Bank or licensed Ah Long?

Some banks charge higher interest than moneylenders. When a bank charges interest on a loan at a rate that is higher than that of a moneylender, does it not make the bank a licensed Ah Long?

When banks charge a compound interest on loans, when licensed moneylenders do not, does it not make them licensed Ah Longs? Banks and Ah Longs, what is the difference? The truth is that often consumers find it hard to tell whether they are dealing with banks or Ah Longs.  Both are in the business of making profits by lending out money and both can be ruthless in their own ways.

Bank loan more expensive than moneylender’s

Consumers cannot take for granted that the loan from the bank will always be cheaper than that of moneylenders.

Under Section 17A of the Moneylenders Act 1951,   moneylenders can charge interest of up to 12% per annum for secured loans and up to 18% per annum for unsecured loans. To charge anything higher would be breaking the law.

For banks, it is a different story. There is no limit on the interest that they can charge on loans. Most of the time their interest is lower than that of moneylenders.

We have come across a case where the interest charged for a personal loan taken from a bank is very much higher than that can be legally charged by a licensed moneylender.   Yet, unlike moneylenders, the bank is not breaking any law.

CIMB Xpress

The CIMB Xpress is an Islamic personal loan which many may find appealing. (Islamic loans  are open to non-Muslims as well). According to its brochure, the requirements for the loan are minimum and the rates are affordable. No guarantor is required for a loan that is less than RM5,000 and  the applicant only needs to have a monthly salary of RM800 to apply.  The applicant can apply for a loan that is 5 times his salary and the loan can be approved within 24 hours.

For a loan of RM3,000 for 5 years, the repayment works out to be RM3.62 per day. This does not seem much but the rate of profit (equivalent to the interest charged on a conventional loan) on the loan is high, at 2% per month or 24% per annum.

In a year, the borrower would have paid RM1,320 and at the end of 5 years he would have paid RM6,600.

ABC Moneylender
If the RM3,000 loan were to be taken from a moneylender, the interest charged is 18% as it is an unsecured loan.

This is cheaper than CIMB  Xpress’ 24% rate of  profit.

For a loan taken from ABC moneylender, the total interest charged on a loan of RM3, 000 for 60 months is RM2, 700.  The monthly instalment works out to be RM95 per month or RM3.12 per day.

At the end of the 5 years the borrower with the loan from ABC Moneylender saves RM900.

Now who says it is always cheaper to take a loan from a bank than a moneylender?

Is it ethical for banks to charge interest that is higher than that of  moneylenders?

Double Standards on Compound Interest?

There are 2 ways to calculate interest for loans — simple interest or compound interest.

Simple interest is interest which is calculated only on the principal amount. Compound interest is where interest is calculated on the principal plus interest incurred in the previous periods.

When compound interest is applied, the debt will grow faster than under simple interest.

For example, if the penalty interest on late payment is RM100 and the balance outstanding is RM10,000, compounding allows the bank to charge interest on the total of RM10,100.  If simple interest is being used, the bank will only be allowed to calculate interest on the outstanding balance of RM10,000.

Section 17 of the Moneylenders Act 1951 prohibits directly or indirectly, the use of compound interest by moneylenders.

However, banks do not face such restrictions on compound interest. By charging compound interest they are effectively charging  interest upon  interest and that is why the debt increases tremendously.

Anyone who has defaulted on his housing loan or credit card payment will  understand how fast debt accumulates because interest is being compounded.

Compounding interest increases the debt much faster and thus allows the banks to make even more money.

Why should the banks be allowed to compound interest when moneylenders are not allowed to do so?

What does Bank Negara have to say?

Read the Moneylenders Act in Utusan Konsumer July-August 2008.