Article (6) Interest
C 29/2011 Effective from 29/3/2011Computation of Interest
a) Each bank or finance company must calculate the interest rate charged for the loans mentioned under article nos. (2) and (3) and overdraft facilities (Article- 4 in case of banks only) as well as unpaid credit card balances (Article -5), in accordance with the following formula:
b) All banks and finance companies must declare their respective interest rates on loans, overdraft balances (In case of banks only), and balances due for credit cards within the table. The rate shall be determined on basis of the reducing balance of the loan on annual basis and included in the display board mentioned in Article (11) of these Regulations.
c) "Interest Amount" on loans and overdraft balances shall be determined on basis of the formula mentioned under (a) above.
d) Deduction of a ratio of the loan in advance, as the payable interest amount is prohibited, the formula mentioned under (a) above should be used to calculate the first interest amount, and then interest amount shall be calculated on the reducing balance of the loan by using the following simple equation:
e) Banks and finance companies must arrive at the "Interest Amount" and deduct it from the agreed monthly installment, then use the net amount to reduce the loan balance and reach "the new balance of the loan at the beginning of the month" which would, in turn, be used in the calculation process at the end of the following month.
f) With regard to calculation of interest amount on credit cards due balances, these shall only be calculated for the outstanding balance after the maturity date for its full payment; i.e., in the month following the month on which the purchases and withdrawals have occurred. Interest amount must then be calculated as per the equation mentioned under (a) above and in accordance with the rates declared on the display board mentioned under Article (11) of these Regulations.
g) A Bank or a finance company shall determine the penalty rate in the event of full or partial prepayment before maturity date, or in case of a top- up loan, however, a top- up loan, should not be granted unless the original loan was repaid, without default, for a period not less than one year, and in this case the rate shall be declared in the table mentioned in Annex-2
- Method of interest calculation has not been changed from the earlier Circular No 12/93. Banks should continue to follow reducing balance method, by taking a year of 365 days. However they must ensure that effective interest rate on per annum basis is disclosed to the customer, displayed on the Board, it is used for calculation and specified in the loan documentation.
- .While reducing balance method of interest calculation will be followed on personal and car loans, average daily outstanding balances will form the basis for interest calculation in all cases.
- In case of credit cards, the banks may continue to follow the global practice where no interest/ finance charges are levied on the outstanding balance (excluding cash advance transactions) when the new balance outstanding shown in the statement is paid in full by the Payment Due Date. Finance/ interest charges on cash advance may be applied from the transaction date till final repayment.
- Within the above broad framework, Islamic banks may vary display of interest rates or use appropriate terminology as permitted under the Shariaah.
- Any bank advertising or propagating ‘Flat’ interest rate must invariably state the equivalent effective rate side by side.