Cooperative loans in Malaysia

Last updated

Cooperative loans in Malaysia (commonly known in the Malay language as Pinjaman Koperasi) are credit services offered by cooperatives registered under the Cooperative Commission of Malaysia (SKM) to their members who work as civil servants. [1] [2] [3] It is part of the shadow banking system in Malaysia. [4] The borrowers are restricted to employees in government departments, statutory bodies, government-linked companies or municipal councils. The Congress of Unions of Employees in the Public and Civil Services (CUEPACS) supports these loans because they aid civil servants in overcoming financial problems and reducing borrowing from loan sharks. [5] All matters relating to the administration of these loans are regulated under the Cooperative Society Act of 1993. [6]

Contents

Loan features

Cooperative loans in Malaysia share some common features such as:

Repayment by salary deduction

Payment of monthly installment is via an automatic salary deduction by a government-related body called the National Cooperative Movement of Malaysia (ANGKASA). [7] Loan size is limited to RM250,000 (maximum allowed) or to the maximum installment amount that can be deducted from the borrower’s salary. Loan installments together with other deductions cannot exceed the maximum 60% limit on salary deductions imposed by the Public Services Department. [8] This is to ensure that the take-home pay is at least 40% of gross salary. The maximum tenure is 10 years (the maximum tenure allowable by Bank Negara Malaysia) or until retirement year, whichever comes first.

Sharia compliance

The vast majority of personal loans offered by the cooperatives are Islamic loans that comply with the Sharia guidelines set by SKM. [9] These loans are based on Islamic banking and finance principles such as Tawarruq and Murabahah which involve the buying and selling of commodity payable by installment or deferred payment. Using the buying-selling model, interest (riba) which is forbidden (haram), is replaced by a profit margin agreed upon between the buyer and the seller. [10] [11] Most cooperative loans come with compulsory takaful insurance protection that covers the outstanding amount in circumstances of death or total permanent disability.

Dependence on borrowed funds

Cooperatives provide credit facilities to their members by using either their own or borrowed funds. Since cooperatives funds are limited, the operations of these loans are primarily dependent on consistent and constant funding from financial institutions. Popular commercial banks in Malaysia such as Maybank, RHB Bank, Kuwait Finance House and Bank Rakyat are currently funding or have in the past contributed funds to the cooperatives. [12] [13] [14] [15]

Approval rate

The approval rate of cooperative loans is very high, as credit score is irrelevant since monthly installment repayment is automatic. Applicants who have been blacklisted by banks due to poor credit score as reflected by Central Credit Reference Information System (CCRIS) and the Credit Tip-Off System (CTOS) successfully apply for cooperative loans. [16]

Controversies

These plans have many critics, one of the most vocal being the Consumer Association of Penang. Among the criticism directed at the cooperatives include encouraging over-borrowing and burdening the borrowers with long-term debts. [17] [18] [19] [20]

Long-term debt burden

In the past, cooperative loan schemes have had very long tenure, up to a maximum of 25 years. A loan stretched over a long tenure allows the borrower to pay lower monthly installment and hence be eligible for a higher loan amount. The maximum loan amount is RM250,000. In June 2013, in an effort to rein in rising household debt, Bank Negara restricted all personal loan borrowings to a maximum of 10 years. [21] [22] This ruling effectively reduced borrowings under the cooperative schemes and led to protests by the cooperatives. [23] [24] The Congress of Union of Employees in the Public And Civil Services (CUEPACS) also opposed the Central Bank’s new ruling and suggested a compromised solution of 15 years tenure. According to them, many government employees will borrow from loan sharks if they are unable to secure cooperative loans. [25] Despite much opposition, the 10-year loan tenure cap is still in place today. [26]

Illegal schemes

Some cooperatives are found to be operating illegal loan schemes and charging exorbitant interest. In August 2016, the Ministry of Domestic Trade, Co-operatives and Consumerism (Malaysia) (KPDNKK) ordered the closure of 12 cooperatives found operating loan schemes with the involvement of loan sharks. [27] The minister of KPDNKK, Datuk Hamzah, announced that the government was working on improving the Cooperative Act of 1993 to better regulate the activities of nearly 13,000 registered cooperatives throughout the country. [28] [29]

High effective interest rates

Another criticism revolves around the actual cost of the loan. Prior to 2012, the typical interest rate of most cooperative loan was around 10% per annum calculated on a flat rate. Borrowers only received 81% of the loan amount with 19% deducted for various fees and expenses including a commission to agents. A recalculation of interest rates based on effective rates on the actual money received showed that borrowers were paying interest of 24% per annum. [30]

Cooperative loans today

Increased competition among cooperatives offering loans resulted in interest rate steadily declining. Most cooperative loans today charge an interest of 4% - 7% per annum with payout usually around 90% to 95%, which makes the cost of cooperative loans similar to bank loans. [31] Cooperative loans are meant to be a more viable option for civil servants with poor credit score cooperative loans compared to license money lenders who charge 18% per annum (maximum allowable interest rate as stipulated by the Money Lending Act 1951). [32]

Related Research Articles

<span class="mw-page-title-main">Federal Farm Loan Act</span> United States federal law

The Federal Farm Loan Act of 1916 was a United States federal law aimed at increasing credit to rural family farmers. It did so by creating a federal farm loan board, twelve regional farm loan banks and tens of farm loan associations. The act was signed into law by President of the United States Woodrow Wilson.

<span class="mw-page-title-main">Loan</span> Lending of money

In finance, a loan is the transfer of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.

A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market or index, the rate can be changed at the lender's discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government, with caps on charges. In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Credit cards are an example of revolving credit used by consumers. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations. They were first introduced by the Strawbridge and Clothier Department Store.

<span class="mw-page-title-main">Prime rate</span> Interest rate at which banks lend to customers with good credit

A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate.

<span class="mw-page-title-main">Islamic banking in Malaysia</span> Banking in Malaysia

Islamic banking in Malaysia began in September 1963 when Perbadanan Wang Simpanan Bakal-Bakal Haji (PWSBH) was established. PWSBH was set up as an institution for Muslims to save for their Hajj expenses. In 1969, PWSBH merged with Pejabat Urusan Haji to form Lembaga Urusan dan Tabung Haji.

A home equity line of credit, or HELOC, is a revolving type of secured loan in which the lender agrees to lend a maximum amount within an agreed period, where the collateral is the borrower's property. Because a home often is a consumer's most valuable asset, many homeowners use their HELOC for major purchases or projects, such as home improvements, education, property investment or medical bills, and choose not to use them for day-to-day expenses.

In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. Unsecured debts are sometimes called signature debt or personal loans. These differ from secured debt such as a mortgage, which is backed by a piece of real estate.

A credit history is a record of a borrower's responsible repayment of debts. A credit report is a record of the borrower's credit history from a number of sources, including banks, credit card companies, collection agencies, and governments. A borrower's credit score is the result of a mathematical algorithm applied to a credit report and other sources of information to predict future delinquency.

<span class="mw-page-title-main">Credit</span> Financial term for the trust between parties in transactions with a deferred payment

Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately, but promises either to repay or return those resources at a later date. The resources provided by the first party can be either property, fulfillment of promises, or performances. In other words, credit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.

<span class="mw-page-title-main">Pan-Malaysian Islamic Front</span> Malaysian political party

BERJASA is a political party in Malaysia. The party is part of a Malay-Islam based coalition named "Gerakan Tanah Air".

Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance, is an insurance product that enables consumers to ensure repayment of credit if the borrower dies, becomes ill or disabled, loses a job, or faces other circumstances that may prevent them from earning income to service the debt. It is not to be confused with income protection insurance, which is not specific to a debt but covers any income. PPI was widely sold by banks and other credit providers as an add-on to the loan or overdraft product.

A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A financial institution makes available an amount of credit to a business or consumer during a specified period of time.

The overnight policy rate is an overnight interest rate set by Bank Negara Malaysia (BNM) used for monetary policy direction. It is the target rate for the day-to-day liquidity operations of the BNM. The overnight policy rate (OPR) is the interest rate at which a depository institution lends immediately available funds to another depository institution overnight. The amount of money a bank has fluctuates daily based on its lending activities and its customers’ withdrawal and deposit activity, therefore the bank may experience a shortage or surplus of cash at the end of the business day. Those banks that experience a surplus often lend money overnight to banks that experience a shortage so the banking system remains stable and liquid. This is an efficient method for banks around the world to practice 'Accessing short-term financing' from the central bank depositories. The interest rate of the OPR is influenced by the central bank, where it is a good predictor for the movement of short-term interest rates. In 2014, Malaysia's central bank raised its key interest rate for the first time in more than three years, to help temper inflation and rising consumer debt.

<span class="mw-page-title-main">Payday loans in the United States</span> Overview of payday loans

A payday loan is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday." The loans are also sometimes referred to as "cash advances," though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the United States, between different states.

Payday loans in Canada are permitted under section 347.1 of the Criminal Code, so long as the province of the borrower has enacted sufficient provincial legislation concerning the provisioning of payday loans. In the event that no such provincial legislation exists payday loans are limited by usury laws, with any effective (compound) rate of interest charged above 60% per annum considered criminal. However, so far this has not been enforced by Newfoundland and Labrador.

<span class="mw-page-title-main">Pegadaian</span> Indonesian financial services company

PT Pegadaian (Persero) is an Indonesian state-owned pawnbroker operated as a subsidiary of Bank Rakyat Indonesia. Formerly a pawnbroking monopoly, its monopoly was legalized in a Dutch East Indies government decree. Several savings and loan co-operatives de facto also offer pawnbroking services.

<span class="mw-page-title-main">Hulu Langat (federal constituency)</span> Federal constituency of Selangor, Malaysia

Hulu Langat is a federal constituency in Hulu Langat District, Selangor, Malaysia, that has been represented in the Dewan Rakyat since 1974.

<span class="mw-page-title-main">Affirm Holdings</span> U.S. financial services company

Affirm Holdings, Inc. is an American public company founded by PayPal co-founder Max Levchin in 2012. It is a fintech company with a buy now, pay later service for online and in-store shopping. Affirm leads the U.S. buy now, pay later sector, reporting over 17 million users and US$20.2 billion annual GMV as of 2023.

<span class="mw-page-title-main">Federal Consumer Credit Act (Switzerland)</span> Swiss federal law

The Federal Consumer Credit Act, is a Swiss federal law that aims to increase the protection of borrowers against overindebtedness. The law covers consumer credits and leasing contracts to natural persons without professional or commercial intention, credit and loyalty cards as well as bank overdrafts.

References

  1. ↑ "Cooperative bank for personal financing". Thestar.com.my. 2016-08-31. Retrieved 2017-02-27.
  2. ↑ "SURUHANJAYA KOPERASI MALAYSIA : GP6 : GARIS PANDUAN MENGENAI KEMUDAHAN KREDIT OLEH KOPERASI : BAHAGIAN A : PENGENALAN" (PDF). Skm.gov.my. Archived from the original (PDF) on 2022-07-28. Retrieved 2017-02-27.
  3. ↑ "PINJAMAN KOPERASI MALAYSIA RASMI : PERKIHDMATAN DAN KEMUDAHAN PINJAMAN PERIBADI OLEH KOPERASI : BAHAGIAN B : PENGENALAN". Koperasimalaysia.org. Retrieved 2020-06-29.
  4. ↑ "Shadow banking: It's a problem". Thestar.com.my. 2013-07-06. Retrieved 2017-02-27.
  5. ↑ "Kempen". Web10.bernama.com. Archived from the original on 2017-01-09. Retrieved 2017-02-27.
  6. ↑ "Laws of Malaysia" (PDF). Agc.gov.my. Archived from the original (PDF) on 2016-12-21. Retrieved 2017-02-27.
  7. ↑ "ANGKASA Salary Deduction System". Angkasa.coop. Archived from the original on 2017-01-22. Retrieved 2017-02-27.
  8. ↑ "PERATURAN MENGENAI LARANGAN MEMINJAM WANG DAN BERADA DALAM KETERHUTANGAN KEWANGAN YANG SERIUS KE ATAS PEGAWAI AWAM" (PDF). Docs.jpa.gov.my. Retrieved 2017-02-27.
  9. ↑ "SURUHANJAYA KOPERASI MALAYSIA : GP7 : GARIS PANDUAN MENGENAI PEMBIAYAAN ISLAM OLEH KOPERASI : BAHAGIAN A : PENGENALAN" (PDF). Skm.gov.my. Archived from the original (PDF) on 2022-07-28. Retrieved 2017-02-27.
  10. ↑ "Archived copy" (PDF). www.bnm.gov.my. Archived from the original (PDF) on 20 December 2016. Retrieved 14 January 2022.{{cite web}}: CS1 maint: archived copy as title (link)
  11. ↑ "Pinjaman Peribadi Berlandaskan Syariah". Pinjamanislamik.com. Retrieved 2017-02-27.
  12. ↑ "Koperasi Bersatu Tenaga Malaysia Berhad (KOBETA) - Laman Web Rasmi". KOBETA. 2010-03-27. Retrieved 2017-02-27.
  13. ↑ "Pinjaman Terbaru Coshare Payout Tinggi". Coshareonline.com. Archived from the original on 2017-02-05. Retrieved 2017-02-27.
  14. ↑ "Koperasi UKHWAH Malaysia Berhad - Ukhwah Pembiayaan". Ukhwah.com.my. Archived from the original on 2016-12-20. Retrieved 2017-02-27.
  15. ↑ "IDSB (Ikhtiar) - Pinjaman Kakitangan Kerajaan dan Swasta". Smartpinjaman.com. 2012-08-10. Retrieved 2017-02-27.
  16. ↑ "Personal Loans of Koperasi Bank". koperasibank.com. Archived from the original on 19 October 2015. Retrieved 14 January 2022.
  17. ↑ "Shutdown co-ops that are agents of moneylenders". Consumer.org.my. Retrieved 2017-02-27.
  18. ↑ "Co-ops heading for trouble again?". Consumer.org.my. Archived from the original on 2017-04-29. Retrieved 2017-02-27.
  19. ↑ "A huge RM43bil problem over non-bank lending". Malaysiakini.com. 28 May 2013. Retrieved 2017-02-27.
  20. ↑ "Majority of family debts result from house, car purchases". Free Malaysia Today. 2016-07-19. Retrieved 2017-02-27.
  21. ↑ "Household debt on the rise". Thestar.com.my. 2016-04-02. Retrieved 2017-02-27.
  22. ↑ "Personal loan repayment fixed at 10 years to protect consumers". Nst.com.my. 2016-05-24. Retrieved 2017-02-27.
  23. ↑ "Johor's credit cooperatives reject Bank Negara's new regulation on personal loan". Thestar.com.my. 2013-07-27. Retrieved 2017-02-27.
  24. ↑ "Credit cooperatives upset over new regulations on loans". Thestar.com.my. 2013-07-31. Retrieved 2017-02-27.
  25. ↑ "Timbang tempoh bayaran balik pinjaman peribadi - Nasional". Sinar Harian. 2014-05-23. Retrieved 2017-02-27.
  26. ↑ "Bank Negara: 10-year personal loan cap stays". Thestar.com.my. 2013-09-12. Retrieved 2017-02-27.
  27. ↑ "12 koperasi beri skim pinjaman diarah tutup - Jenayah - Utusan Online". www.utusan.com.my. Archived from the original on 15 August 2016. Retrieved 14 January 2022.
  28. ↑ Wartawan Sinar Harian (2016-08-02). "SKM kaji semula Akta Koperasi 1993 - Nasional". Sinar Harian. Retrieved 2017-02-27.
  29. ↑ "KPDNKK will review Cooperatives Act 1993: Hamzah Zainuddin". Thesundaily.my. Retrieved 2017-02-27.
  30. ↑ "24% interest rate for co-op loan". Consumer.org.my. Archived from the original on 2016-12-20. Retrieved 2017-02-27.
  31. ↑ "Skim Pinjaman Koperasi Malaysia - Pusat Sehenti Pinjaman Kakitangan Kerajaan". Pinjamankoperasi.org. Retrieved 2017-02-27.
  32. ↑ "BI" (PDF). 54.251.120.208. Archived from the original (PDF) on 2016-12-20. Retrieved 2017-02-27.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.