Pahang Deforestation Aided by RM52m Financing From Bank Islam

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In April, Malaysiakini reported an oil palm plantation project developed near Pahang National Park.

The plantation is over 8,000ha, rife with problems caused by poor management and deforestation from a government-linked company named Perbadanan Kemajuan Negeri Pahang (PKNP).

Malaysiakini’s on-site visit discovered that the plantation was not developed in accordance with environmental impact assessment (EIA) report recommendations. As elephant herds grazed away on the oil palm saplings, the resulting harvest was severely reduced.

The usual step forward would be to halt this mismanaged, loss-making plantation project. However, PKNP’s logging activities were not only backed by the Pahang government but also financially supported by Bank Islam.

This invites further inquiry: How are our local banks complicit in illegal forest clearings? Are bank loans not regulated by our government and Bank Negara Malaysia (BNM)? Why would our banks lend funds to high-risk projects, especially ones that risk no returns? 

Six top-ups in 9 years

The developer of this oil palm plantation that took out loans from Bank Islam is PKNP Agro Tech Sdn Bhd (PASB), a subsidiary of PKNP.

Between 2015 and 2023, Bank Islam has issued loans totalling up to RM52.07 million.

In August 2015, PASB mortgaged 1,930 hectares of land in Ganchong, Pekan, to Bank Islam for RM17 million. According to them, these funds were used to develop their oil palm plantation.

It is also worth noting that Bank Islam gave out six additional loans to PASB in the nine years that followed. Each loan amount was greater than RM3.58 million.

For example, PASB further mortgaged 4,046ha of their Hulu Tembeling oil palm plantation to Bank Islam for an RM12.41 million loan, which was the largest top-up loan by far.

 As such, the rapid clearing of the forest progressed in tandem with the rate of loans being approved by Bank Islam to PASB.

Bank’s credibility at risk

Why would the bank continue to give out loans in increasing amounts despite PASB’s failing project?

This is what puzzled a financial expert who spoke with Malaysiakini - Did PASB’s struggling finances and operations go unnoticed when their applications for top-up loans were being processed?

“As reported, from a financial perspective, the fact that they are so bad at business, the yield is very low, and if you look at the expense-to-income ratio, it’s very high.

“When the bank is approving new loans to this company, they should have questioned where the money from the previous loans was?”

The financial expert, who spoke anonymously, described that companies involved in oil palm plantation and deforestation are high-risk companies in the financial sector and hence should be given more attention.

She added that requesting additional loans would have been a red flag for banks.

She explained that banks have different levels of protocols to avoid risks, including basic customer due diligence, and enhanced due diligence when it involves politically exposed persons.

“This is a very basic requirement of repayments, you know? What if the clients are not able to repay the debts due to their erratic cash flows?

“Forget about climate crises or social issues, just repayment is at risk here. There’s credit risk for the bank.”

Where did the money go?

The Hulu Tembeling oil palm plantation presented a pathetic sight: no one was managing the plantation, and the land was barren, upturned by elephant herds that ate away the oil palm saplings - it hardly looked like it was worth RM52 million in investments.

Malaysiakini previously reported that half of PKNP’s plantation - about 4,046ha - is in operation, and from there the plantation yielded just 29 tonnes of fresh fruit bunches a year, according to a report.

This is just 7kg per hectare of land, annually. In contrast, the average oil palm harvest of Peninsular Malaysia in 2022 is 16.41 tonnes of FFB per hectare of land.

The Malaysian Palm Oil Certification Council (MPOCC) confirmed that the plantation owner did not properly implement the recommendations of EIA - including the construction of ditches, electric fencing, and buffer zones - which resulted in poor crop production due to elephant encroachment.

An environmental consultant even said that this is “the worst-managed oil palm plantation in Malaysia” which intensified the human-elephant conflicts in the area, disrupted the water supply for the local community, and the opportunity costs of storing 227,395 tonnes of carbon dioxide if the forests were preserved.

Where did the funds go exactly? Perhaps PASB’s financial records would be able to give us a clue.

According to their company financial report, PASB holds a total of RM29.15 million in loans: RM17 million from Bank Islam in 2015, and RM12.15 million borrowed from Bank Islam by their parent company PKNP.

According to financial statements, the bulk of the loan, RM25.25 million, was invested into “developing plantations”. The lack of details concerning the project gave no indication of where the money ended up.

The following year, the costs of “plantation development” were re-categorised as “biological assets”, referring to the expenditure on maintaining immature oil palm trees.

Once the trees mature and start producing crops, these costs will be categorised under company assets.

As most oil palm saplings have been destroyed by elephants, all funds given out by Bank Islam have gone down the drain. While the trees bore no fruit for harvesting, PASB bore over RM36.16 million in debt.

Money laundering risks when GLCs set up private companies

Pushpan Murugiah, the Centre to Combat Corruption and Cronyism CEO, told Malaysiakini that PASB involves politically exposed persons.

For example, he said, former Pahang menteri besar Adnan Yaakob chairs the company while PASB’s parent company is a GLC.

“The disproportionate income and expenses, coupled with a large loan spent on a nearly non-productive asset, raise red flags for regulatory scrutiny.”

Pushpan pointed out that BNM should be alerted to assess the potential risks of money laundering and financial mismanagement behind this plantation project.

“There should be further investigation from the Public Accounts Committee (PAC) as this involves the financial obligation of a GLC. Greater transparency is needed to ensure money obtained through bank loans by subsidiaries is not misappropriated.

“Should there be any element of corruption uncovered, MACC must act to investigate,” he said.

Pushpan warned that GLCs will borrow loans from banks through private limited companies owned by them, these private companies receive less public scrutiny compared to their GLC parents.

The loan debts are not recorded under the GLCs, but sometimes fall into “contingent liability”, which means a liability that may occur depending on the outcome of an uncertain future event.

“This is because should the loan not be repaid, the liability is then transferred to the GLC and ultimately back to the government.

“There is also the concern of who are the real beneficial owners of the subsidiary of the GLC. GLCs, often led by politically influential figures, can use subsidiaries for personal or political gain,” Pushpan said.

He noted that the inherent secrecy of private limited companies makes it easier to avoid public oversight, fostering an environment for corrupt practices.

As such, Pushpan proposed enhanced transparency of GLCs and their subsidiaries, including the appointment process of any GLC position. He also said politicians should be barred from being appointed to GLC positions.

‘BNM should be alerted’

In 2022, BNM issued a policy document on Climate Risk Management. Coming into effect on Dec 31, 2024, this policy document sets out the principles and specific requirements for the management of climate-related risks by financial institutions. 

Rimbawatch said BNM has issued policies and guidelines for financial institutions to prevent financing activities that cause harm to the environment but they need much improvement, with stricter oversight and enforcement.

Due to PASB’s poor financial record and posing a credit risk, Rimbawatch told Malaysiakini that BNM should be alerted.

“The fact that Bank Islam has been approving these loans over the years raises questions over their due diligence procedures and the involvement of politically exposed persons in the failed scheme warrants further investigation by the bank,” the group said.

“With cases like this, banks are still getting away with poor due diligence standards, and given that the EIA system in Malaysia has many loopholes, banks need to have additional checks in place to prevent financing high-risk companies.”

For example, Rimbawatch said, companies should be required to submit geospatial data of their projects, which the banks should analyse against independent forest cover datasets to determine deforestation risks and other environmental zoning plans to determine if the project violates any federal zoning requirements.

Sahabat Alam Malaysia (SAM), along with several international organisations that are part of the Forests and Finance Coalition, has a platform that consolidates financial data including bank loan data and advocates against financing environmentally destructive projects.

In mid-October this year, SAM issued a statement that revealed Malaysian banks as the seventh-largest financier of forest destruction projects in the world.

Between 2016 and June 2024, these banks provided US$16.4 billion worth of loans or guarantees to the companies involved.

SAM told Malaysiakini that BNM should establish consistent and stringent standards, due diligence, and independent verification procedures that compel the compliance of financial institutions, ensuring they focus on those driving biodiversity loss and violation of indigenous rights.

Financing for oil palm plantation projects has caused irreversible damage, how can Bank Islam mitigate the impacts? Who will establish a compensation mechanism? SAM believes that BNM must ensure financial institutions take responsibility for the destruction caused by their financing.

SAM proposed that BNM establish a mechanism that holds senior management accountable, penalties magnitudes higher than the profits made, and a mechanism for remedy and redress for affected communities and the environment.

Bank Islam may take away collaterals

In response to Malaysiakini’s query, Bank Islam said they thoroughly assess environmental and social risks before extending any financing, conduct thorough due diligence, and perform regular evaluations to ensure clients’ ongoing creditworthiness.

When asked about the reasons for approving additional loans to this company that suffered financial losses, poor performance, and very low palm oil yield, Bank Islam said they are unable to comment on customer relationships or any banking details.

However, they promised to “remain steadfast in upholding confidentiality and legal obligations”.

Similarly, BNM did not comment on queries concerning Bank Islam, but the statutory body provides an overview of their policy controls for both credit and climate risk management. 

For instance, BNM requires financial institutions to conduct comprehensive risk assessments to understand the customer’s repayment capabilities, including an evaluation of the customer’s creditworthiness and financial strength.

Besides, financial institutions are required to continuously monitor credit risk exposures through repayment tracking and periodic reviews (including financial assessments and site visits).

BNM stressed that financial institutions have the legal right to exercise credit risk mitigation measures, which include foreclosure of collaterals pledged for the financing, to manage losses.

PASB previously put two pieces of land in mortgage for their loan applications, totalling 5,976 hectares. If PASB is unable to repay the debts, Bank Islam may take the land.

Malaysiakini has contacted PASB, its chairperson Adnan, and Pahang Menteri Besar Wan Rosdy Wan Ismail for their response. 

This story was translated by Leong Jie Yu.