Credit law needed to protect consumers

The Federation of Malaysian Consumers Associations (Fomca) supports the announcement by the Bank Negara Malaysia (BNM) governor that it is working towards making the Consumer Credit Act law soon.

In the current economic situation, with stagnating incomes and increasing cost of living, consumers face tremendous financial pressures affecting their personal, family and working lives.

All too often, consumers, especially those from the low- and middle-income groups, need to borrow to overcome their financial hardship. BNM reported that 76% of Malaysian consumers would find it difficult to raise RM1,000 in case of an emergency.

According to a study by Universiti Putra Malaysia covering workers aged 20 to 40 staying in a public housing area in Kuala Lumpur, the problems faced by them and their families were late bill payments (89%), not enough money for medicine (61%), borrowing from family and friends (55%), lack of cash to face emergencies (58%), inability to pay instalments (56%), not enough money to buy basic food items (49%) and borrowing from loan sharks (22%).

Their financial problems led to depression (57%) and regular arguments with their spouses (57%).

Currently, consumers can borrow from banks, which are regulated by BNM, money lenders or pawn brokers regulated by the housing ministry. They can also purchase on hire-purchase terms, regulated by the domestic trade and consumer affairs ministry.

When borrowing is not possible from the registered financial institutions for various reasons, they often borrow outside the system from loan sharks and other unregistered entities. This often results in serious detriment and harm to consumer protection and consumer welfare.

Although the services provided by registered lenders do help borrowers to temporarily solve their financial problems, there is an urgent need to impose safeguards for such transactions and to protect borrowers.

Of particular concern to Fomca are major retail chains which sell furniture and other items, with the promotion of low weekly/monthly payments. However, if the interest rates are computed, consumers are being charged exorbitant sums. What is particularly unfortunate is that many of the affected consumers are from the low-income category who are attracted by the low payment rates.

There is currently no legislation to protect consumers, and the agency responsible for protecting them from extravagant interest rates has failed to act to protect them.

Without a comprehensive consumer credit law where interest rates are not only regulated but enforced, the poor will continue to suffer.

Through the Consumer Credit Act, Malaysians can be transparently informed of the true annual percentage rates (APR) or effective interest rates of their financing or purchases.

There should also be a realigning of regulations on consumer credit among government agencies to ensure that interest rates are fair and reasonable and that consumers are aware of the interest they are paying to creditors.

Most importantly, the act should state the limits regarding the calculation on interest rates, including late payment interest rates and any other payments. It should also provide strict guidelines regarding debt collection and repossession.

There must be truth in advertising and marketing practices and, finally, the act should give more powers to law enforcement agencies in dealing with credit providers.

Fomca further suggests that the consumer credit law be placed under the jurisdiction of BNM, which has shown the greatest fitness and competency in implementing and enforcing fair interest rates.

In these challenging economic times, the Consumer Credit Act will provide them some protection against unscrupulous lenders, who are ever ready to take advantage of those in their vulnerable state.

Paul Selva Raj is CEO of Fomca.

The views expressed are those of the author and do not necessarily reflect those of FMT.