Friday 02 Jun 2023
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This article first appeared in Wealth, The Edge Malaysia Weekly on May 30, 2022 - June 5, 2022

Within just one month, four digital personal loan solutions were introduced by financial institutions and financial technology (fintech) start-ups. Getting a loan no longer entails queuing up at bank branches and filling up physical forms. It takes only several minutes and a few taps on your smartphone. 

On March 3, BigPay — a venture company of Capital A Bhd — fired the first shot by announcing the launch of BigPay Later, a digital loan solution aimed at BigPay users. On March 15, Malayan Banking Bhd launched its Personal Digital Financing solution, which can be applied for via the Maybank2u website and MAE mobile application. 

Three days later, Grab Financial Group Malaysia and Sedania As Salam Capital Sdn Bhd (SASC) launched Grab Cash Financing-i, a shariah-compliant financing product accessible to Grab drivers and delivery partners. The Grab Cash Financing-i solution is powered by SASC's GoHalal Financing Programme which ensures all financial activities and operations are compliant with Shariah principles and practices. 

The last of the four announcements came on April 1, when Touch ’n Go (TNG) Group launched GOpinjam, which allows its e-wallet users to apply for personal loans. 

Industry players with whom Wealth spoke to point out that the digital personal loan trend, enabled by the internet and technological advancements, is here to stay. The solution will gain in popularity as it offers instant loan approval within minutes compared with traditional personal loans that could take days.

The wide reach of mobile apps is another factor that will accelerate the adoption of digital personal financing solutions. For instance, BigPay had 1.2 million transacting users as at Oct 9, 2020, while MAE had 1.8 million users. TNG’s e-wallet had garnered 15 million users as at August 2021. 

"Super app providers already have profiles of their clients such as riders and delivery partners. Suppose you are a gig worker for Grab, your credit scoring criteria changes tremendously [compared with those of traditional financial institutions], whereby your income flows can be judged based on your performance data that is already available on our platform.” - Nisa

These personal loans are aimed at different target groups. The younger generation, aged 35 and below, are BigPay Later’s main customers as it leverages the BigPay app’s user base. 

BigPay CEO Salim Dhanani says BigPay Later wants to extend financial assistance and extra capital to the younger generation to help them jump-start their careers. Having some debt may not be a bad thing for them, he adds. 

“Debt can be good. We want it to be an enabler to help the younger generation achieve their goals. Some need access to credit to enhance their skills by attending a training course. Others could need a scooter to help them get a job,” he explains. 

In its email response to Wealth, Maybank says it hopes its digital personal loan offers are picked up by customers who need instant financial assistance during emergencies. “As the funds for personal loan/financing can be intended for immediate and urgent use such as medical emergencies, we made the application process user-friendly and accessible digitally so that customers can draw funds as soon as possible.” 

Gig workers who may not have a credit history or score to take out personal loans directly from banks will form an integral part of the digital personal financing industry. SASC CEO Nisa Ismail says the Grab Cash Financing-i can support gig workers who need financial assistance, especially during the ongoing pandemic. 

She says super app providers such as Grab have profiled their riders and delivery partners to understand their incomes and work performance, among others, using proprietary data. This is then used to develop an alternative credit scoring system to better assess the credit risks of the borrowers.

“Super app providers already have profiles of their clients such as riders and delivery partners. Suppose you are a gig worker for Grab, your credit scoring criteria changes tremendously [compared with those of traditional financial institutions], whereby your income flows can be judged based on your performance data that is already available on our platform,” says Nisa. 

She explains that Grab “gatekeeps” the applicant pool by only offering Grab Cash Financing-i to five-star-rated drivers who complete a specific number of working hours daily. These indicate that the drivers are active, have a steady income and pose low default risk. 

"If you cannot afford luxurious activities, you shouldn’t get a loan for them in the first place. I am worried that consumers do not know how to calculate the loans’ interest accurately.” - Wong (Photo by Haris Hassan/The Edge)

Alternative credit scoring key to financial inclusion 

Industry players point out that alternative credit scoring systems, developed by each digital personal loan provider using its proprietary data, will play an increasingly important role in promoting financial inclusion by allowing financial institutions to extend personal loans to the broader public. 

An alternative credit scoring system allows digital personal loan providers to assess the credit risk of individuals without a sufficient credit history by using proprietary data points not adopted by traditional banks. This data can be their spending behaviour or income generated through specific online platforms or mobile apps. 

In general, people without sufficient credit history are lower-income earners living in rural areas who don’t have proper access to services provided by banks. They may not have a bank account or credit card that can help them build a credit history. 

Today, CCRIS (Central Credit Reference Information System) and CTOS reports are referred to by digital personal loan providers when assessing borrowers’ credit risk. These providers may also have their own alternative credit score model underpinned by proprietary data to better understand the financial health of the borrowers.

BigPay utilises proprietary data derived from its mobile app to assess the credit risk of its loan applicants. This data could include the spending behaviour of a BigPay app user. 

“We can understand some behavioural traits about them even if they haven’t taken out a loan before. We can still understand them and say ‘Well actually, we can lend to you. You are not necessarily high risk,” says Salim.

He adds that BigPay looks for any data points that can reduce the borrower’s risk and allow the company to provide the best interest rate possible to the loan applicant.

Such a focus on financial inclusion by digital personal loan providers aligns with one of the main goals outlined in the Financial Sector Blueprint 2022-2026. Announced by Bank Negara in January, the blueprint supports advanced digitalisation for financial service. It also believes digital financial products, such as digital personal loans underpinned by new data sharing arrangements and alternative credit score models, can improve the state of financial inclusion in the country.

"You should ask yourself two critical questions before taking out a loan: How much do I need? How much can I afford to pay monthly instalments? You have to be clear about your intention of borrowing.” - Keah

Loans to be extended prudently 

Yet, the abundance of digital personal loans is worrying some people in the market. Though in smaller amounts, these loans are provided much faster to more people than before. This could potentially cause the general public to chalk up too much debt. 

BigPay’s Salim admits that digital personal loans should be given out cautiously as the debt level of Malaysians in general is quite high. “We spoke to people when we were doing our user surveys, and there are segments of the population with a debt-service ratio (DSR) of as high as 90%. [We must] help people to borrow within their means and ensure that access to credit becomes an enabler for people, and not a burden,” he stresses. 

The adverse effects of digital personal loans are manifested when financial institutions approve loans at maximum capacity without looking into an applicant’s financial commitments in detail, he adds. 

SASC’s Nisa agrees, saying that financial institutions should be prudent in extending loans to applicants. They should also help lenders when they face challenges in repayments, including providing them with financial advice. 

A role that digital personal loan providers have been playing, which will be increasingly important moving forward, is that of a financial educator. They will have to help improve the financial literacy of the public and their clients, so they can better understand the various financial products. 

For instance, BigPay engages with the public by conducting quizzes on its mobile app and it will introduce more policies and features to educate its users, while SASC publishes a blog on financial management through its As-Sidq marketplace, which connects borrowers to shariah-compliant money lenders. 

Maybank Group has been conducting financial literacy conferences and workshops, and has set up [email protected] centres at universities across the country to provide banking facilities and financial advisory services to students on campus. 

However, TNG Group takes a different approach by collaborating with credit reporting agency CTOS Data Systems Sdn Bhd to provide complimentary MyCTOS credit reports to TNG e-wallet users and facilitate credit health self-checks in the community.


Borrow within your means

Despite the accessibility and convenience digital personal loans offer their target groups, two financial planners point out that a loan is still a loan. All the financial considerations for taking out a personal loan should be taken into account. 

Keah Eewen, a licensed financial planner at VKA Wealth Planners, says consumers should evaluate their cash flow and come up with a monthly budget to check whether it is necessary for them to get a digital personal loan. 

“You should ask yourself two critical questions: How much do I need? How much can I afford to pay in terms of monthly installments? You have to be clear about your intention of borrowing,” she says. 

Marshall Wong, a licensed financial planner at FA Advisory Sdn Bhd who goes by the moniker PlanNERD, emphasises that lavish spending, such as travelling or purchasing high-end items, should not be the reason for consumers to apply for digital personal loans. 

“If you cannot afford luxurious activities, you shouldn’t get a loan for them in the first place. I am worried that consumers do not know how to calculate the loans’ interest accurately,” he says. 

Some digital personal loan providers have expressed their intention to offer such loans in small amounts — at as low as RM100 — to those who require cash during emergencies. However, Keah opposes the notion and believes that one should re-evaluate their emergency funds if this happens. “Taking out a personal loan for emergencies is not the best solution over the long term,” she points out. 

Wong also expresses his concerns about people taking on digital personal loans for emergencies due to the country’s low level of financial literacy. “It can be dangerous for people who do not know what they are getting into when they are desperately in need of financial help.”

Both financial planners emphasise that people should always borrow within their means. “Digital personal loans will be widely available on many platforms, but one should never fall for marketing gimmicks. When managing money, we should be sensible and practical, and always review our financial situation,” says Keah.

“Also, all loans may look the same, but consumers have to pay greater attention to the details before signing the agreement.”

Keah and Wong remind consumers to be mindful of the effective interest rate per annum of these digital personal loans, which is generally higher than that of traditional personal loan products, as well as their tenure.

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