Overview
Due to the upward trend in inflation, many individuals are turning to borrowing money as a means to meet their financial needs. In such circumstances, it is not uncommon for friends or family members to approach you for a friendly loan. However, it is essential to understand the risks associated with such agreements if you are not a licensed money lender.
First and foremost, it is crucial to recognize that if you are not a licensed money lender and your friendly loan falls within the definition of a 'moneylending transaction' as outlined in the Moneylenders Act 1951, you may be in violation of the law. This means that not only could you potentially face criminal charges, but you may also encounter difficulties in recovering the loan through civil courts, depending on the specific circumstances of your case.
To understand whether your friendly loan will be caught under the Moneylenders Act 1951, we first need to understand the definition of moneylending.
What is moneylending?
The Moneylenders Act 1951 defines ‘moneylending’ as ‘the lending of money at interest, with or without security, by a moneylender to a borrower’.
An ‘interest’ is defined as “….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.”
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”.
At this juncture, it is important to note that the Act is intended to apply to moneylenders exclusively and not to moneylending transactions or transactions per se.
Contract by unlicensed moneylender unenforceable
Under the Act, any moneylending agreement by an unlicensed moneylender will not be enforceable. This means that if you engage in lending money as an unlicensed moneylender and have entered into a friendly loan arrangement with a fixed interest, enforcing your agreement could pose challenges. Depending on the specific circumstances of the case, the court has the discretion to either require the repayment of the original loan amount without any associated interest or deny the return of the principal sum to the lender.
Presumption under the Moneylenders Act 1951
Section 10OA states:
“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.”
Consequently, when a loan involves any form of interest, even if it is just a single instance, the responsibility of providing evidence to demonstrate that the lender is not engaged in the moneylending business will fall upon the lender.
In assessing whether an individual is involved in the business of moneylending, the courts will examine several factors to make their determination which includes but not limited to the following;
a) Continuity or repetition of similar transactions
If there is a record of previous comparable transactions by the lender, the presence of such a history will increase the probability of being deemed as conducting the business of moneylending.
b) The rate of interest imposed
The courts are more inclined to view a transaction as moneylending rather than a friendly loan when the lender imposes a higher and more unjustifiable interest rate.
In the context of a one-off transaction for a friendly loan, the interest rates established by banks, which typically adhere to a simple interest structure, can serve as a reasonable benchmark for determining an acceptable interest rate. However, it is crucial to exercise caution and avoid engaging in multiple transactions that could potentially fall under the circumstances described in point (a) mentioned earlier.
c) The purpose of the agreement
In certain cases, individuals may rely on the principle of freedom of contract, which allows parties to establish contractual obligations as long as they are not prohibited by the Act. However, once a court determines that a transaction qualifies as moneylending and the lender lacks the necessary license to lend with interest, the entire agreement, regardless of its structure, form or disguise, becomes an illegal moneylending arrangement under the Act. Consequently, such an agreement is unenforceable in a court of law.
Effects of breaching the Moneylenders Act 1951
In the event that a loan agreement is determined to be based on an illegal moneylending transaction, it will be rendered null and unenforceable under the law. The courts have the discretion to decide whether or not to order the repayment of the loan to the lender. If it is established that both parties were aware of the illegality, the courts may not require the return of the loan.
Furthermore, the lender may face prosecution for an offense under the Act wherein the violators are subject to a fine ranging from RM250,000 to RM1,000,000.00 and imprisonment for a maximum of 5 years, or both.
Conclusion
When you lend money to someone with interest, it creates an automatic assumption that you are engaged in the business of moneylending. In such cases, the costs associated with court fees and legal fees during the litigation process can be burdensome. If you are contemplating lending a significant amount of money to someone with chargeable interest, it is important to be aware that recovering it may not be a straightforward process.
This article has been produced for general information purposes and further advice should be sought from a professional advisor.
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