KUALA LUMPUR: Abolishing flat-rate interest for personal financing could result in lower interest payments for consumers, but it might also make it difficult for consumers to access Buy Now, Pay Later (BNPL) services.
Bank Negara Malaysia (BNM) announced yesterday that it plans to phase out the practice charging interest on the principal amount for personal financing, including BNPL arrangements.
The central bank is seeking public input on proposed regulations to abolish flat rate interest personal financing where interest or profit charges are calculated using the flat-rate method with the Rule of 78 formula.
The Malaysian Financial Planning Council (MFPC) president Andy Ng said this move is a positive step towards promoting financial fairness and empowering consumers.
"Borrowers will no longer face disproportionately high interest charges in the early loan term. Interest will better reflect the outstanding loan balance," he said.
Ng added that the shift could also raise awareness of how interest works.
"This empowers borrowers to make more informed financial decisions," he added.
However, Ng noted that with stricter credit assessments, consumers may become cautious about using BNPL services, potentially lowering demand.
UCSI University Malaysia Associate Professor of Finance Dr Liew Chee Yoong said flat rate interest charges a fixed percentage on the original loan amount throughout the tenure, leading to higher effective interest costs.
"Consumers will better understand their loan costs as interest will align with the outstanding balance rather than being front-loaded.
"Borrowers will benefit from clearer terms, which reduces exploitation risks, particularly for financially less-savvy consumers," he told Business Times.
The draft exposure by BNM for comments include a proposal to classify certain home financing - such as the practice of refinancing your mortgage for more than you owe and taking the difference in cash - as personal loans.
In the draft rules, BNM said at a minimum, a financial services provider must review the consumer's repayment history on existing credit before providing a BNPL facility.
In the absence of existing credit, the provider will evaluate the consumers' utility or telecommunication bills.
The facility is also not to be offered to bankrupt individuals.
BNM is also gathering feedback on reducing the existing maximum tenure of 10 years for personal financing.
As at end-2023, aggregate household debt stood at RM1.53 trillion, with 12.6 per cent attributed to personal financing.
Personal financing is one of the top contributors of bankruptcy, accounting for 46 per cent of total bankruptcy cases in 2023.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told Business Times the removal of Rule 78, would allow borrowers who opt for early settlement in the personal financing to enjoy greater savings as the financing principle amount have been paid in greater share relative to the share of profit (interest).
"Perhaps, it could incentivise the borrowers to make early settlement," he said.
Industry Impact
Liew said BNPL providers will need to revise their lending models, interest calculations and internal systems to comply with the new regulation.
"BNPL companies largely operate on fixed interest margins. Transitioning to a reducing balance system will lower interest revenue, squeezing their profit margins. Their popularity partly stems from its simplicity and perceived affordability.
"If classified as personal financing, it could face stricter regulations and this might lose appeal among consumers due to increased complexity," he explained.
Liew said start-ups and small-scale BNPL players might struggle to adapt, leading to potential industry consolidation where large players dominate.
"In the long run, Malaysia's BNPL sector may experience slower growth as regulations curb lenient lending practices," he added.
According to the Consumer Credit Oversight Board (CCOB) Task Force, BNPL services have seen significant growth in Malaysia, with 77.3 million transactions valued at RM6.2 billion recorded in 2023.
This upward trend continued into the first quarter of 2024 (1Q24), fueled by rising demand and greater familiarity with the payment method.
In its BNPL Industry in Malaysia Trends & Analysis (Q1 2023–Q1 2024) report, CCOB highlighted that most BNPL users utilise less than 40 per cent of their credit limits, except for those with credit limits below RM500.
The task force also noted an improvement in the quality of BNPL credit exposure, with a reduced overdue rate.
By the end of 1Q24, BNPL credit exposure reached RM1.42 billion in total outstanding balances, marking a 34 per cent increase from RM1.06 billion at the end of 2023.
"BNPL accounted for 0.07 per cent of the total household debt as of end-2023," it said.
Liew said banks and non-bank financial institutions offering personal loans at flat rates may face reduced revenues from these products.
"Financial institutions will need to offer competitive rates and restructure loan products to attract consumers, fostering healthier competition.
"Banks will focus on more robust checks and responsible lending practices to align with BNM's consumer protection goals," he added.
Additionally, Liew explained that certain home financing products, when classified as personal financing, may face new compliance and reporting obligations.
He added that this could make such financing less attractive or harder to structure for lenders and homebuyers may face revised loan terms of eligibility criteria, impacting affordability for them.
"Overall, the BNPL industry could face reduced profitability, higher compliance burdens, and slower adoption among consumers.
"Stricter regulations will improve financial system integrity but may deter innovation and limit access to financing, particularly for underserved segments," said Liew.
He said the industry will need to adapt by innovating transparent and sustainable business models to retain market share.
According to Ng, BNPL providers will face increased compliance costs, including system enhancements, reporting mechanisms, and customer affordability evaluations.
"In conclusion, this move aims to promote fairer lending practices, benefiting borrowers by reducing interest costs and encouraging strategic financial decisions.
"While lenders and BNPL providers will need to adjust their operations and profitability, the proposal ultimately supports financial transparency and aligns Malaysia's practices with global standards, fostering healthy growth in the credit industry," he shared.
A spokesperson for Atome told Business Times that while BNPL arrangements may be affected, the impact is expected to be minimal.
"This is because the average BNPL industry transaction size is relatively small, at approximately RM80, and only 1.3 per cent of users carry outstanding balances of more than three months.
"We prioritise responsible lending and consumer protection. Before granting BNPL facilities, we will continue to conduct rigorous assessments of an individual's credit risk and repayment history, ensuring that users are able to manage their obligations effectively."
Atome further noted that BNPL accounts for only a small fraction of total household debt.
"We remain committed to working within the regulatory framework and supporting initiatives that ensure consumer protection and financial stability," the spokesperson said.