AN archaic law unexpectedly came under sharp public scrutiny last week, stirring up an intense debate on whether property developers, not banks, should lend money to property buyers.
Urban Wellbeing, Housing and Local Government Minister Tan Sri Noh Omar sparked off the discussion when he announced that builders could seek moneylending licences from his ministry in order to offer loans to buyers.
In Malaysia, moneylenders and pawnbrokers are under the supervision of the ministry and are subjected to stringent guidelines under the Moneylenders Act 1951 (Act 400) and Moneylenders (Control and Licensing) Regulations 2003, and Moneylenders (Compounding of Offences) Regulations 2003.
Yes, the law was enacted in 1951 and is still in effect today. It was designed to provide what some historians say was “informal financing” in facilitating private sector growth and for the livelihood of communities that fell under the radar of the formal financial system.
The ministry insisted that the objective of setting up licensed moneylenders and pawnbrokers was part of the government’s social obligation to help those who needed financial assistance.
This will invariably prevent the Ah Long problem and educate society and the public to avoid borrowing money from loan-sharks.
Unfortunately in Malaysia, moneylending, an activity of lending money with interest, with or without security by a licensed moneylender to a borrower, as defined by the Moneylenders Act 1951, is often confused with loan sharking.
The Moneylending Act stipulates that the interest for a secured loan shall not exceed 12 per cent per annum and the interest for an unsecured loan shall not exceed 18 per cent per annum.
Both rates are apparently similar to the ones charged by commercial banks for personal financing products.
With amendments to the act, which took effect on April 15, 2011, new provisions have been enforced.
These include enhancing the powers of the Registrar of Moneylenders and the Inspectors of Moneylenders, as well as the police, in the enforcement of the act.
In order to counter illegal moneylending, the penalty for those who carry out a moneylending business without a licence was increased to RM1 million from RM100,000. The law also prohibits the licensee and unlicensed moneylender from employing an agent to invite any person to borrow money.
Granted, strict provisions are in place, but the big question is: should property developers also double up as moneylenders?
Critics were quick to denounce Noh’s proposal, with many saying it was a ridiculous idea giving developers moneylending licences.
“Many of us can still recall the sub-prime financial crisis in the US in 2008. Many houseowners lost their homes to live in tents in Sacramento, California. Does Noh Omar want this debacle to happen here?” said one commentator on social media.
At issue are the access to financing and the steep property prices. Many potential buyers are unable to raise bank financing and the fear is that they could resort to moneylenders to provide loans at a much higher rate to finance their purchases.
One foreign investment banker said: “This housing issue boils down to either the developers going bust or the banks going bust. This is the endgame.
“At the moment, I see developers having an upper hand because in Malaysia, they are politically well-connected. I fear we are going down the American road of sub-priming our own real estate and destroying our banks in the process.”
Noh’s colleague in the cabinet, Second Finance Minister Datuk Johari Abdul Ghani, felt that the financing model was unsustainable and queried how homebuyers could service loans with 12 per cent interest per annum.
He also said the matter was never discussed at cabinet meetings.
While some property developers applaud Noh’s idea, potential borrowers are less enthusiastic, saying that it upsets their financial stability because they have to fork out more money to moneylenders.
There have been calls by opposition lawmakers to repeal the act, saying that it is no longer relevant.
“Now that the archaic Moneylenders Act 1951 is brought into the limelight, it is best to get rid of it so as not to give legal cover to loan sharks, and, more importantly, to protect Malaysia’s financial institutions from systemic risks and possible collapse,” DAP Kluang member of parliament Liew Chin Tong said.
“Shadow banking, such as those provided for under the Moneylenders Act 1951, should be curbed and curtained,” he said.
The public’s scepticism is not misplaced.
The 1951 law, on its own, is “ineffective and inefficient in protecting the interest of borrowers and maximising the public’s welfare as a whole”, says Adelene Teo, ex-Bank Negara Malaysia official and an alumna of the Endeavour Award and the Crawford School of Public Policy.
“The regulatory approach exposes borrowers to an unfair marketplace, fails to deter loan-sharking activities and compounds licensed moneylenders to high compliance costs and risks,” she said.
Alternative approaches, such as market-based instruments, co-regulation and information method should be integrated with the act to establish an equitable market for both the borrowers and the licensed moneylenders and demotivate illegal activities, she added.
A veteran newsman, A Jalil Hamid believes that a good journalist should be curious and sceptical at the same time. He can be reached via jalil@nstp.com.my