Before Borrowing Money, Know What Is A Licensed Moneylender First
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 a paper published by public policy think tank Institute for Democracy and Economic Affairs (IDEAS), the report highlighted that many Malaysians are confused when it comes to how moneylenders are different from banks.
“The biggest myth is that licensed moneylenders have the same business model and they operate exactly like a bank. They do not,” the IDEAS report highlighted.
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 licensed moneylender.
|Commercial Bank||Licensed 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.
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 while still 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.
How to differentiate a licensed moneylender from a loan shark
On one hand, the public can’t differentiate moneylenders’ services from banks but on the other hand, they also confuse licensed money lending and loan sharking, negatively tainting the reputation of licensed moneylenders.
Earlier this year, a Johor man had borrowed money from what he thought was a legitimate moneylender to pay for his son’s wedding but ended up falling into the clutches of a loan shark instead.
He found out the hard way that he had made a costly mistake when hired thugs visited his house to splash the proverbial red paint on the walls of his house.
The report said that the man thought he was borrowing funds from a licensed moneylender as it had an office and a proper signboard when he took up a loan with interest of 14.5% per month.
Adding to the confusion is the scam which surfaced last year of companies involved in illegal money lending activities while displaying fake money lending licences purportedly issued by the central bank.
Borrowing from licensed moneylenders
In a media statement, Bank Negara Malaysia (BNM) had alerted the public to be wary of fraudulent moneylenders.
“These fraudsters aim to deceive the public to believe that they are licensed moneylenders and to lure the public to make initial payments for various purposes related to the loan such as administrative expenses, stamp duty and legal fees.
“These fraudulent activities are promoted through the website, social media, telephone calls, SMS, emails or other forms of communication,” the statement from BNM cautioned that it does not issue any moneylending licences.
How do you know if the moneylender is legit?
When it comes to money matters, it is crucial for consumers to do their 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% per annum
For instance, like the victim in Johor who found out the hard way that he had been conned, prospective borrowers should be aware that 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.
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 and 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 while Section 8(d), which 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.
BNM has a list of licensed moneylenders on its website so the public can check for themselves that a moneylender is legitimate before signing any legal document and entering into any business transactions. The list of institutions can be found at http://www.bnm.gov.my.
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.