The BNM Exposure Draft on personal financing (PF), announced on 16 December 2024, introduces new rules to abolish personal financing practices where interest or profit charges are calculated using the flat rate with the Rule of 78 method.
This move aligns with the joint efforts of Bank Negara Malaysia (BNM), the Consumer Credit Oversight Board (CCOB) Task Force, and the Ministry of Domestic Trade and Cost of Living to phase out this method. The changes will be part of amendments to the Hire Purchase Act 1967, set to be tabled in Parliament in the first half of 2025.
BNM invites written feedback on the requirements outlined in the exposure draft by 14 February 2025. Submissions should include clear rationale, evidence, or illustrations. The focus should be on the application of maximum PF tenure and the abolishment of PF where interest or profit charges are calculated using the flat rate with the Rule of 78 method.
What is the Rule of 78 Method?
The Rule of 78 is a method used to allocate the interest payments on a loan over its term, particularly in loans with fixed monthly payments. It is commonly applied to short-term loans and determines how much interest a borrower owes at any given point during the loan’s duration.
The method works by assigning each month of the loan term a fraction of the total interest, with the earlier months receiving a larger share. This results in the borrower paying more interest in the initial payments, which decreases as the loan progresses.
The Rule of 78 simplifies interest calculation but favours lenders, as early loan payoffs often result in higher interest payments.
Tackling Unsustainable Debt and Personal Financing Risks
The exposure draft addresses a growing concern. The rise of financing products that appear affordable at first but can leave customers struggling with unsustainable debt and financial hardship.
According to the BNM exposure draft, as at end-2023, Malaysia’s household debt stood at RM1.53 trillion, with personal financing making up 12.6% of the total. Personal financing was also a major contributor to bankruptcy, accounting for 46.26% of total cases in 2023.
By end-April 2024, 32.8% of loan facilities under Agensi Kaunseling dan Pengurusan Kredit’s (AKPK) Debt Management Programme were personal financing loans.
Financial service providers (FSPs) are already required to assess suitability and affordability for every new financing facility they offer to consumers. However, stricter measures are necessary to prevent unhealthy trends in the personal financing sector.
Current and New Changes Proposed to BNPL Personal Financing
Existingly, under BNPL (Buy Now, Pay Later) facilities, FSPs must assess a consumer’s ability to repay in full without resulting in undue financial hardship. At a minimum, the evaluation should include reviewing the consumer’s repayment history on existing credit facilities.
For consumers without a credit repayment history, FSPs should consider their track record with other recurring payment obligations. Examples include utility or telecommunication bills. FSPs cannot offer BNPL facilities to consumers who have declared bankruptcy.
One new change is that when a FSP offers an Islamic BNPL facility, the FSP has to ensure its compliance with Shariah. This includes the applicable rulings of the Shariah Advisory Council on Islamic Finance (SAC BNM) at all times.
An interesting observation from the Malaysia Fintech Report 2024 is that BNPL outstanding balances are nominal compared to credit cards, with only 1.3% of its consumers having missed more over 3 months in payments.
Another new development is this, a FSP will need to treat the following three types of financing offered under a home financing product for personal, domestic, or household purposes as personal financing products.
The condition is as follows: additional financing amount is in excess of an outstanding home financing amount being financed, additional financing beyond the original home financing amount when the borrower has paid down the home financing, and finally for financing secured by an unencumbered party.
For these additional types of financing, the FSP must ensure that the debt service ratio is appropriately calculated and the contractual monthly repayment period does not exceed ten years.
BNM Exposure Draft Exclusions and Definitions
The draft excludes a series of financing products, including vehicle financing, credit card an credit card-i (including easy payment plans using the same credit limit), overdraft and revolving credit facilities with no fixed repayment or payment tenures, and financing for education purposes.
However, a personal financing product with a payment mode involving a salary deduction scheme is included within the draft’s scope.
For context, the draft defines a”personal financing product” as financing provided by a financial service provider (FSP) — directly, jointly with a partner, or through intermediaries — for personal, domestic, or household purposes.
It also covers Buy Now Pay Later (BNPL) arrangements where the FSP pays the seller, provides credit to the consumer, and allows deferred payments, either in one lump sum or installments. However, it excludes moneylending under the Moneylenders Act 1951 and credit sales under the Consumer Protection Act 1999.
More information on the BNM Exposure Draft on Personal Financing can be found here.
Featured image credit: Edited from Freepik
