Life is not always a bed of roses, nor is it full of thorns. In life, inevitably, there will be ups and downs. Particularly in this economic climate, there could be times where one would require a little financial assistance. It is in such circumstances that one would look to take loans. Banks and financial institutions not only charge interest but the red tape and stringent requirements prove difficult for many to obtain a loan. As such, one might look to take a friendly loan from a friend or family member. But are friendly loans legal in Malaysia? This is an important question that has to be answered, especially if one is looking to recover an unpaid friendly loan.
What Are Friendly Loans?
Friendly loans must be distinguished from a borrowing from a moneylender or a financial institution. As will be discussed later in this article, a moneylender is subject to strict and stringent conditions and requirements and the failure of the moneylender to comply with these conditions and requirements may not only result in the refusal of the Courts to assist in the recovery of the unpaid loan but may also amount to a criminal act.
The Court of Appeal in Tan Aik Teck v Tang Soon Chye [2007] 2 MLRA 58 described a friendly loan as follows:
A friendly loan is opposed to the normal borrowing from a moneylender or financial institution. A friendly loan is a loan between two persons based on trust. There may be an agreement such as an I.O.U. or security pledged to repayment but most important there will be no interest imposed.
Is It Truly A Friendly Loan?
It is at this juncture that we must refer to the Moneylenders Act 1951 (“MA 1951“) as this will be the determining factor of whether or not a loan is a friendly loan or one that is subject to the MA 1951.
The first and obvious question to ask is this — what is a moneylender? This is defined in Section 2 of the MA 1951 as follows:
"moneylender" means 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;
"moneylending" means the lending of money at interest, with or without security, by a moneylender to a borrower;
At this point, it appears quite clear who a moneylender under the MA 1951 is. But one must be cautious to assume to understand the meaning of all words. The word ‘interest’ is also given a specific definition under the MA 1951 as follows:
"interest" does not include any sum lawfully charged in accordance with this Act by a moneylender for or on account of stamp duties, fees payable by law and legal costs but, save as aforesaid, includes any amount by whatsoever name called in excess of the principal paid or payable to a moneylender in consideration of or otherwise in respect of a loan;
Therefore, in summary, a moneylending transaction in which an interest or profit is obtained from the lending of such monies would likely be caught under the MA 1951.
Does This Mean That No Interest Can Be Charged?
In view of the definitions above, it seems that a friendly loan cannot be subject to any interest or profit in excess of the principal. The mere charging of an interest would likely bring the loan transaction under the MA 1951. In fact, all is required is an allegation that the lender is a moneylender for the burden to shift to the lender to prove that he or she is not in the business of moneylending as defined under the MA 1951. This presumption is enshrined under Section 10OA of the MA 1951.
The Federal Court in Triple Zest Trading & Suppliers Sdn Bhd & Ors v Applied Business Technologies Sdn Bhd [2024] 1 MLRA 144 explained the presumption under Section 10OA of the MA 1951 as follows:
[55] The presumption under s 10OA of MA51 applied against the respondent as a matter of law and not "even if" it applied as implied by the Court of Appeal. It applied as a matter of law because it was alleged in the pleadings that the respondent was a moneylender. This automatically kicked in the presumption that the respondent was carrying on the business of moneylending "until the contrary is proved." Failure to rebut the presumption must lead to a finding that the presumed fact is true. [56] To successfully rebut the presumption under s 10OA of MA51, the respondent must prove on the balance of probabilities that by entering into the loan agreement with the appellants, it was not engaging in an act of "lending of money at interest, with or without security, by a moneylender to a borrower", which is the meaning ascribed to the word "moneylending" by s 2 of MA51.
Therefore, it would seem that any lending of money at an interest on the principal would, at the face of it, be a lending under the MA 1951. It must be noted that in an illegal moneylending transaction, that is to say a moneylending transaction under the MA 1951 by an unlicensed moneylender, even the principal would not be recoverable. Hence, if a friendly loan is deemed to be a moneylending transaction under the MA1951 and the lender does not have a moneylending licence, the lender would not be able to recover the loan given.
Interests On Default Of Payment
While it appears that the charging of interest in consideration or in respect of a loan is prohibited, there could be a case made out for interest charged where the borrower has defaulted in the repayment of the loan. In such circumstances, it may be argued that such an interest is not a consideration for the loan and therefore would not fall within the meaning of the MA 1951. In the words of the Court of Appeal in Shim Vui Geh v Dayang Mastura Sahari & Another Appeal [2024] 1 MLRA 392:
We appreciate that in a case of friendly loan, the lender should not be made to suffer greater loss in trying to help a friend or someone in need and to face the uncertainty of not being able to recover the loan and the risk of nonrecovery and yet not being able to charge the costs of funds which the lender would have to bear or conversely put the money to use profitably or even by earning interest by putting it in fixed deposit with a bank. In trying to help someone in need, the law does not require one to be so selfless and sacrificial as not to be able to charge a reasonable amount of interest upon default to cover the lender's loss or the foregoing of his gain.
Conclusion
Where a friendly loan is to be given, it is generally a good practice to have the terms recorded in a written agreement. The terms of the loan must be spelt out clearly. It must be remembered that all the borrower has to do is to allege that the lender is a moneylender within the meaning of the MA 1951 for the burden to shift to the lender to prove that it is not a moneylender nor is it a business of moneylending under the MA 1951. Hence, documentary evidence must be clear for such situations. One must also bear in mind that interest should not be charged nor be the consideration for the friendly loan given, lest the lender be caught under the MA 1951, in which event the principal would not be recoverable as well.
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