Individuals and businesses often turn to banks for making loans in order to meet a variety of expenditure demands. However, not all the loans will be approved by the banks for some reasons perhaps due to the tight lending policies. Banks are nonetheless not the only option available for those potential borrowers, some non-bank financial institutions might offer a more competitive interest rates for them. The non-bank financial institutions in Malaysia such as Malaysia Building Society Bhd (MBSB), RCE Capital Bhd and Bank Kerjasama Rakyat Malaysia Bhd, offer a wide range of loan products for households and businesses purpose.
Yet, there are some advantages and disadvantages of availing loans from non-bank financial institutions to be analysed in advance of making loans from them.
First and foremost, the non-bank lending institutions are able to offer a competitive interest rates for borrowers (Blake, 2016). Owing to their small operations as compared to banks in the lending market, they have a relatively lower setup and ongoing costs.
The saving from the cost of having large corporate structure and branch networks enables the non-bank lending institutions to offer lower interest rates for borrowers. Furthermore, they have a relatively lower administrative costs for processing loan application as they are not regulated by the central bank. For example, they do not have to send the loan application to the central bank for gaining approval before granting a loan. This is because they are not subject to many stringent regulations as those imposed on the banking institutions by Bank Negara Malaysia.
Thus, the non-bank lending institutions are capable of providing a competitive interest rates while maximizing profit.
Secondly, borrowing from non-bank financial institutions is recognized as being quick and easy. It is easy to borrow from non-bank lending institutions than banking institutions as there are less paper works needed when applying for a loan. As small operators, non-bank lending institutions are able to provide quick services to their customers because their customer base is not as large as those of banking institutions. Apart from that, the lending criteria of non-bank lending institutions are more lenient than banks who have to comply with the strict banking acts. Oftentimes, people who apply for loan are in an urgent need of money. The stringent rules and requirements for loan eligibility may restrict applicants access to funds. Banks, for instance, have to undergo a profound credit history investigation on applicants to ensure their creditworthiness, and this action may extend the loan processing time. In this situation, non-bank lending institutions stand out in comparison with banks by having more liberty in approving a loan. Therefore, non-bank lending institution is a good option for those who need immediate funds.
Thirdly, non-bank lending institutions are reputed for providing a more personalized lending services and a wider range of niche lending solutions. Since non-bank lending institutions are subjected to different regulations from banks, they have greater flexibility in tailoring their loan products to meet various borrowers demand. Most of the time, borrowers prefer personalized services to better understand their needs and to obtain a satisfactory loan that best suit their circumstances. It is the strength of non-bank lending institutions, being specialized in lending activities, they can customize lending services to different customers. As an illustration, a start-up business owner who gets into trouble of obtaining funds to purchase equipment for business operation might require personalized service from non-bank lending institution to give him advice on the type of loan to be made. Hence, non-bank lending institutions have lending specialists to offer higher level of customer services to meet each customers specific circumstance.
Despite having sound reputation in providing better services to borrowers, there are some disadvantages of availing loans from non-bank financial institutions. Some may argue that non-bank lending institutions may charge hidden costs on borrowers. Non-bank lending institutions take advantage of the lenient loan eligibility regulations by providing loans to a lot of applicants with low or bad credit history who have failed to borrow from banks. Some may try to offer attractive loan program in an attempt to entice loan applicants to apply for loan, even those with bad credit rating and low capability to repay loan are welcomed. For example, they offer a longer repayment term at a lower interest rate for borrowers. This practice creates a downside to non-bank lending institutions in terms of high credit risk from the borrowers, particularly those with bad credit history and credit rating. In order to compensate for the high credit risk, some non-bank lending institutions will pass this hidden cost onto their customers. It ends up with an increase in interest rate charged on borrowers, attempting to recover the costs from loan defaults. Thus, an applicant should analyze the feature of loan products provided by various non-bank lending institutions in order to make sure that the price offered is fair and just.
According to Barker (2012), making loans from non-bank financial institutions are more vulnerable to changing economic conditions as they less restricted by capitalization requirements. It is risky to borrow money from a small operator because it may go out of business if huge economic downturn hits the financial industry. Since non-bank financial institutions do not have a stable and strong sources of funds in comparison with banks, some may not be able to survive in a bad economic condition. As a result, those who rely on loans from non-bank lending institutions especially those who are rejected by banks for loan approval will be affected. Once the non-bank lending institutions collapse during economic downturn, the options for making loans will decrease. Other than that, it will affect the business operations of borrowers. For instance, a borrower who made loan with a non-bank lending institution will loss his source of fund when the institution suddenly shut down due to financial crisis. It will in turn lead to loss if he could not attain a loan elsewhere, or to obtain a more expensive loan option. Therefore, an applicant is encouraged to make a proper evaluation on the non-bank lending institution to ensure its stability before applying for loan.
In addition, the creditworthiness of non-bank lending institutions is at doubt. Their trustworthiness is questionable because there are less regulations imposed on them by the banking agencies or government. Unlike banks, they are not back by a strong source of funds. Thus, when they grant too much loans and lead to declining liquidity in their operation, they tend to pressure borrowers to pay back their loans in various means. To illustrate, they will offer a lower interest rate in the market to attract people to make loan. If the borrower ultimately defaults, they will charge a higher interest rate on interest. Being less constrained by strict regulations give them more room in doing the most they can so as to look for a quick return for their money. Hence, borrowing from non-bank lending institution poses a risk on borrowers in regard to the subsequent action taken by the institution in treating the borrowers as they are seeking the maximum profit.
In conclusion, to borrow from a non-bank financial institution or not, all depend on the applicants own evaluation of the benefits and weaknesses of availing loans from the institution. In spite of the criticism on some non-bank lending institutions in other countries, Malaysia has experienced a rapid grow in the lending activities of the non-bank financial institutions. The loose credit offered by those non-bank financial institutions is a major attractive feature for the public. The personal financing granted to civil servants with monthly incomes of less than RM3,000 make up about 80 percent of the lending portfolio of non-bank financial institutions in personal loans (Bank Negara Malaysia, 2017). As reported by Bank Negara Malaysia (2017), the growth rate of personal financing by non-bank financial institutions reach 30 percent year-on-year in 2012 and it was almost three times as fast as the growth in personal financing at banks that grew by 9% in 2011. This statistic clearly shows that the lending activities of non-bank financial institutions are increasing gradually throughout the years. Also, the deputy governor of Bank Negara Malaysia, Dr Sukhdave Singh (2017) claimed that Bank Negara Malaysia will continue to monitor the management of non-bank financial institutions to ensure their lending activity especially their over dependence on personal financing does not become a major concern in future. Lastly and most importantly, the borrowers themselves have to be meticulous in borrowing and managing their loans even though non-bank financial institutions may offer a competitive loan program for them.