Malaysia debates allowing cash-strapped citizens to use pension funds as loan backstop

  • PM Anwar says the loan option allows quick financing without members dipping into their pensions but analysts say loan applicants already face high default risk
  • Anwar has been under pressure for a fresh round of withdrawals from the pension fund, after his predecessors allowed four rounds of withdrawals in 2020-2022

Malaysia’s government needs to carefully weigh the risks of allowing members of a national private pension fund to use their savings as “support” to secure personal loans, experts have said, as Prime Minister Anwar Ibrahim pushes ahead with the plan to help households in financial distress from the Covid-19 pandemic.

Anwar this week defended the move, saying that it was one of several measures that the government is considering to help households get back on their feet without allowing further withdrawals from the Employees Provident Fund (EPF), as had been done during the pandemic years.

The prime minister on Tuesday told parliament that the loan option presents an avenue for quick financing without members needing to dip into their pension, with the assurance that they will continue to earn interest from their savings and that it cannot be seized by banks to recoup the loan in case of a default.

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“The biggest risk is that many of the loan applicants may already be facing an income crunch to pay for existing loans, hence there’s a high default risk,” said Hafidzi Razali, associate director with political risk consultancy BowerGroupAsia.

Anwar, who became prime minister in November after a deeply divisive national election, has been under pressure from the opposition and public for a fresh round of withdrawals from the pension fund as households grapple with persistent inflation crimping income recovery from two years of strict pandemic curbs that all but halted the economy.

His predecessors allowed four rounds of withdrawals between 2020 and 2022, resulting in an outflow of 145.5 billion ringgit (US$32.8 billion) at the end of 2022, according to government data.

The EPF has warned that further withdrawals could precipitate a pension crisis. The fund’s data showed the median savings of members in the B40 category – which covers the bottom 40 per cent income earners – was just 785 ringgit as of December 31, after the withdrawals in 2020 to 2022.

By comparison, median savings among the top 20 per cent income earners stood at 159,430 ringgit, still far short of the 600,000 ringgit in savings the fund estimates is needed for a comfortable retirement.

“We cannot allow more withdrawals. The base has got too low for some groups,” EPF chief executive Amir Hamzah Azizan told media when presenting the fund’s 2022 performance and dividend announcement earlier this month.

The EPF is expected to unveil details of the loan plan on Friday, according to an official with the finance ministry that Anwar also heads.

BowerGroupAsia’s Hafidzi, however, called the loan scheme a “mismatch of solution” as the EPF already provides flexibility for members to use part of their savings to deal with specific living needs such as their children’s education, housing and medical costs.

“Collateralising this safety net puts those in financial distress in a likely scenario of ‘losing it all’, especially if the loans secured are primarily used to cover existing liabilities,” he said.

The government also has other programmes such as welfare aid for those with disabilities and financial help for Muslims – who account for more than 60 per cent of Malaysia’s 32 million population – through the zakat or tithe programme run by state Islamic authorities, according to Bank Muamalat chief economist Mohd Afzanizam Abdul Rashid.

The long-term key to helping households pull themselves out of financial distress is to educate them on financial literacy, said Mohd Afzanizam.

“The way I see it, the idea [behind the EPF loan scheme] is to allow some form of flexibility for those who are having financial difficulties to get better access to financing from the banks,” he told This Week in Asia.

“In that sense, the EPF members would need to understand how the facility can help them and the risk associated with it such as in the event of loan default. Therefore, the financial literacy among the EPF members would need to be beefed up so that they really understand the product feature.”

South China Morning Post