Malaysian banks now prohibited from offering pre-approved personal financing products

Responsible lending practices are reinforced.

BNM recently announced the implementation of a set of measures aimed at avoiding excessive household indebtedness and to reinforce responsible lending practices by key credit providers.

These measures, which take effect immediately, complements the earlier measures introduced since 2010 to promote a sound and sustainable household sector.

The measures are:

• Maximum tenure of 10 years for financing extended for personal use;
• Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties;
• Prohibition on the offering of pre-approved personal financing products.

The limits on financing tenure will not affect applications made before today.

Household debts have continued to increase at a strong pace, averaging at an annual rate of 12% over the recent five years. While this has been supported by positive income and employment conditions, in the more recent period, there has been a growing trend in the offering of financial products that are not in the long-term interest of consumers. 

This includes extended financing tenures of up to 45 years for house financing and 25 years for personal financing. While this may reduce the monthly repayments, in the long run, this increases the overall debt burden of households. Such practices encourage excessive debt accumulation by households and increase the vulnerability of this sector.

These measures are issued pursuant to section 31(1)(a) of the Central Bank of Malaysia Act 2009 and apply to all financial institutions regulated by Bank Negara Malaysia, credit cooperatives regulated by the Suruhanjaya Koperasi Malaysia, Malaysia Building Society Berhad and AEON Credit Service (M) Berhad. This is to ensure consistency in the financing practices across all the key credit providers.

In addition to the above measures, the key credit providers are required to observe prudent debt service ratios in their credit assessment to ensure households have sufficient financial buffers to protect them against rising costs and unexpected adverse events. Households who have the financial capacity to take on borrowings will continue to enjoy access to financing.

To enhance responsible debt management by households, Bank Negara Malaysia will intensify its efforts in financial education to all segments of society including young and first time borrowers from financial institutions. In addition, the framework for consumer protection will continue to be further strengthened under the Financial Services Act and Islamic Financial Services Act.