Think Twice Before Lending Money

Have you ever wondered whether it is illegal to loan money to a friend or relative? Can you charge interest on it? 

If your loan is a ‘moneylending transaction’ and you do not possess the necessary license, you are in contravention of the Moneylenders Act 1950. Not only could you potentially attract criminal charges, but you may not be able to recover the loan in the civil courts, depending on the facts of your case.

So, what kind of loans contravene the Moneylenders Act 1950? Simply put, they are the loans that are considered ‘moneylending’ as opposed to ‘friendly loans’. 

A single loan with interest raises a presumption of moneylending

In 2011, the Moneylenders Act 1950 was amended by Parliament, whereby Section 10OA was added, stating that:

“Where in any proceedings against any person, it is alleged that such person is a moneylender, the proof of a single loan at interest made by such person shall raise a presumption that such person is carrying on the business of moneylending, until the contrary is proved.”

Recently, the Court of Appeal in Global Globe Property (Melawati) Sdn Bhd v Jangka Prestasi Sdn Bhd [2020] 6 CLJ 1 and Mahmood Ooyub v Li Chee Loong [2020] 1 LNS 660 held that Section 10OA applies to civil proceedings. This means that, where there is even a single loan with interest of any rate, the burden of proof will shift to the lender to prove that they are not carrying out the business of moneylending. 

The consequence of a presumption of business of moneylending can be grave, as any loan given out by a person in the ‘business of moneylending’ is considered to be a moneylending transaction. The Moneylenders Act 1950 defines ‘moneylending’ as ‘the lending of money at interest, with or without security, by a moneylender to a borrower’. A ‘moneylender’ is defined as “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”.

To determine whether someone carrying out the business of moneylending, the Courts will consider a number of factors.

1. The relationship between the lender and borrower

The nature of the relationship is also a factor for consideration. For example, in the case of Pan Global Equities Sdn Bhd & Anor v Taisho Company Sdn Bhd [2005] 3 CLJ 734, the Federal Court held that the nature of the lender and borrower was one of a shareholder and company. As such the company was not found to be a moneylender. 

2. History of similar transactions 

Where there are past similar transactions, be it with other parties or the borrower in question, a history of having engaged in similar transactions will attract a stronger likelihood of being found to be in the business of moneylending.   

3. The rate of interest imposed

The higher and more unreasonable the interest rate imposed by the lender, the more likely the Courts will perceive the transaction to be one of moneylending, and not a friendly loan. The simple interest rates imposed by banks may serve as a useful benchmark for what is acceptable.  

Effects of violating the Moneylenders Act 1951

If a loan agreement is found to be based on an illegal moneylending transaction, it will be rendered void and unenforceable in law. It is the Courts’ discretion to decide whether or not to order the return of the loan to the lender. If both parties are found to have had knowledge of the illegality, the Courts may not order the return of the loan.

The lender may also be prosecuted for an offence under Section 5 of the Moneylenders Act 1951. Those found to be in violation of the Act they will be fined for not less than RM250,000 but not more than RM1,000,000, or imprisonment for no more than 5 years, or both. For repeat offenders, there will be whipping in addition to the fine and/or imprisonment sentence.

Conclusion

If you are lending money to someone at an interest, not only is there an automatic presumption that you are in the business of moneylending, the Courts’ fees and legal fees payable during the litigation process can be onerous. If you are considering lending a large sum of money to someone, beware of the possibility that you may not be able to recover it easily.