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Bank Negara Malaysia issues replacement Policy Document on Personal Financing

26 December 2023

Bank Negara Malaysia (“BNM”) issued a Policy Document on Personal Financing (“Policy Document”) on 15 December 2023.
 
The Policy Document came into effect immediately and superseded the Policy Document on Personal Financing issued on 5 July 2013 (BNM/RH/GL 008-19).
 
The Policy Document applies to the following: 
  1. a licensed bank under the Financial Services Act 2013;
  2. a  licensed Islamic bank under the Islamic Financial Services Act 2013;
  3. a prescribed institution under the Development Financial Institutions Act 2002;
  4. an approved issuer of a designated payment instrument under the Financial Services Act 2013; and
  5. an approved issuer of a designated Islamic payment instrument under the Islamic Financial Services Act 2013, 
(severally, an “FSP” and collectively, “FSPs”).
 
This article provides a summary of the main requirements in the Policy Document.
 
Objective
 
The Policy Document seeks to promote prudent and responsible financing practices with respect to the provision of personal financing by FSPs, while encouraging responsible borrowing behaviours by financial consumers. The Policy Document complements the Policy Document on Responsible Financing in promoting a sustainable retail credit market and a resilient household sector.
 
Related documents
 
The Policy Document is to be read together with the 11 policy documents, guidelines and other documents set out in paragraph 7.1 of the Policy Document.
 
Application of Policy Document
 
The Policy Document applies to the following products: 
  1. a financing product offered either directly by a FSP or jointly with another entity or through the FSP’s intermediary to individuals for personal, domestic or household purposes; and 

  2. any buy now pay later (“BNPL”) arrangement, however designed or by whatever name called, entered into by a financial consumer with a FSP, or in the case of a jointly provided product, with a FSP and the FSP's partner, for the purchase of goods or services where: 
  • the FSP pays the seller for the purchase and provides credit to the financial consumer; and
  • the payment due from the financial consumer to the FSP is deferred and may be made in a single payment or by instalments over an agreed period of time in accordance with the terms and conditions of the arrangement; 
(severally a “personal financing product” and collectively “personal financing products”).
 
Paragraph 9 (Submission requirement) and paragraph 10 (General requirements) of the Policy Document apply to a FSP offering a personal financing product set out in sub-paragraph (1) above, whereas paragraph 11 (Additional requirements on BNPL) applies to a FSP offering a personal financing product set out in sub-paragraph (2) above.
 
The Policy Document does not apply to the following financing products: 
  • financing the purchase of residential and non-residential property;
  • vehicle financing;
  • credit card and credit card-i;
  • charge card and charge card-i;
  • overdraft and revolving credit facilities with no fixed repayment or payment tenure;
  • micro-financing product or financing to a sole proprietor for purposes of its business;
  • financing the purchase of securities1;
  • financing granted to employees of FSPs; and
  • pawnbroking or Ar-Rahnu (Islamic pawnbroking). 
Personal financing products do not include moneylending as defined in the Moneylenders Act 1951 and credit sales transaction as defined in the Consumer Protection Act 1999.
 
The following points in the Policy Document should also be noted: 
  1. a personal financing product where the mode of repayment is through a salary deduction scheme falls within the scope of the Policy Document; and 

  2. in the context of an Islamic personal financing product, “repayment” includes payment by a financial consumer under the terms of the Islamic personal financing product. 
Submission requirement
 
FSPs are to refer to Policy Document on Personal Financing as published in BNM’s Regulatory Handbook for requirements on product submissions.
 
General requirements
 
The general requirements in the Policy Document include the following: 
  1. the tenure of a personal financing product must not exceed 10 years. This requirement also applies to restructuring or rescheduling of existing personal financing facilities which involve an increase in the amount of financing; 

  2. a FSP must not offer any form of pre-approved personal financing product. Personal financing is only to be granted upon receiving a financial consumer’s verbal or written acceptance of the offer and the FSP is satisfied based on an affordability assessment, that the financial consumer has the capacity to repay. The prohibition against offering any form of pre-approved personal financing product does not extend to sending promotional materials or informing pre-selected financial consumers of new personal financing products; and 

  3. a FSP is prohibited from offering any personal financing product where the total or bulk of repayment, whether principal only or principal plus interest / profit, is due only at the end of the financing tenure and is to be repaid from the retirement funds2 of the financial consumer. 
Additional requirements for BNPL
 
General
 
Before granting BNPL, a FSP must assess the financial consumer’s ability to make full repayment of the BNPL without resulting in undue financial hardship. At a minimum, the FSP must consider the financial consumer’s repayment history on his existing credit facilities. In the absence of any credit repayment history, a FSP shall evaluate the financial consumer’s repayment history on other recurring payment obligations, such as utility or telecommunication bills.
 
Affordability assessment
 
For a financial consumer who has a cumulative BNPL credit limit of RM1,5003] or above, a FSP must conduct an affordability assessment to ascertain the financial consumer’s ability to fully repay the new BNPL facility by observing a prudent debt service ratio (DSR) as specified in the Policy Document on Responsible Financing. A FSP is allowed to set a lower cumulative BNPL credit limit for determining when an affordability assessment is required.
 
In carrying out the affordability assessment, a FSP is required to obtain and verify the financial consumer’s income, and establish the financial consumer’s overall indebtedness by obtaining information on the consumer’s existing debt repayment obligations.

Fees and charges
 
In determining the late payment charge (“LPC”) and any other fees imposed on financial consumers, a FSP is required to comply with the following, as the case may be: 
  1. Guidelines on Imposition of Fees and Charges on Financial Products and Services issued on 10 May 2012;
  2. Operational Procedures for Submission of Application for the Imposition of Fees and Charges on Financial Products and Services issued on 23 January 2017; and
  3. Guidelines on Late Payment Charges for Islamic Financial Institutions issued on 31 January 2013. 
A FSP must obtain BNM’s approval before introducing any fees and charges on BNPL or increasing the current fees and charges on BNPL, including the LPC.4
 
The LPC imposed must be an amount that only covers the actual costs incurred for recovering overdue instalments from financial consumers. A FSP must not set a minimum LPC. The LPC is also not subject to the cap of 1% per annum under paragraph 5.9.1 of the Guidelines on Imposition of Fees and Charges on Financial Products and Services and paragraph 5.2.2.A(i) of the Guidelines on Late Payment Charges for Islamic Financial Institutions.
 
A FSP shall observe the following principles and requirements to ensure that the LPC imposed on financial consumers is fair and reasonable: 
  1. the quantum of LPC shall not be excessive (i.e. disproportionate when compared to the actual costs incurred for recovering overdue instalments);
  2. the LPC shall exclude costs that are not relevant to the recovery of overdue instalments, such as cost of funding, marketing and advertising costs, opportunity costs or any other operating costs not attributable to late payments by financial consumers;
  3. unpaid LPC shall not be added to the outstanding amount (i.e. compounding of LPC is not allowed); and
  4. the FSP shall not consider LPC as an additional source of income for BNPL facility. 
A FSP is to maintain proper documentation and supporting information from which its LPC is derived. Such information is to be made available upon request by BNM.
 
At the point of offering BNPL to financial consumers, a FSP shall clearly inform the consumers about the imposition of LPC if they fail to make payment by the due date. The FSP shall also provide a simple illustration on when the LPC will be imposed and the LPC amount.
 
A FSP must send a reminder to financial consumers at least three calendar days before the payment due date. The reminder must clearly state the amount due and that a LPC will be imposed if the payment is missed, and include a simple illustration on when the LPC will be imposed and the LPC amount. The reminder may be made to financial consumers through the most effective communication channels such as short message service (SMS) or in-app notification.
 
If a financial consumer has missed up to three payments for a purchase, a FSP shall suspend the consumer’s BNPL account from being further utilised for new transactions until the missed payments have been fully settled. The reminder notification mentioned in the preceding paragraph must clearly state that the BNPL account will be suspended after a specified number of missed payments.
 
A FSP is permitted to suspend a financial consumer’s BNPL account from being further utilised even if the financial consumer has missed less than three payments for a purchase.
 
Shariah requirements on Islamic BNPL
 
The following requirements apply to Islamic BNPL facilities: 
  1. the Islamic BNPL facility must at all times comply with Shariah and applicable rulings of BNM’s Shariah Advisory Council (“SAC”); 

  2. the Islamic BNPL facility must be structured based on appropriate underlying Shariah contracts that are consistent with the business and operational models, product features and contractual terms of the Islamic BNPL facility; 

  3. a FSP must seek the approval of the SAC for Shariah-compliant products which involve the application of a new Shariah contract5; 

  4. a FSP offering an Islamic BNPL facility must seek the written approval of its Shariah Committee (“SC”) on the component of actual costs as ta’widh (compensation) for the LPC; 

  5. A FSP offering an Islamic BNPL facility is allowed to recognise the LPC on a judgment debt decided by the court as ta’widh that is equivalent to its actual costs. If the charge on judgment debt decided by the court exceeds the FSP’s actual cost, it must channel the excess amount to a charitable organisation, subject to obtaining the written approval of its SC before making the disbursement. 
Merchant requirement
 
A FSP is to ensure its merchants do not set BNPL as the default payment option for financial consumers.
 
Reporting requirement
 
A FSP is required to report both conventional and Islamic BNPL in the Central Credit Reference Information System (CCRIS) as a facility named “Buy Now Pay Later”.
 
Comments
 
It is interesting that the Policy Document includes provisions to regulate conventional and Islamic BNPL which are fast gaining popularity as personal financing products. These products are also becoming a source of concern for the Government as embattled financial consumers from the lower income segment of Malaysian society struggle to meet their debt obligations.
 
More changes lie ahead in the personal financing and consumer credit landscape in Malaysia. The Consumer Credit Oversight Board Task Force, supported by  the Ministry of Finance, BNM and the Securities Commission Malaysia, will be presenting a proposed Consumer Credit Act for adoption by the government in the near future. The proposed legislation and regulatory requirements, which are targeted to be introduced in phases from 2024 onwards, will apply to a wide spectrum of consumer credit, including hire purchase, leasing, pawnbroking, moneylending and BNPL schemes. Our articles on the two public consultation papers issued by the Consumer Credit Oversight Board Task Force can be read here: 
Article by Lee Ai Hsian (Partner) of the Banking and Finance Practice and Hafidah Aman Hashim (Partner) of the Islamic Finance Practice of Skrine.
 
 
1 This includes units of funds managed by Amanah Saham Nasional Berhad and other unit trusts.
2 Retirement funds include the Employees Provident Fund, pension and gratuity payments.
3 This refers to the total credit limits on BNPL granted to a financial consumer by all BNPL providers, including
the FSP.
4 See paragraph 5.1 of the Guidelines on Imposition of Fees and Charges on Financial Products and Services.
5 A new Shariah contract refers to a Shariah contract that has never been introduced in the Malaysian market and there is no current SAC resolution on such contract.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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