Debt Trap or Financial Freedom? Unmasking Responsible Lending in Malaysia’s Non-Bank Credit Sector

Debt Trap or Financial Freedom? Unmasking Responsible Lending in Malaysia’s Non-Bank Credit Sector

Ibtisam @ Ilyana Ilias, Nurul Afifah Adawiyah Rafie

Faculty of Law, Universiti Teknologi MARA

DOI: https://dx.doi.org/10.47772/IJRISS.2025.906000143

Received: 17 March 2025; Accepted: 21 March 2025; Published: 03 July 2025

ABSTRACT

In Malaysia, only credit providers governed by Bank Negara Malaysia must conduct affordability assessments to evaluate the credit risk of the prospective borrowers. This gap regrettably contributes to the high number of overindebted individuals, as reflected in the high number of bankruptcies. Those who are ineligible to apply for loans from banks may resort to non-bank credit providers that do not strictly evaluate their financial standing, exposing them to the negative impacts of overindebtedness. This research argues that one of the feasible interventions is to impose mandatory suitability and affordability assessment on all non-bank credit providers as embraced by some jurisdictions such as South Africa and Australia. A qualitative study was employed to explore the current practice among non-bank credit providers prior to loan approval, to elicit non-bank views on the imposition of mandatory assessment, the constraints in implementing the assessment, and the suggestions to improve the existing affordability assessment practice. Interviews were conducted with 20 respondents, including non-banks, consumer associations, and relevant regulators. The research found that different mechanisms are being applied to evaluate consumers’ affordability for credit products. The findings offer insights into how regulators can adopt the best approach to weighing the right balance between protecting consumers against overindebtedness and providing eligible consumers with access to credit, especially in the formulation of the new Consumer Credit Act.

Keywords: Credit risk management, responsible lending, affordability assessment, consumer credit, non-bank credit providers,

INTRODUCTION

Advocating responsible lending emerges as one of the critical agendas of policymakers both on the domestic front and internationally, resulting from the destructive consequence of the global financial crisis in 2008  (Financial Stability Board, 2011).The crisis witnessed the damaging impact of lax credit granting on individuals and industry players.  Moreover, the high level of household debt creates vulnerabilities in the economy and negatively impacts financial stability (Melecky & Rutledge, 2011). Responsible lending obligation means demanding higher responsibility on the part of credit providers (Nield, 2015).  In general, it obliges the credit providers to validate the affordability and suitability of a loan for the borrower, assess the impact of future changes in interest rates (stress tests), and ensure that the borrower has a feasible repayment strategy (Mak, 2015).The undeniable reality is that credit has become indispensable to daily existence. The persistent rise in living expenses forces individuals in the lower and middle socioeconomic classes to accumulate debt to meet their core needs, including housing, transportation, education, and even necessities like food and clothing.

Nonetheless, the impacts of credit are not universally advantageous.   Unfavourable attitudes related to living beyond one’s mean (Ahmed et al., 2010), coupled with reduced borrowing expenses due to financial deregulation (Hull, 2003)frequently allure people to engage in excessive borrowing and accumulate overwhelming debt. This, in turn, leads to dire repercussions for both consumers and their families.  Accessing mortgage credit can also be a risky process when the mortgage market is rife with unscrupulous lenders who lend irresponsibly, especially when they explicitly target and exploit vulnerable, disadvantaged, or low-income consumers (Tuffin, 2009).Thus, despite the many advantages offered by credit, its damaging consequences, resulting from market exploitation, manipulation, and the irresponsible conduct of credit providers, warrant government intervention.

Financial service providers governed by Bank Negara Malaysia (BNM) are obligated to perform assessments of suitability and affordability as outlined in the Guidelines on Responsible Financing (GRF). However, this legal requirement does not extend to other credit providers like moneylenders and credit sale companies (Ilias et al., 2019).  It is submitted that this gap may contribute to the high number of overindebted individuals, as reflected in the high number of bankruptcies (Andria, 2018; Cheah, 2016).  Those who are excessively indebted and ineligible to apply for loans from banks may resort to non-banks that do not properly evaluate the financial standing of the consumers.  Eventually, when faced with unanticipated events such as job retrenchment, they cannot afford to pay and have to bear the impacts of overindebtedness, which are closely connected with health effects, either physical or mental (Drentea & Lavrakas, 2000; French & McKillop, 2015; Jacoby, 2002).

Despite a reported decline in the household debt-to-GDP ratio during the first half of 2021, Malaysia continues to face significant concerns regarding the overall level of household indebtedness (Farah Adilla, 2021). Bank Negara Malaysia has cautioned that excessive household borrowing could have severe repercussions, including the potential for abrupt debt reduction by households following a crisis; an outcome that could hinder or even reverse economic recovery efforts (Zainul, 2021). Figure 1 demonstrates a significant increase of 10.5% from 2019 to 2020.

Figure 1 Percentage of Malaysia’s Household Debt to GDP 2012-2020

Source: Malaysian Department of Insolvency

A frequent legal consequence associated with over-indebtedness is bankruptcy. As illustrated in Figure 2, a substantial portion of bankruptcy filings stems from consumer credit facilities, particularly hire-purchase agreements and personal financing. The situation is exacerbated by the relative ease of accessing personal loans and financial institutions’ willingness to extend credit to borrowers who are financially overextended (Mohd Nazari, 2020).

Figure 2 The Top Factors of Bankruptcy in Malaysia from 2017 – June 2021

Source: Malaysian Department of Insolvency

In line with the scope of this research, this paper argues that one of the feasible government interventions is to impose mandatory suitability and affordability assessment on non-bank credit providers.  Some jurisdictions such as South Africa and Australia have embraced this approach with the objective of preventing overindebtedness due to reckless lending practices (Van Heerden & Renke, 2015; Pearson & Batten, 2010).  In the absence of uniform legal requirements, this research employs qualitative study to investigate the current practice among non-bank credit providers prior to loan application approval. It also attempts to elicit the views of non-bank credit providers on the imposition of mandatory affordability assessment, the constraints in implementing mandatory affordability assessment among non-bank credit providers and the suggestions to improve the existing affordability assessment practice among non-bank credit providers. It is submitted that the outcome of this research will offer valuable reference to policymakers that regulate the consumer credit industry in Malaysia. In particular, the finding will shed some light on the regulators’ adoption of the best approach in weighing the right balance between protecting consumers against overindebtedness through mandatory suitability and affordability assessment and providing access to credit to eligible consumers.  This research was funded by a research grant and subject to time limitations.  To adhere to the specified timeframe, data must be gathered during the COVID-19 pandemic when a movement control order (MCO) was enforced. The researchers faced constraints in reaching the respondents, and only 11 non-bank credit providers were willing to participate, representing different consumer credit industries.  Future research could be undertaken to engage more respondents for a more comprehensive finding.

LITERATURE REVIEW

Responsible Lending 

Responsible lending involves ethical credit practices, including proper disclosure, suitability assessment, and fair redress mechanisms (Prouza, 2013). Scholars have also highlighted terms like “reckless” or “irresponsible lending” to capture predatory conduct (Migiro, 2017; Richards et al., 2008). Despite the absence of a universal definition, jurisdictions such as the UK, Australia, and South Africa impose affordability and creditworthiness assessments through statutory instruments like the FCA Handbook, the National Consumer Credit Protection Act 2009 (NCCP), and the South African National Credit Act 2005. These measures align with the broader trend of protecting consumers from over-indebtedness and poor financial choices (Cherednychenko & Meindertsma, 2019).

Malaysia’s regulatory framework includes Bank Negara Malaysia’s Guidelines on Responsible Financing (GRF), which mandate banks and Islamic banks to assess borrowers’ affordability and suitability before loan approval (Ilias et al., 2019). However, this requirement only applies to BNM-regulated institutions, leaving non-bank credit providers outside its ambit (Rafie & Ilias, 2022). This fragmentation permits regulatory arbitrage, as rejected bank borrowers may turn to unregulated lenders with less stringent checks.

Rationale and Consequences

Responsible lending is necessary not only due to institutional obligations, but also because consumers may be psychologically influenced by marketing tactics to take on excessive debt (Musa, 2015; Ramsay, 2016). Financial products must be suitable for consumers’ circumstances to prevent harm, especially in unpredictable life situations such as illness or unemployment (Anderloni & Vandone, 2011).  Debt stress can have serious health consequences. Studies indicate a correlation between over-indebtedness and depression, anxiety, and even suicidal ideation (Blázquez & Budría, 2015; Hojman et al., 2016; Tan et al., 2023) From a systemic view, excessive indebtedness may reduce consumer trust and financial system stability (Grundmann et al., 2015; Micklitz, 2015).

Affordability Assessment

Affordability or creditworthiness assessment is central to responsible lending. The World Bank (2012) and global regulatory bodies have recognised this process as crucial. In Malaysia, Rosli et al., (2021) confirmed that selected banks comply with GRF obligations by conducting detailed suitability and affordability checks. However, this compliance is limited to banks under BNM, excluding non-bank institutions that often provide alternative credit with fewer safeguards (Ilias et al., 2019).

Credit Providers and Legal Framework

Malaysia’s credit ecosystem includes both bank and non-bank institutions, regulated by multiple ministries and statutes (e.g., FSA 2013, Moneylenders Act 1951, Hire-Purchase Act 1967). This fragmented framework creates gaps in enforcing consistent responsible lending practices across all providers (Ilias, 2018).

CONCLUSION

While studies have addressed GRF compliance among banks (Isa & Hussin, 2016;Rosli et al., 2021), empirical work on non-bank lenders remains limited. This study seeks to address that gap by examining how affordability assessment is carried out across a broader segment of Malaysian credit providers.

METHODOLOGY

The research employed qualitative research methodology.  The secondary data collection commenced with a comprehensive literature review. As highlighted by Jesson et al. (2011), engaging in a literature review is essential for gaining an in-depth understanding of existing research pertaining to the subject matter. This encompasses exploring the methodologies employed, key focus areas, and prominent concerns addressed in previous studies. In the context of the current research, this phase encompasses a meticulous evaluation of pertinent literature concerning responsible lending on both international and national scales, along with the evaluation of affordability assessment frameworks. Information is sourced from a variety of outlets such as textbooks, scholarly articles, government publications, newspaper reports, and online materials.

In the next stage, semi-structured interviews with chosen respondents were used to gather primary data. The methods employed for collecting qualitative data centred around semi-structured interviews, particularly for aspects not covered in the existing literature. As highlighted by Bryman (2008), employing comprehensive qualitative interviews was deemed the most suitable approach for procuring data in this current study, given its aim to comprehend the perspectives of the participants.

A purposive sampling was employed to choose participants, specifically focusing on their job responsibilities. This method of selection aligns with the concepts outlined by Alston & Bowles (2003), who emphasize the use of selective sampling when there exists prior understanding of a particular group that holds significance for the study. Following Morse (1998) guidelines for primary selection, individuals suitable for the semi-structured interviews were identified based on their expertise, experience, and knowledge. Adhering to these guiding principles, a total of 20 respondents were interviewed. This group comprises various roles, including moneylenders, pawnbrokers, credit sale company personnel, and cooperative members. Additionally, individuals from non-governmental associations, consumer associations, credit counselling and debt management agencies, along with representatives from four non-bank consumer credit regulatory bodies, were included in the respondent pool. The list of respondents is illustrated in Table 1. A pseudonym was utilised to protect the interviewees’ identities.

Table 1 List of respondents

Source: Author’s own

The sample size adheres to the perspective of Crouch & McKenzie (2006), who argue that having 20 participants in a qualitative study facilitates the establishment and maintenance of a strong rapport. This approach enhances the transparent and open exchange of information. On the other hand, Bertaux, (1981)proposes that a minimum of 15 participants is suitable for qualitative research. In this current study, the decision to employ semi-structured interviews is rooted in the intention to collect comprehensive firsthand data from the participants directly. This approach enables the researcher to develop a profound comprehension of their beliefs and viewpoints, which, in turn, aids in answering the research questions.

Data collection was initiated during the final quarter of 2020, following the acquisition of research ethics approval. The entire process of data collection spanned a year, concluding in 2021. The COVID-19 pandemic and the enforcement of MCO necessitated a transition to remote methods for conducting interviews. Both phone interviews and the Google Meet platform were utilised for this purpose. Notably, even before the pandemic, multi-stage research endeavours had begun incorporating extensive phone interviews as demonstrated by Cachia & Millward, (2011) and Sturges & Hanrahan (2004)Additionally, the contemporary trend involves the widespread utilisation of online platforms for conducting interviews, as exemplified by Nehls et al. (2015). To ensure the reliability of the gathered data, meticulous protocols were adhered to prior to, during, and subsequent to both phone interviews, drawing from Burke & Miller (2001), and online interviews, following the practices outlined by James & Busher (2016).

In general, participants received a concise introduction regarding the research’s objectives and were made aware that the interviews were carried out with their consent. Every respondent granted permission for the interview sessions to be recorded. To accommodate the diverse communication preferences of the participants, the interviews were conducted in both Malay and English languages, as certain individuals found it easier to express themselves using this blend. Interviews with representatives from NGOs, regulators, and the CCDM officer were concluded within an approximate timeframe of one hour. Regarding industry participant respondents, the interview sessions lasted for about 20 to 30 minutes.

Following the guidance of Saldaña (2021), the study ensured its credibility by transcribing participant responses verbatim. Throughout the coding process, individual transcripts were thoroughly read and reviewed. Employing a thematic analysis technique, the research aimed to uncover and interpret patterns in the data collected from participants, as outlined by Braun & Clarke (2006). This analytical approach was complemented by content analysis, which systematically elucidated the significance of interview data. This was accomplished by attributing successive sections of the material to predefined coding categories, as detailed by Schreier (2014).  For the organisation and analysis of data, ATLAS Ti version 9 software was employed. This facilitated the creation of codes, categorisation, and thematic insights. To reinforce the reliability of the findings, the collected data was triangulated with expert opinions and a comprehensive literature review. Through the integration of primary and secondary data, the study’s outcomes were derived, shaping the forthcoming discussion.

RESULTS

The results are divided into several themes in accordance with the research questions as follows:-

Theme 1: Affordability Assessment Practice Among Non-banks

Based on the interview, the documents that are relevant for the purpose of affordability assessment were payslips and bank statements, while the process involved checking credit data through credit rating agency databases such as CTOS Data Systems Sdn Bhd (CTOS) and savings account checking.  Some credit providers also request the consumer to furnish an ATM card for security, though this practice is not allowed. Some of them also imposed a 10% fee deducted from the loan amount to be paid if the loan application is approved.  Several credit providers need additional information reflecting more detailed requirements as compared to others.  In this regard, most respondents were hesitant to disclose information that they classified as confidential, especially the companies’ internal policies and procedures.  Nevertheless, basic information as depicted in Table 2, discloses that certain measures have been adopted by different credit providers before approving the credit application.

R8 highlighted that as of now, there are over 600 moneylenders who subscribe to CTOS but the system only provides a negative report. R8 confirmed that it is not mandatory to subscribe to CTOS for moneylenders and pawnbrokers. He stated that:

The subscription is voluntary due to the expensive subscription fee. R9 also mentioned that subscription to CTOS by the cooperatives is encouraged but not compulsory.  Furthermore, R2 argued that the system does not provide accurate information.  Thus, despite reference being made to CTOS, the inaccuracy may lead to an erroneous evaluation of the existing financial commitment of the applicants.

All regulators confirmed that there is no specific uniform legal requirement on the performance of affordability assessment before granting loans to prospective customers.  According to R8, the regulator allows the moneylenders and pawnbrokers to establish their own mechanism to grant the loan to consumers. There is no specific legal requirement developed by regulators. R6 and R7 confirmed that there is an internal practice among the credit sale provider in evaluating the affordability of the consumer though not formally provided under specific legislation. They emphasized that in respect of hire purchase, there is the Hire Purchase Act 1967 while credit sale is governed under Consumer Protection (Credit Sale) Regulation 2007. However, these laws do not impose obligation to perform mandatory affordability assessment in view of promoting a free market for credit sale and hire purchase transactions.  R9 explained that cooperatives are governed by the Cooperative Act and Society Commission 1993 and co-monitored by BNM.  He further added that the said regulatory body has established an internal guideline on affordability criteria.

In the case of a cooperative, the risk of non-payment is minimal because, according to R16, the applicant, who is also a cooperative member, must have a savings account with the cooperative and make a monthly contribution via this account.  R16 also stated that, generally, there is no legal action against the defaulter due to the salary deduction mode of payment.  If the consumer retires or is no longer an employee of the organisation, the amount of the savings account (monthly contribution to the cooperative) will be deducted first. Hence, the issue of non-payment is mitigated.

From R9’s perspective, the risk of non-performing loans among cooperative members is very minimal, namely about 5%.  This usually happens when the members retire or are dismissed from employment.  In a cooperative system, the members are required to pay monthly fees.  English translation. So, if the member fails to pay the loan, the cooperative can take the member’s fee as collateral and repay the loan.  Some cooperatives practise a guarantor system where if the member cannot repay, the guarantor is liable to repay the cooperative. Guarantors can be either from members or non-members of the cooperative.

Table 2 Measures adopted by different credit providers before approving the credit application

Theme 2: Views on Imposing Mandatory Affordability Assessment to Non-Bank Credit Providers

The majority of the respondents agreed with the imposition of mandatory affordability assessment on credit providers, with the exception of R19, R18 and R20, who contended that there was no need to exercise the procedures for pawnbroking.  R6, R7, R5 and R8 agreed and emphasised the need for uniform regulation on responsible lending to regulate all credit providers.  R1 further explained that:

I think the basic process is to examine how BNM regulates the banking industry through mandatory assessment. Non-banks need to examine their modus operandi to determine whether it is different from banks’. However, the best process is to review and adapt based on their respective systems and circumstances.

R2 suggested that to ensure a fair and transparent process, the credit scoring system must reflect the updated financial status of the consumers, and the reasons for the rejection must also be disclosed to the consumers.  Additionally, R3 and R4 recommended establishing one centralised credit reporting system covering both banks and non-banks. R8 added that the credit report must include positive and negative reporting to ensure a comprehensive assessment.

According to R9, affordability assessment has been practised by cooperatives since they are monitored by BNM.  Thus, there will be no issue for the cooperative to adopt mandatory affordability assessment in the future.  R10, R15, R17 and R14 extremely agree with the imposition of mandatory affordability assessment to ensure the consumers’ ability to repay the loan to reduce credit risk on the part of credit providers while R13 viewed that such action will protect consumers from the impact of overindebtedness.

Theme 3: Views on Constraints in Imposing Mandatory Affordability Assessment to Non-bank Credit Providers

Some respondents raised their concerns about the possible constraints in implementing fair and effective affordability assessments. According to R1, there may be an issue with enforcement mechanisms by non-bank regulators. R2 and R8 viewed that there may be an issue with the validity and reliability of the credit information furnished by the credit reporting system, which is not updated, causing unfair rejection of loan applications.

R3 and R4 highlighted the need to consider consumer welfare and interest in getting access to credit.  R5 on the other hand opined that the effectiveness of MAA is questionable if the consumers’ financial literacy is poor and still ignorant of their rights.  R16 forecasted a delay in evaluating the application due to a delay in submitting all the requested documents by the consumers.  R17 and R20 held the view that consumers will hesitate to apply for loans from legal credit providers due to complicated and stringent procedures.

Theme 4: Recommendations to Improve the Affordability Assessment Practice Among Non-Bank Credit Providers

The majority of the respondents also emphasised the need for a specific law governing both banking and non-banking to facilitate the loan process and repayment obligation.  Other recommendations advanced by the respondents to improve the current practice of assessing the consumers’ affordability are as follows:- more rigorous monitoring and enforcement from regulators financial literacy and awareness, especially to younger generations more campaigns on financial education to have a balanced responsible lending policy, especially to cater for the needs of specific groups

Most respondents agreed that civil remedies and criminal sanctions can be the appropriate legal consequences of non-compliance with the MAA.  An example of civil consequence is that the contract is considered void. In this regard, R8 suggested that only fines and penalties should be imposed on the credit providers for non-compliance with mandatory affordability assessment. According to him, civil liability is unnecessary.  Among the recommended criminal sanctions are fines, penalties, warnings, and license revocations.  R19 stated that :

Action must be taken against licensed moneylenders. Perhaps suspension of license for 6 months first and revocation of license for subsequent offences…This is important as a lesson to other moneylenders.

R1 suggested that it would be proper to benchmark the practices adopted by BNM in regulating financial service providers’ non-compliance with the existing GRF.

DISCUSSION

The first theme aligns with contemporary literature that emphasises the lack of a consistent legal obligation to examine the financial status of potential customers before extending credit. This finding aligns with the existing literature, which emphasises that, currently, there is no obligatory requirement for performing affordability assessments on all credit providers in Malaysia (Ilias et al., 2019; Rafie & Ilias, 2022).  This absence contributes to various methods employed by different credit providers following their risk appetite and profit orientation.  All credit providers require the consumers to furnish payslips as a prerequisite document except pawnbrokers.  Similarly, most of them, except pawnbrokers and R16, make it obligatory for the applicant to produce a bank statement.  However, the number of months differs, with a minimum of one month and a maximum of three months.  All credit providers except pawnbrokers conduct CTOS credit reports to check the existing financial commitment of the applicants and their credit history.  It is also unfortunate that illegal practices such as withholding the consumers’ ATM card until payment is made and charging a 10% fee if the loan is approved are prevalent among several credit providers.

Without uniform legal requirements, the success of a responsible lending regime through suitability and affordability assessment will vastly depend on industry self-regulation. Arguably, sole dependence on the individual credit providers to regulate will pose three  issues:- 1) the determination of the best mechanisms/procedures to evaluate the suitability and affordability of the consumers 2) the establishment of supporting system to enable appropriate implementation of suitability and affordability assessment such as comprehensive credit reporting system and credit database; 3) the absence of legal enforcement in the event  of non-compliance will unlikely promote proper practice.

In Malaysia, there is no objective yardstick to evaluate the effect of this lacuna or to what extent the present self-regulation regime contributes to over-indebtedness.  If the bankruptcy rate is to be considered as a measure to assess the impact of this gap, it is to be noted that the bankruptcy statistics published by the Malaysian Department of Insolvency do not distinguish the source of credit of a bankrupt person.  Furthermore, despite the rise in the number of people suffering from mental health issues due to financial hitches, the precise types of loans causing stress and depression are not revealed.  Nevertheless, past literature agreed that the absence of legal intervention to impose mandatory suitability and affordability assessment is one of the factors leading to over-indebtedness and the subsequent repercussions.  As highlighted earlier, this approach has been adopted by several jurisdictions such as Australia, the United Kingdom and South Africa, whereby most credit providers are subjected to uniform responsible lending provisions with some exceptions to several credit providers such as pawnbroking, educational loans and emergency loans.  This intervention is parallel with paternalism theory which contends that state interference is permissible to advocate effective supervision and enforcement of a law or policy or regulation which aims to protect the people from any harmful effect (Cvjetanovic, 2013).

The second theme concludes that all credit providers agreed that suitability and affordability assessment should be imposed on credit providers except for R18, R19 and  R20, who argued that this requirement should not be imposed on pawnbrokers.  It is submitted that excluding pawnbroking from mandatory suitability and affordability assessment is acceptable because in the event the consumer is unable to pay the debt, the pledged asset will be auctioned, and the auction proceeds will be used to settle the debt.  Hence, overindebtedness resulting from pawnbroking improbably arises.  Moreover, pawnbroking is short-term, mostly resorted to for immediate cash, and the maximum statutory loan amount is up to RM10,000. Moreover, this exception is also applied by Australia, the UK and South Africa, indicating that some flexibility is needed in certain circumstances to allow access to credit when the detrimental consequence is less likely to happen.

However, before implementing this legal obligation, qualitative data recommends various aspects to be carefully scrutinised including: –

For benchmarking purposes, the guidelines of responsible financing imposed by BNM may be referred to. However, necessary adjustments should be made to suit the business nature of different credit providers.

The provision of an internal system to ensure correct credit scoring, The establishment of a centralised credit reporting system Credit reporting to cover both positive and negative reporting.

Disclosure of reasons for rejection.

According to BNM’s GRF, credit providers supervised by BNM, such as commercial banks, Islamic banks, and development financial institutions, are required to perform suitability and affordability assessments for every new and additional credit facility they provide. Table 3 summarizes the suitability and affordability assessments under the GRF.

Table 3 Summary of mandatory suitability and affordability assessments under GRF

Source: Author’s own

Additionally, it is also argued that a comprehensive credit reporting system is one of the critical elements which must be in place prior to the introduction of mandatory suitability and affordability assessment.  For example, Teo (2015) highlighted that Singapore, Australia, and the United Kingdom have implemented a credit scoring system to effectively manage the risks associated with moneylending. This system serves as a comprehensive support mechanism for risk management.  He further explained that this system offers moneylenders data regarding the borrower’s creditworthiness, credit exposure amount, and the potential credit risk involved. This information is valuable as it enables moneylenders to assess the borrower’s suitability and make informed decisions regarding the terms and interest rates for lending.

For the purpose of preparing a credible credit report, BNM establishes the Central Credit Reference Information System (CCRIS).  The system’s primary function is to convert data submitted by participating financial institutions (PFIs) into credit reports. Parties that can access these credit reports are PFIs, borrowers (upon their request), and approved credit reporting agencies (with the borrower’s consent). The credit reports record a borrower’s financing and repayment activities over the previous 12 months and thus enable the PFIs to assess the credit histories of their potential borrowers. Presently, the list of PFIs stands as follows: –

Table 4 List of CCRIS’s participating financial institutions

Source: Bank Negara Malaysia

Non-PFIs have the option to become subscribers of credit reporting agencies (CRAs) to obtain the credit reports of individuals who may potentially borrow from them. Presently, there are six credit bureaus in operation, as mandated by the Credit Reporting Agencies Act of 2010. The Credit Reporting Agencies (CRAs) are subject to regulation by the Registrar Office of Credit Reporting Agencies, which operates under the jurisdiction of the Ministry of Finance.

CRAs can retrieve the credit information of borrowers from CCRIS, albeit with the borrowers’ prior consent and subject to approval by BNM. At this point, three Credit Reporting Agencies (CRAs) have received approval, specifically Credit Bureau Malaysia Sdn Bhd, CTOS, and Experian Information Services (Malaysia) Sdn Bhd. PFIs that are linked with these Credit Reporting Agencies (CRAs) have the right to directly ask for credit reports of individuals who are applying for a loan or are already borrowers. This helps them make informed decisions regarding lending.

Regarding CRAs, it is contended that their credit reports are restricted due to two factors: firstly, as of now, BNM has only approved three CRAs to access the CCRIS data, and secondly, credit providers are not obligated to subscribe to their services (Ilias et al., 2023).  Furthermore, CCRIS solely encompasses credit information obtained from PFIs. Moreover, the implementation of fees could pose a hindrance to subscribing, particularly for small-scale credit companies. In due course, these deficiencies may impact the precision of the evaluation. Therefore, it is crucial to establish a comprehensive credit reporting framework in order to guarantee precise and equitable evaluation.

Although credit providers can ask for further information from consumers, an omission to provide truthful information is not penalised.  For comparison, section 81(1) of NCA provides that the consumer must fully and truthfully answer any requests for information made by the credit provider as part of the assessment when the application is being considered by the credit provider. Should the consumer supply wrong information and impact the assessment of the borrower, any reckless lending allegations brought against the credit provider may be dismissed as provided under NCA (Migiro, 2017). It is a complete defence to an allegation of reckless credit when the credit provider establishes that the consumer failed to answer fully and truthfully any such request for information made by the credit provider (Rayi, 2016). Moreover, if a court or the National Consumer Tribunal (NCT) determines that the consumer’s failure to do so materially affects the ability of the credit provider to make a proper assessment as mentioned under section 81(4) of NCA.

Despite assenting to the idea of mandatory suitability and affordability assessment, some possible constraints are raised by the respondents, as reflected in theme three. Summarily, the concerns are:

Delay in processing the application.

Consumers’ hesitancy to apply for loans due to stringent procedures.

Validity and reliability of the credit information furnished by the credit reporting system which is not updated causing unfair rejection of loan applications.

Enforcement by non-bank regulators

Deprivation of consumer welfare to get credit

Effectiveness of this measure is questionable if the level of financial literacy among consumers is poor.

In this regard, a reference to Australia is worth emulating.  One distinctive feature of the Australian consumer credit regime is the imposition of a responsible lending obligation on the holder of the Australian Credit License, as enumerated in Chapter 3 of the NCCP. The Australian Securities and Investment Commission (ASIC) exercises its regulatory role by publishing Regulatory Guides 209, Credit Licensing: Responsible Lending Conduct, and setting out the mechanisms to comply with the obligation. Among others, ASIC must ensure that licensees have adequate systems and processes in place to assess unsuitability.

In light of the preceding concerns, the respondents have proposed several key recommendations. Key takeaways include the role of the regulators in formulating a balanced suitability and affordability assessment framework, enforcing the law, and disseminating financial education to enhance financial literacy and awareness among consumers. more rigorous monitoring and enforcement from regulators financial literacy and awareness, especially to younger generations more campaigns on financial education to have a balanced responsible lending policy, especially to cater for the needs of certain groups

Most of the respondents agreed that both civil remedies and criminal sanctions can be the appropriate legal consequences of non-compliance with the MAA.  In Australia, the Australian Securities and Investments Commission (ASIC) has the authority to enforce a range of regulatory measures in cases of non-compliance with responsible lending practices. For example, ASIC has the authority to take legal action that can result in a civil penalty of up to 2000 penalty units. They can also apply for an injunction under section 177 of the NCCP, as well as seek compensation for any loss or damage caused by a breach of a civil penalty provision or the commission of an offence under section 178 of the NCCP. If a consumer is given an inappropriate contract by a credit provider, there are several remedies available. These include obtaining an injunction to stop the credit provider from collecting interest payments, receiving compensation for any losses or damages (as outlined in section 178 of the NCCP), or obtaining an order to modify the contract or declare it void, either in part or in its entirety (as outlined in section 179 of the NCCP).

The Federal Court of Australia has levied a $2 million penalty on Thorn Australia Pty Ltd’s (Thorn) Radio Rentals for breaching its responsible lending obligations in the case of Australian Securities & Investments Commission v Thorn Australia Pty Ltd [2018] FCA 704. This violation relates to a total of 275,060 leases that were signed over a period of three years, specifically between 23 January 2012 and 1 May 2015. Furthermore, Thorn was directed to cover ASIC’s legal expenses amounting to $200,000. When imposing the penalty, the Court found that Thorn failed to conduct comprehensive investigations into the financial circumstances of each consumer. Thorn failed to ask about the precise housing costs and expenses of each consumer before determining if the lease was suitable for them. By neglecting to inquire about the actual housing costs and verify the expenses of each consumer, it failed to conduct a thorough assessment to determine if the lease would be unsuitable for the consumer, as stipulated by section 152 of the National Credit Act 2005.

It is pertinent to reiterate that in Malaysia, consumer credit regulation is fragmented in nature and the industry players are governed by different regulators.  An Inter-Agency Steering Committee was formed in January 2017 to formulate new consumer credit legislation and suitability and affordability assessment is one of the key focus areas under the proposed law (Bank Negara Malaysia, 2017).Nevertheless, the implementation of the said law is expected to be materialised by the end of 2024.  The said law will provide a paradigm in dealing with suitability and affordability assessment in the Malaysian consumer credit industry.

CONCLUSION

Preceding discussions reveal empirical evidence on the practice of non-banks in Malaysia in evaluating the consumers’ affordability before their loan applications are approved.  Since it is left to the industry to regulate, different mechanisms are being applied with different degrees of strictness.  From one perspective, it may be perceived as positive, that is though there is no legal requirement, the industry players have somehow made an effort to evaluate the consumers’ financial standing.  However, as stated above, self-regulation suffers from several weaknesses namely; 1) the determination of the best mechanisms/procedures to evaluate suitability and affordability of the consumers across all industry players 2) the presence of comprehensive support system to enable appropriate implementation of suitability and affordability assessment such as credit reporting system and credit database; 3) the absence of legal enforcement in the event of non-compliance will unlikely promote proper practice.  The analysis also discloses one major constraint in implementing an effective affordability regime namely the absence of uniform consumer credit law and comprehensive credit database of all credit providers in Malaysia.  Likewise, internal system and standard operating procedures must be in place to ensure practical implementation which will not create unnecessary burdens to both consumers and the credit providers.  Thus, foreseeable hiccups must be ironed out and the concerns raised by the respondents in the abovementioned discussions must be strongly considered by the relevant regulators prior to implementing the mandatory requirement.  The experience of countries that have long implemented this mandatory requirement should be studied to ensure there is no stumbling block that will lead to negative repercussions for all stakeholders including consumers and credit providers alike.  Other mechanisms, especially financial education and awareness programs must be equally developed and unceasingly executed parallel with affordability assessment.

ACKNOWLEDGEMENT

This work was supported by the Ministry of Higher Education, Malaysia, under the Fundamental Research Grant Scheme. Ref No 600-IRMI/FRGS 5/3 (422/2019).

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