Debt Trap or Financial Freedom? Unmasking Responsible Lending in Malaysia’s Non-Bank Credit Sector

In Malaysia, only credit providers governed by Bank Negara Malaysia must conduct affordability assessments to evaluate the credit risk of the prospective borrowers. This gap regrettably contributes to the high number of overindebted individuals, as reflected in the high number of bankruptcies. Those who are ineligible to apply for loans from banks may resort to non-bank credit providers that do not strictly evaluate their financial standing, exposing them to the negative impacts of overindebtedness. This research argues that one of the feasible interventions is to impose mandatory suitability and affordability assessment on all non-bank credit providers as embraced by some jurisdictions such as South Africa and Australia. A qualitative study was employed to explore the current practice among non-bank credit providers prior to loan approval, to elicit non-bank views on the imposition of mandatory assessment, the constraints in implementing the assessment, and the suggestions to improve the existing affordability assessment practice. Interviews were conducted with 20 respondents, including non-banks, consumer associations, and relevant regulators. The research found that different mechanisms are being applied to evaluate consumers’ affordability for credit products. The findings offer insights into how regulators can adopt the best approach to weighing the right balance between protecting consumers against overindebtedness and providing eligible consumers with access to credit, especially in the formulation of the new Consumer Credit Act.