrowers in the early stages of repayment, and penalising early settlements.
He highlighted how the Rule of 78 contrasted with the reducing balance method, which was more widely used globally for its fairness and transparency. Many countries, including the U.K., European nations, Australia and Singapore, have adopted the reducing balance method, while the U.S. has restricted the Rule of 78 to loans with terms under five years.
Consumer awareness emerged as a key theme of the discussion. Panelists emphasised the importance of consumers understanding financial products and their implications. Prof Zulkarnain raised concerns about younger borrowers, often managing multiple loans, who may struggle with early settlements due to the minimal reduction in principal during the initial repayment period.
Mr Amir pointed out that alternative financing products utilising the reducing balance method were already available in the market, offering consumers more equitable options.
He also advocated for a phased approach to reform, where existing loans remain under the current structure while new loans adopt the reducing balance method. This gradual shift, he suggested, would ensure fairness while minimising disruptions for borrowers.
Meanwhile, Mr. Rafe Haneef underscored MBSB’s commitment to phasing out the Rule of 78 by 2026, in line with the Malaysian Financial Reporting Standards (MFRS 9), which required effective rate calculations. He emphasised that the transition to global best practices must be carefully managed to prevent unintended consequences, such as increased costs for borrowers.
The discussion also addressed the ethical dimensions of the Rule of 78. The panel explored how fairness, transparency, and alignment with Maqasid Al Shariah—the objectives of Islamic law—can guide reform efforts. Moving away from the Rule of 78, they argued, is a critical step toward building a more just and sustainable financial system.
The event concluded with a consensus on the need for financial education, greater transparency, and collaboration among policymakers, financial institutions, and consumers. Reforming the Rule of 78 is not just about modernising financial practices; it is about creating a system that aligns with principles of fairness and sustainability.
By hosting discussions such as this, INCEIF University continues to contribute to important dialogues that shape the future of Malaysia’s financial system, reinforcing its commitment to advancing knowledge and innovation in Islamic economics and finance.
For the full video, click here.
To view the presentation slides where Prof. Dr Zulkarnain explains the mechanics of the Rule of 78, click here.
