Closing remarks by Minister for Law, K Shanmugam, at the Institute of Policy Studies Conference on Moneylending

3 Nov 2014 Posted in Speeches

Mr David Poh, President of the Moneylenders Association
Mr Kuo How Nam, President of Credit Counselling
Ladies and gentlemen

1. Good evening to all of you.

2. I will share my thoughts quite frankly and then have a discussion later. I’ve been briefed a little about some of the earlier discussions. I want you to understand one thing – what has been presented is not the end result. The whole approach is that the committee has taken a wide array of feedback and come out with a report. They haven’t finalised it yet. I think today’s discussions would be very useful. That will be taken into account and then I’m sure the committee will come back with a finalised report.

Evolving Regulatory Environment

3. From our approach – the Ministry of Law’s approach – the moneylending industry has grown significantly over the past few years and we have been making regular adjustments to the regulatory environment to really anticipate as well as deal with changes in the industry.

4. Interest rates were liberalised in 2009. Prior to that, interest rates were not liberalised. But interest rate caps to protect low-income borrowers were retained. This was because borrowers with higher incomes have alternative sources of credit and need less protection from the law, whereas low-income borrows without alternative sources of credit are more vulnerable and we felt that they should continue to be protected.

5. New loan quantum caps were imposed in 2009. These caps served to limit how much each borrower could borrow from each moneylender, and make it a little less likely that a borrower might overestimate his own ability to pay.

6. New advertising restrictions were imposed in 2011. This was in response to a lot of feedback from the ground over the proliferation of newspaper advertisements as well as advertisements in other media. Moneylenders then were only allowed to advertise in business directories, on dedicated websites and on the façade of their business premises.

7. Now I understand that from the feedback today, a number of points were made. One was on the proposed interest rate cap of 4 per cent which I think on an annualised basis works out to 96 per cent or so. The data that the committee worked on showed that the moneylenders should be able to make a decent profit out of it, but I think a fair bit of feedback was given that that’s actually very difficult. I will assure you that from the Government’s perspective that if we can solve problems by passing legislation, we would have done that long ago.

8. At the end of the day, there is ultimately a need on the part of the borrowers sometimes to access credit which is not available from the banks or from credit cards. And as long as there is that need, I think we have to find legitimate ways of satisfying that need. If I can take care of all the moneylending problems by passing a law which says there should be no moneylending, people would have done it a long time ago. It’s not possible. So there is a need for the industry, because there will be a need for people to borrow. Our task is to say how it can be done in a framework that is reasonable for the industry and reasonable for the borrower. So I understand Manu has said “Look, give us your data, tell us why you say 4 per cent won’t work,” and they will study it. And I give you my assurance as the Law Ministry that we will ask them to study that carefully and look at your data as well.

9. The second thing is, I think there has been feedback that while unlicensed moneylenders advertise, Malaysian moneylenders advertise, the only people who cannot advertise are the licensed moneylenders. Now I get offers on credit on my handphone frequently, which is against the law and I frequently think of sending it to the police, but you know there are so many that it’s a waste of my time to refer everyone. So again, there is a balance, we will look at it. I don’t want to make promises but I think we will deal with each other reasonably.

Regulatory Philosophy

10. Our philosophy, as I have tried to explain, is really that we have to try and make it fair for both sides in a way that the public can accept. There will always be some inherent information asymmetry and imbalance in negotiating power between the borrower and the moneylender.

11. Lenders are usually in a stronger position than borrowers, especially borrowers who are desperate for credit. But then lenders may also have insufficient information because they may not have sufficient data to assess the risk of lending because borrowers can borrow from many moneylenders.

12. So though there have been calls for greater government intervention, we recognise the need for a balanced approach. If you have looked at the letters that Ministry of Law had to write to the media, because many people write in, why doesn’t the Law Ministry put a ban on this, ban that, interest rate caps, why are you allowing this, why are you allowing that? That’s the usual type of letter which I’m sure most of you have seen. And most of the time, the Law Ministry, my Press Secretary writes in to say we can’t do that, we shouldn’t do that – it looks as if we are giving excuses on your behalf.

13. But actually, the reality is it’s not that we are seeking to protect you or seeking to protect anybody else; the reality is we are trying to be fair, and recognising that there is a need for people to borrow, trying to create an environment that’s workable and fair, and do what we can to protect the vulnerable borrowers – those with lower incomes, those who are desperate, then they need greater protection. While being mindful that too heavy an intervention will simply drive the demand underground; they will just move to unlicensed moneylenders or, as you all point out, to Malaysian moneylenders.

14. So this is the approach that we’ve been trying to take, it’s not an easy one, but as the regulatory state continues to change, we have noticed a sharp spike in the borrowing, the total quantum that has been lent. While the number of borrowers hasn’t increased, the amount borrowed has increased quite substantially which means the loan quantum perhaps has increased quite a bit.

15. So we decided rather than wait for these things to happen slowly, we should set up this Advisory Committee and balance the different perspectives and to make recommendations to my Ministry after consulting widely on how we can further strengthen the regulatory environment.

16. They have done that, they have taken in lenders’ as well as borrowers’ perspectives, put in a lot of hard work, they have come up with an initial set of ideas, we thank them for their hard work, and the process today is part of that process which will be factored back in into their recommendations.

17. So ultimately regulation is a balancing act, we have to protect people who are vulnerable, and on the other hand, we need to preserve access to credit that the moneylending industry provides. So the Advisory Committee’s work will help us move in the right direction.

18. Thank you.

Last updated on 18 Nov 2014