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MUST KNOW SERIES: NOT SO FRIENDLY LOAN IN MALAYSIA


INTRODUCTION: TOM & JERRY EXAMPLE

Tom is a successful entrepreneur in Malaysia and is in an urgent need to gather funds to expand his business. Unfortunately, Tom does not have sufficient money to expand his business at the pace he desires. So he turns to Jerry for a friendly loan to expand his business. Jerry is the best friend of Tom. They have known each other since young and used to play cat and mouse at the playground. Jerry had known Tom for many years, Jerry knows that he leads a luxurious life. As such, he is reluctant to loan him the money. After considering for days, Jerry is agreeable to loan a sum of money to Tom. However, to encourage repayment by Tom, Jerry decided to charge him an interest of 5% per annum if he fails to repay him on time. Jerry heard from his friend that lending money with an interest without a license is illegal in Malaysia. So he had an orally-agreed “Gentlemen Agreement” with Tom.


IS LENDING MONEY WITH INTEREST ILLEGAL IN MALAYSIA?

Many might think that there is nothing wrong to lend your friends some money during a difficult time and by doing so charge them some small fees (interest) for the inconvenience caused to you. However, there is actually a law in Malaysia that governs the act of moneylending.


Moneylending is defined in the Moneylenders Act 1951 as:-


“…the lending of money at interest, with our without security, by a moneylender to a borrower.”


It is true that by lending your money with an interest will fall squarely within the definition of “money-lending” in the Moneylenders Act 1951. As such, it will be illegal to charge interest on the loan if you are without a moneylender license.


This position is no longer true as the latest amendment to the Moneylenders Act 1951 defines “moneylender” as:-


“…any person who carries on or advertises or announces himself or holds himself out in any way as carrying on the business of moneylending, whether or not he carries on any other business.”


Unlike the old definition for “moneylender”, now it is required to show that a person is actually operating a money lending business in order to be subjected to the rules under the Moneylenders Act.


So the answer to the question is No – the act of lending money with an interest is not illegal as long as the person lending the money is not operating a money lending business.



CAN YOU CHARGE INTEREST?

Generally speaking, since it is a “friendly loan” why would you want to charge your friend with interest? The Malaysian Court took the same approach in the case of Tan Aik Teck v Tang Soon Chye [2007] 6 MLJ 97 which emphasizes that a friendly loan should not have any interest imposed on it.


However, with the latest amendment to the Moneylenders Act 1985 in 2011, this position seems to have changed.



This is reflected in the High Court case of Barisan Tenaga Perancang Bhd. v Dr. Mansur Hussain & Ors 177 [2017] 2 MLRH decided the following:-


“…the title to MA and the above provisions in MA show Parliament’s intention for MA to regulate the business of money lending and not to regulate all kinds of money lending transactions Section 5(1) and (2) MA prohibit unlicensed money lending business and certain acts related thereto. MA does not prohibit any money lending transaction with interest unless the lender has carried on an unlicensed money lending business;”


The High Court decision of Barisan was later affirmed by the Court of Appeal in the appeal case of Dr. Mansur Bin Hussain & Ors v Barisan Tenaga Perancang Bhd & Ors [2019] MLJU 1959.


Based on the case of Barisan, we are clear that a lender can charge interest on the principal sum. However, we should bear in mind that the interest imposed should be reasonable and not exorbitant as the court still has the discretion to reduce or strike out the interest element.


An example of this can be seen in the High Court case of Menta Construction Sdn. Bhd. v SPM Property & Management Sdn. Bhd & Anor [2017] MJLU 526 – where the court took a strict approach in examining the interest charge on the loan. The court decided that the court has the discretion to reduce or strike out the element of interest if the court finds it to be too exorbitant or unjust. (Bear in mind that in this case, the court’s reasoning was based on the provision of the old MoneyLenders Act).



WHO IS A MONEYLENDER?












Moneylender is defined in the Moneylenders Act as:-


“…any person who carries on or advertises or announces himself or holds himself out in any way as carrying on the business of moneylending, whether or not he carries on any other business.”


Based on the case of Barisan Tenaga Perancang Bhd. v Dr. Mansur Hussain & Ors 177 [2017] 2 MLRH- For a person to be considered as moneylender, the other party has to adduce evidence to prove that the person had:


(1) Carried on;

(2) Advertised;

(3) Announced himself as carrying on; or

(4) Held himself out as carrying on money lending business.


Further, the court draws attention to the presumption of business of moneylending S.100 of the Moneylenders Act which states the following:


“…where in any proceedings against any person, it is alleged that such person is a moneylender, the proof of a single loan at interest made by such person shall raise a presumption that such person is carrying on the business of money lending until the contrary is proved”


We have summarized all of the above into the Tom & Jerry Example for a better understanding.


(a) Jerry told Tom that he has been lending money to other people for a profit, Jerry

falls under the definition.

(b) Jerry told all his friends that he has been lending money to other people for a

profit, Jerry falls under the definition.

(c) Jerry advertises himself in the newspaper to be a moneylender, Jerry falls under

the definition.

(d) Many people know Jerry to be carrying out the business of money lending, Jerry

falls under the definition.

(e) Tom shows that there is an instance where Jerry lends money to Harry with

interest, Jerry is presumed to be a moneylender.


Once Jerry is proven or presumed to be a moneylender, he must adduce evidence to prove otherwise or he will be considered as a moneylender entering into an unenforceable moneylending agreement.



FACTORS TO BE CONSIDERED BEFORE GIVING A FRIENDLY LOAN


We do recommend you not to give out any friendly loan as there is a Canadian show called “Till Debt Do Us Part”. You are certainly going to lose this good friend of yours if they failed to pay your money back.


If you elect to loan money to your friend urgently in need of money. It is certainly a smart move to document the friendly loan rather than relying on an oral agreement. Based on our discussion above, it is clear that a loan agreement with interest is both legal and enforceable. Thus, you can enforce your friendly loan agreement and take action against your borrower. However, as a good practice, it is advisable to charge reasonable interest against your borrower to avoid having the interest element being struck off by the court.


Once again we are back to the Tom & Jerry Example- Jerry does not have any formal friendly loan agreement, what will happen next?


Do not panic. Firstly, gather all past messages, emails, or any form of documented communication between you and the borrower. This documentation may be sufficient for you to prove that the borrower has borrowed money from you.

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