Despite our best efforts, sometimes we find ourselves in a situation where we do need to borrow money, for a variety of legitimate reasons.
While borrowing from banking and financial institutions is the most ideal solution, many people prefer to turn to moneylenders as an easier, more convenient alternative to borrowing money from the bank.
However, you must be able to know how to tell the difference between the two, to avoid falling into a financial pitfall.
Moneylenders are not banks, neither are they loan sharks
In Malaysia, there are three legal sources for borrowing money – licensed financial institutions, cooperatives and licensed moneylenders.
Licensed financial institutions: These are mainly commercial banks or financial services providers that offer a wide range of products and services. They are regulated by Bank Negara (BNM) together with the Securities Commission (SC).
Cooperatives: These enterprises play a big role in rural areas to advance the livelihood of underserved communities and boost economic development. Regulated by the Malaysia Cooperative Societies Commission (SKM), it is a statutory body under Domestic Trade, Cooperatives and Consumerism Ministry.
License moneylenders: These companies are licensed by the Ministry of Housing and Local Government to provide loans to the public. Since 2019, these money lending companies were rebranded as credit community companies by the ministry.
Besides these three main financial services providers, there are also unlicensed moneylenders, in other words loan sharks. They are illegal and you should never resort to borrowing from them.
Banks vs licensed moneylenders (credit community companies)
The following table illustrates what happens when you apply to borrow RM100 from a commercial bank as compared to getting a loan for the same amount from a credit community company.
Commercial BankLicensed Moneylender
Loan RM100 (capital) but require deposit of RM500 from the client Loan RM100 (capital)
For commercial banks, they earn interest from their own capital (RM100) and also from loans extended using the borrower’s deposits (RM500)Earns interest from its own capital (RM100) only
In the event of a default, shareholders of the bank are protected from losses as the bank still maintains capital (RM100) with the deposit RM400 (less RM100 borrowed)In the event of a default, the moneylender loses 100 percent of its capital (RM100), a risk that such institutions bear and are bound by legal guidelines.
Unlike commercial banks, licensed moneylenders offer loans out of their own capital at a rate capped by the Moneylenders Act 1951.
Moneylenders under the Act are only entitled to charge simple interest between 12% to 18% per annum depending on whether security for the loan is provided or not.
The Act also clearly defines the scope of a moneylender’s activities and business operations, regardless if the person is an employee, agent or owner of a moneylending business including sources of income from the business.
Section 29B of the Act also makes it a punishable offence for a licensed moneylender to resort to harass or intimidate borrowers, as most people can recall about cases of loansharks violent methods that make news headlines.
Serving the underbanked
In many developing countries, licensed moneylenders are more accessible to the general population who often earn a daily wage and do not have access to the line of credit made available to those with financial assets recognised by banks and bigger financial institutions.
Most borrowers turn to licensed moneylenders because they offer greater flexibility in financing terms and faster fund disbursements. In Malaysia, they are regulated by the authorities under the Moneylenders Act 1951 and its subsequent amendments in 2003 and 2011.
This sets moneylenders apart from loan sharking, which involves the illegal activity of offering loans at extremely high interest rates and even resorting to blackmailing or threats of violence when borrowers default.
In 2020, the government amended the existing Moneylenders Act 195 to allow licensed moneylenders to offer loans digitally. Existing licensed moneylenders will be required to apply for this permit separately and comply with the Online Moneylending (Community Credit) Guidelines issued by KPKT.
How do you know if the moneylender is legit?
When it comes to a serious commitment like taking a loan, carry out all due diligence before signing on the dotted line. So, how do you protect yourself from falling victim to loan sharks disguised as licensed moneylenders?
Here are 3 easy ways you can identify if it’s a licenced moneylender:
1. The interest rate charged should not be above 12% to 18% per annum
Licensed moneylenders are bound by law when it comes to charging interest.
Section 17(1) of the Act also governs licensed moneylenders who are only allowed to charge a maximum of 12% interest per year for secured loans and 18% interest per year for unsecured ones.
This means that for loans taken with collateral, legal moneylenders can only charge up to 12% interest per year. As for loans without collateral, the maximum interest should not be more than 18% per year.
2. The loan agreement must be validated by a legal third party
The loan agreement must be a proper legal document that can stand up in any court of law. It must be witnessed by a lawyer, a legal officer, a Commissioner for Oaths, or any other authorized person.
Section 27 of the Act requires that your loan agreement be witnessed by a lawyer, a legal officer, a Commissioner for Oaths, or any other authorized person. Section 8(d), also makes it illegal for licensed moneylenders to loan money to people under 18 years of age.
3. Do your homework and ensure the moneylender is licensed
This is a no-brainer. Legitimate moneylenders need a licence to operate and the holder of the licence must not have a criminal record or be a bankrupt to qualify.
You can find out if the moneylender you want to use is licensed by cross-checking the company’s registration number (SSM) on the Ministry of Urban Wellbeing, Housing and Local Government (KPKT) i-KrediKom mobile application. You can also use this app to report complaints and find information on your right as a borrower under the Money Lenders Act 1951.
Finally, use your common sense. If a deal is too good to be true, then it probably is not legit so exercise caution and check through every point in the loan agreement before signing on the dotted line.
For more options on licensed financial services providers, you should first compare and find the right one that suits your needs.
This article was first published in August 2018 and has been updated for freshness, accuracy and comprehensiveness.