KUCHING: The Malaysian Financial Planning Council (MFPC) has lauded the Central Bank of Malaysia (BNM) Exposure Draft on Personal Financing as a significant move toward promoting financial fairness and transparency.
Its president, Andy Ng Yen Heng, pointed out that the draft seeks to abolish flat-rate interest calculations under the Rule of 78, limit loan tenures to 10 years, enhance affordability assessments, and improve disclosure on effective interest rates.
In addition, he said that the draft also outlines specific requirements for Buy Now, Pay Later (BNPL) facilities, such as affordability checks, reporting BNPL in the Central Credit Reference Information System (CCRIS), and regulating late payment charges.
Addressing household debt and bankruptcy concerns
Citing data from BNM’s Financial Stability Review First Half 2024 and Reuters, Ng said that as of June 2024, Malaysia’s household debt-to-gross domestic product (GDP) ratio stood at 83.8 per cent, second only to Thailand at 89.6 per cent among Southeast Asian countries.
He noted that the banking system’s household debt-to-GDP ratio remains at 69.2 per cent, indicating moderate debt growth aligned with economic activity.
“Total household debt rose to RM1.57 trillion, driven primarily by housing loans (61 per cent) and vehicle financing (13.5 per cent), while personal finance accounted for 12.4 per cent of the total debt. The Malaysian Department of Insolvency reported 141,662 bankruptcy cases as of October 2024.
“With 30,398 cases recorded between 2020 and October 2024, accounting for 21.46 per cent of total cases over the past four years — an alarming trend, with an average of 16 cases daily in 2024.
“The primary contributors to these bankruptcies were personal loans at 14,978 cases (49.27 per cent) and business loans at 5,683 cases (18.70 per cent), highlighting significant financial stress among individuals and businesses,” he said to Sarawak Tribune.
Benefits for borrowers and challenges for lenders
Therefore, looking at the situation, Ng said that from a financial planning perspective, the ruling proposed by BNM is a positive step toward promoting financial fairness and empowering consumers.
He noted that the key changes for borrowers include fairer interest calculations using the reducing balance method, reduced costs for early repayment, improved financial literacy, and potentially higher upfront costs.
With this, he said, borrowers will better understand the terms and costs associated with their loans, empowering them to make more informed decisions.
“While this transition promotes fairness, it impacts lenders’ profitability, particularly through the removal of front-loaded interest payments.
“Additionally, lenders will need to shift to the reducing balance method, where they will have to adopt fairer interest calculation methods, increasing administrative adjustments and possibly impacting profitability,” he said.
Following this, he added that lenders will need to adapt loan structures to align with regulatory expectations, requiring more transparent communication with borrowers, while financial institutions may need system upgrades and retraining for staff to manage the new calculation methods.
“As for other related parties, regulators will be seen as promoting financial fairness, aligning Malaysia’s lending practices with global standards, and ensuring consumer protection.
“Credit agencies will benefit from improved transparency, leading to more accurate credit assessments. Legal and advisory services will assist in guiding institutions and borrowers through changes in loan structures.
“Technology providers will support the implementation of new interest calculation systems for lenders,” he said.
BNPL industry under scrutiny
Nevertheless, Ng further said that the draft’s impacts extend beyond borrowers and lenders.
Among the several implications for the BNPL industry, he said that BNPL providers will be required to conduct affordability assessments for consumers with cumulative BNPL limits above RM1,500, ensuring responsible lending and preventing debt accumulation.
In addition, he said, BNPL facilities must be reported to CCRIS, increasing visibility of BNPL debt and promoting more responsible usage by consumers.
“With this, BNPL providers will only recover actual costs for missed payments, preventing excessive penalties and promoting fairer practices.
“Moreover, with stricter credit assessments, consumers may become more cautious about using BNPL services, potentially lowering demand.
“Additionally, providers will also face increased compliance costs, including system enhancements, reporting mechanisms, and customer affordability evaluations,” he said.
Verdict of the draft
Having said that, Ng pointed out that this move aims to promote fairer lending practices, benefiting borrowers by reducing interest costs and encouraging strategic financial decisions.
“The regulations also enhance transparency and mitigate consumer risk, particularly in the BNPL sector, by aligning it with responsible financing standards.
“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 said.
