Money lenders have been around for a long time. In fact, money lending has been referenced in several religious books and countless works of literature.
In Malaysia, pawnbrokers known as “Nattukottai Chettiars” who were pawnbrokers by profession have been part of the country’s economy since the migration of Indians from the Kaveri Delta regions in the 1790s.
They advanced necessary working capital to merchants, miners and planters in Penang with the aim of creating a cash economy in Penang at the time.
Although it is slowly losing popularity due to its perceived reputation and lack of regulatory oversight, there is still a sizable demand for licensed and unlicensed pawnbrokers that fall under the shadow banking category.
Several countries have enacted laws to prevent people from charging usurious rates on loan services and to regulate this practice. In the United States, each state has laws that set the maximum legal interest rates.
Here in Malaysia, the Pawnbrokers Act 1951 was intended to institutionalize the money lending business in the country.
The usurious practices of money lending are known locally through its most popular nicknames such as ah long, sepuluh-tiga and hari-hari. Pawnbrokers represent only 0.7% of non-banking financial institutions and this percentage still includes pawnshops and social security organizations according to the 2013 report on financial stability and payment systems.
Lenders respond to a need of certain sectors of society
Lack of access to formal financial services has favored the survival of informal lenders in Malaysia.
The moneylender problem is highly resistant to eradication because it is “endemic or even symbiotic to a market economy”, like that of Malaysia. The fact that people continue to use the services of “illegal” lenders is also a manifestation of a problem in the market. This problem is that formal financial services are out of reach for certain sectors of society. People need financial services and they turn to entities that provide them even if they are not strictly legal – as long as their needs are met.
It is not difficult to see why some Malaysians still choose to use the services of unlicensed lenders. For one, applying for a personal loan from a bank requires proof of income. If you were a vendor and owner of a small market stall, you would struggle to produce documents required by a bank, such as proof of your income. Day laborers who do not receive payslips will find themselves in a similar situation, so they will naturally find a favorable option for unlicensed lenders.
Others just don’t know any better. They may not have information about the rates offered by formal lenders, even if they have the proper documents to apply for a loan. They may also be unaware of online services that can help them compare loan products and rates.
With easily comparable rates, choosing one that doesn’t charge usurious rates is possible – and convenient.
Shadow banking system in Malaysia
Pawnbrokers are only a very small part of the larger ‘shadow banking’ system in Malaysia. The country’s shadow banking system is made up of non-banking financial institutions (NBFIs) that not only engage in lending, but also in buying debt securities and even credit collateral.
Partly due to loopholes in the Lenders Act, Malaysian regulators have introduced several laws to address the risks to the economy from these NBFIs.
These laws include the Central Bank of Malaysia Act 2009, the Financial Services Act 2013 and the Islamic Financial Services Act 2013, which subject NBFIs to the ongoing regulation and supervision of Bank Negara Malaysia. (BNM).
The BNM Financial Stability and Payment Systems Report 2013 indicates that NBFIs are the largest provider of personal finance to households with a 60% market share.
In terms of new personal funding approvals for 2013, NBFIs approved over RM26.9 billion last year. On the other hand, banks approved RM16.95 billion in personal finance in 2013.
People’s reliance on NBFIs presents a healthy challenge for the private sector and the formal banking sector to take active steps to increase their reach and make financial services information available to more people. of people.
Five Ways to Identify Permissible Practices
Need a loan shark? Only look for those that have a license.
i) Use of a Fixed Telephone Line: Approved Lenders must have a fixed telephone line in their office. Loan sharks operate through different mobile phone numbers.
ii) Ask to see the Pawnbrokers License: All pawnbrokers must display their licenses in their offices and view them openly as required by the Pawnbrokers Act 1951. The license is issued by the Ministry of Urban Welfare, Housing and Local Government (KPKT).
iii) Conduct transactions in the office: invitations to transact at other locations are likely to be loan sharks
iv) Written Agreement: All loans must be made through a written agreement setting out the terms of the loan as stipulated in the Lenders Act.
v) No stickers: Members of the Malaysian Licensed Moneylenders Association (MiLMA) said they do not display stickers in the form of advertisements and instead opt for flyers. Pawnbrokers are not allowed to advertise without obtaining an advertising permit.
Floyd Sijmons gives you unbiased opinions on credit cards, loans, even insurance and home services (like broadband and telecommunications) and other financial products in the Malaysian market. So go ahead and ask.
This content was created by Floyd Sijmons for Borneo Post readers.
Sijmons is the CEO of CompareHero, the most comprehensive Malaysian financial comparison platform to date. He believes in saving Malaysians time and money by giving them the information they need to compare financial products in the market. To learn more, visit CompareHero.my.