Money lost under the shadow banking: loan sharks Ah Long

IN my previous article, I shared the impact of high credit card interest rate that many have overlooked and hence, overspent. Interestingly, there are loans outside the confines of financial institutions that affect the mass. These loans are largely unregulated and therefore, more painful in terms of financial burden and emotional stress when the loan and interest cannot be repaid on time.

Every now and then, I will receive text messages from unknown contacts offering loans at “attractive” rates. A check with my close associates indicates that I am not alone in receiving such messages. These messages and those stickers offering loans on the streets share the same traits, i.e. easy loan with no pre-qualification required. Example – “Borrow RM1,000, and return RM200 monthly for six months”.

At first glance, it seems like the interest rate for the loan is 20%. However, as the repayment period is only six months, it is actually 40% per annum! This rate is 11 times higher compared with the average fixed deposit rate of 3.5% per annum in the market.

These loans are offered mostly by unlicensed moneylenders, otherwise commonly known as “loan sharks”. According to a news article published in The Star recently, the interest they charged are mostly counted based on monthly or even daily rest basis.

It is learnt from the article that people usually borrow between RM1,000 and RM10,000 at an interest rate of 0.5% to 1% per day. This works up to about 15% to 30% monthly. When the loan is defaulted, another 5% is added as a late repayment penalty.

It therefore becomes evident that the borrowers of such loans face immense problem repaying their loans. They will generally end up borrowing from other moneylender to cover their existing loan which will lead them to more debts. Imagine the emotional stress from harassment when they are unable to serve the interest.

Sadly, this loan with its easy application process and low requirement attracts people who are financially desperate, regardless of professional or income group.

Bank Negara has announced that Malaysia’s household debt-to-gross domestic product (GDP) ratio has increased from 86.8% to 89.1% as of 2015. We have one of the highest household debts in the region without including the unregulated loans from these “moneylenders”. I wonder how this “shadow banking” or “off balance sheet transaction” impact our people and economy.

To protect the rakyat, the government should look at strengthening the enforcement of eliminating illegal money lending.

As the saying goes “where there is demand, there is supply”. Hence the key is to first understand why people resort to borrowing from these “moneylenders”. It is important to strengthen financial education and awareness of public through various channels.

People, especially children, should be taught to borrow for the right things from young, and understand the difference between good debt and bad debt. More importantly, people should learn to ask themselves if there is a real need to borrow. Borrowing money to buy assets that depreciate over a short period of time, such as cars and luxury items is deemed as “bad debt”. This is in stark contrast to “good debt”, such as buying a home or asset that has the possibility of appreciating in the long term, and at the same time, paying a much lower interest rate compared with bad debts.

For people with a genuine need for financing, there are many other options such as borrowing from the banks and legal money lenders, or even to the explore “fintech”, a financial technology which offers more efficient and cheaper financial services through the use of technology. Again, it is important to ensure these channels are legal and well regulated.

Borrowing from unregulated moneylenders is like jumping from the frying pan into the fire. It is important to have wise financial planning in the first place and always seek advice before doing anything financially. One may get advice from government agencies, such as Agensi Kaunseling dan Pengurusan Kredit, when faced with financial challenges.


By Datuk Alan Tong, who has over 50 years of experience in property development. He was the World President of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.


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Worries over systemic risks of shadow banking and mid-tier banks

Analysts have been warning on the risks of China’s “shadow banking” system – a sector estimated to have as much as RM4.15tril in assets. 

RAMADAN is always a good time for reflection.

This year, I’ve been researching a new TV documentary series, Ceritalah Indonesia, that I’m hoping to shoot by September.

I want to tell the story of how Indonesia, having endured the Asian Financial Crisis in 1997/1998, ousted President Suharto and then launched into the tumultuous “Reformasi Era” before finding some degree of stability under President Susilo Bambang Yudhoyono.

As a result, I’ve been going over recent history – including the roots of the crisis itself.

Now even though I’m not an economist, it’s been a very interesting journey, especially reading about the various bank failures that sparked off and then deepened the crisis.

Back then, banks seemed to be falling like dominoes: Thailand’s Finance One collapsed spectacularly.

This was followed only a few months later by Bank Indonesia’s surprise decision to close sixteen banks.

As the momentum gathered in intensity, one of Japan’s most important brokerage houses – Sanyo Securities was also shuttered.

Just over a decade later, a similar sequence of events was to take place in Europe and North America as Northern Rock, Iceland’s Landsbanki (better known by its British brand-name Icesave) and Lehman Brothers also failed, leaving in their wake a massive dislocation across the developed world.

Now, as I reflect on the events of 1998 and 2008, I can’t help but sense a similar trend emerging to our north – in China.

Indeed, the next global economic crisis could very well start there. Why?

Well, have you visited the many ghostly, almost totally-empty high-rise communities that have sprung up across the Middle Kingdom?

I can still recall wandering through vast and deserted business quarters in Dalian, Tianjin and Beijing.

At the time, everyone told me that China was different ... well that’s what they said about Thailand, Iceland and Spain.

But now after years of over-building: roads, bridges and railway lines, expanding capacity to the highest degree, people are beginning to question China’s growth model.

For many months now, analysts have been warning on the risks of China’s “shadow banking” system – a sector which some estimate to have as much as US$1.3tril (RM4.15tril) in assets.

“Shadow banking”– is simply non-bank lending and borrowing. Investing in hedge funds, venture capital and private equity are all forms of “shadow banking”.

There’s nothing wrong with this: shadow banking often helps individuals or businesses that would otherwise not qualify for conventional bank loans or get credit.

Also, some shadow banking wealth management products offer lucrative returns.

Shadow banking thrived in China with the liquidity that flooded the market in 2008, when its government pumped in a US$586bil (RM1,828bil) stimulus package in response to the subprime crisis.

All this excess liquidity has, however, causing a housing bubble and also saved a number of underperforming Chinese state-owned enterprises from having to reform.

At the same time, Chinese policymakers were debating long-standing calls for them to cool down their economy – a fateful decision as we will see later.

As the astute Henny Sender wrote in the Financial Times on July 11, the investment products which form the backbone of Chinese “shadow banking” have the potential to create yet another subprime crisis.

Why? Well, many of China’s hedge funds are shorting the shares of China’s weaker banks. Does that sound familiar?

According to Sender: “… second-tier banks listed in Hong Kong or in mainland China, including China Merchants, China Minsheng Banking and tiny Huaxia, are vulnerable” as they “… have less ability to absorb losses and more of their balance sheets are tied up with shadow-like activities.”

Minsheng, founded in 1996, is China’s ninth-largest bank by assets and the only private bank amongst its top 10 commercial lenders.

It also, according to JP Morgan, has the fastest growth in inter-bank assets and the highest weighting of interbank liabilities to total interest bearing liabilities.

As mentioned, China’s government was initially determined to “cool” its economy.

The People’s Bank of China (PBOC) hence refused to intervene when the Shanghai interbank offered rate (“Shibor”, China’s LIBOR) spiked to an all-time high, to almost 14% from 3% previously.

This led to fears that the sudden “credit crunch” would leave banks like Minsheng at risk of default, the very thing that caused the collapse of Western banks like Lehman in 2008 due to a sudden lack of liquidity.

Indeed, in late June worried investors sent Minsheng’s shares down by 16.7%, wiping out US$6bil (RM18.7bil) of its market value.

Talk of a crisis forced the PBOC to promise to end the credit crunch.

Still, worries over China’s shadow banking system persist.

As Fitch Ratings has stressed, systemic risk over China’s mid-tier banks is rising due to their credit exposure and weakness in absorbing losses.

It remains to be seen whether banks like Minsheng will indeed become China’s Lehman.

But this much is clear: those who ignore history are doomed to repeat it.

Ceritalah  By KARIM RASLAN

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