This article first appeared in The Edge Malaysia Weekly on April 24, 2023 - April 30, 2023
MUCH eye-rolling took place when Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim announced in early March that retirement savings with the Employees Provident Fund (EPF) can be used as security for personal loans because interest rates typically charged on personal loans are way above EPF dividend rates. Many saw the announcement as giving in to political pressure, negating the positives of halting pandemic-type premature withdrawals in February this year.
To be sure, there is genuine concern over high household debt levels and very low retirement savings among most EPF members, especially after the massive withdrawals via four schemes between April 2020 and May 2022 totalling RM145.5 billion, or nearly 15% of assets managed by the EPF. The latter also had an impact on the local equities and bond markets. Malaysia was probably one of the last countries, if not the last, in the world, that still allowed pandemic-type withdrawals of statutory retirement savings in April 2022 — several months after the full reopening of the economy post-Covid-19.
With many politicians eager to win support for the upcoming six state elections, which pundits expect to take place in July, the brouhaha that ensued is not entirely unexpected. Among other things, there was the coincidental photo opportunity between a taxi driver (who walked more than 300km from Johor to Istana Negara during the fasting month) and an opposition Member of Parliament (MP), along with representatives of three fringe non-governmental organisations (NGOs). That same day (April 3), opposition MPs staged a walkout from the Dewan Rakyat after a motion to debate the issue of allowing more EPF withdrawals was rejected.
We weigh the facts to ascertain the costs of allowing special loans to be taken against the EPF Account 2 savings from five perspectives: EPF members who borrow, the banks, the capital market as well as the EPF and dividends.
Concession interest rates
Interest rates on personal loans are typically higher than what is charged for a home mortgage or vehicle hire purchase because they are often not backed by an asset or collateral, thus making those loans riskier for the lender.
For loans supported by one’s retirement savings with the EPF, concession, or lower than market, interest rates are provided under the EPF Account 2 Support Facility (FSA2), allowing EPF members to apply for a one-time personal loan of RM3,000 to RM50,000 for a maximum tenure of 10 years.
According to the EPF’s statement dated April 3, interest rates (conventional) or profit rates (Islamic) charged by participating banks for these EPF savings-backed loans, or FSA2, “will range from 4% to 5%, lower and more affordable than the current market rate of 8% to 15%”. Applications will remain open for one year through April 2024.
If the borrower defaults, banks will be paid by the EPF from Account 2 only when he or she reaches the age of 50 to 55, according to the member’s choice of withdrawal age, as stipulated in the EPF Act 1951. (More later on those who do not pay the loans.)
So far, the FSA2 facility is offered by only two banks: MBSB Bank Bhd (from April 7) and the Ministry of Finance-controlled Bank Simpanan Nasional Bhd (BSN) (from April 14). The EPF, which controls 65.87% of MBSB, said in a statement dated April 3 that it “may consider adding more participating banks in the future”.
Both MBSB’s Ihsan-i and BSN MyRinggit Insan-i FSA2 loans currently charge a profit rate of 4.5%, being 1.75% above the standard base rate (SBR) that is benchmarked against the central bank’s overnight policy rate (OPR), which is currently at 2.75%, according to information on the bank’s respective websites.
For now, only EPF members aged 40 to 55 with at least RM3,000 savings with the EPF may apply for the FSA2 (Phase 1) while Phase 2 for members under age 40 “will be announced in due course”.
Members who fully settle their personal financing can tell the EPF to rescind the advance notice for age 50 or 55 withdrawal, the EPF says, adding that it is up to the banks to do financing assessment and credit framework for the FSA2 personal loans.
RM722 mil eligible loans within a week
Justified or otherwise, the taxi driver who walked more than 300km is not alone in wanting more EPF withdrawals, going by the applications that have come in for the FSA2 within the first week.
At least 27,705, or 47%, of the 59,230 EPF members who have applied for the FSA2 as at April 11, were eligible for the facility that began accepting applications on April 7 this year, Deputy Finance Minister Datuk Seri Ahmad Maslan reportedly told the media on April 12. He did not specifically say whether ineligible applications were by members below age 40 or whether they had been rejected because of a poor credit score or lack of EPF Account 2 balance.
By April 14, a total of 74,392 applications had been received under MBSB Bank’s Ihsan-i FSA2 facility, of which 34,643 application, or 47%, were eligible for RM722 million loans, the EPF said in a statement dated April 15.
While RM722 million in personal loans being approved within a week is no small amount, the demand is significantly lower than the “special withdrawals of up to RM10,000” in April 2022 that resulted in RM44.6 billion withdrawn from the EPF within just one month, EPF data shows.
Because savings stay in the EPF members account and are eligible for dividend payments throughout the FSA2 loan tenure, members should still be better off in the longer term than they would have been if allowed to withdraw the money from the EPF today — especially if EPF dividend rates are higher than the profit rate charged on loans, our calculations show.
This is true even if the OPR goes up by one percentage point. For one, the interest on FSA2 loans is charged on a reduced balance once the principal payments kick in from the second year (see “What if the OPR goes up on EPF savings-backed FSA2 loans?”).
Our calculations also show those taking the shortest loan tenure of two years would be more dependent on EPF dividends being significantly higher to be better off during the loan period, as it takes time for compounding power to work on savings. Also, there are fees associated with the loan (including mandatory takaful contribution at a maximum 2.75% of the financing amount that will be deducted from the amount disbursed), even though interest on the loan is counted on a reducing balance. That said, one can still argue that money staying in the EPF would continue to earn dividends after the short-term loan has been paid off.
No hit on EPF dividend, bond market
As no money is to leave the EPF until the members reach at least the age of 50 or 55 — even if the borrowed fails to service the loan — the facility should not affect the EPF’s normal operations or investment decisions to grow members’ retirement savings.
Unlike how huge pandemic-related withdrawals caused the EPF to see rare net withdrawals — more money going out than coming in — in both 2021 and 2022, forcing the EPF to prematurely take profit on certain investments locally and from abroad, the FSA2 facilities would not be a drag on the local capital and bond markets.
In an April 10 note, Winson Phoon, head of fixed income research at Maybank Investment Banking Group in Singapore, writes: “Previously, we thought the use of Account 2 as collateral would cause some liquidity drain on the EPF when [FSA2] loans default, but following the details announced thus far, we now believe there will be no impact because the entry barrier is higher than the previous withdrawal schemes; applications require proof of income to support repayment, and the take-up rate should be lower.
“More importantly, the use of EPF Account 2 as collateral is implemented through the signing of an advance notice of the ‘age 50-54/55 withdrawal’ [form], where the collateralised amount of EPF Account 2 will continue to stay and accrue dividends at EPF until the members reach 50 to 55 years old, then only be transferred to the banks to settle any outstanding loan amount. While not explicitly stated in the EPF press release, we believe this means that the collateralised amount will remain [with] the EPF even in the event of default and cash outflows will occur only when the members reach ages 50 to 55, which are the currently permissible withdrawals under the EPF Act.”
To quote the EPF, the FSA2 facility “offers a practical solution for EPF members who are facing temporary liquidity issues by providing cash flow through personal financing but with minimal impact [on] their retirement savings”. The EPF adds that savings will remain intact in EPF Account 2 and continue to receive annual EPF dividend, “[thus] allowing members to take advantage of the power of compounding their retirement nest egg, while still addressing their short-term financial needs”.
Ideally, the EPF member services the loans provided to them at lower than market rates for personal financing, while not affecting their retirement savings being grown by the EPF.
Borrowers should service loans
Ahmad Maslan told The Edge on April 15 that borrowers who take up the FSA2 facility need to service their loans, as those who default would risk being blacklisted like any other borrower.
That is consistent with words boxed and highlighted in bold in the product disclosure sheet for MBSB’s Ihsan-i FSA2 loan: “Recovery action may be taken against you if you fail to pay the monthly instalments of your personal financing-i facility.”
Disclosure sheets for the BSN MyRinggit Insan-i FSA2 facility state that customer’s financial or credit record in the Central Credit Reference Information System (CCRIS) and Credit Tip-Off Service (CTOS) report will be affected if he or she fails to pay monthly instalments based on the set payment schedule. This could cause problems in getting loans in future.
EPF CEO Datuk Seri Amir Hamzah also reminded members who take up the FSA2 facility to service the monthly repayments themselves.
“We understand that there has been confusion among some EPF members regarding the need for monthly repayments towards the personal loans. We want to clarify that this facility is targeted towards EPF members who have savings in Account 2 and are supported by a reasonable income to ensure they can afford the personal financing and committed to the monthly repayments without compromising their retirement income adequacy and security.
“It is essential to note that the monthly repayments [by borrowers] are necessary to ensure that the loan is repaid on time,” Amir said in a statement dated April 15, describing the FSA2 as one that would “help members with temporary liquidity issues to obtain cash flow through personal financing but without causing serious impact to their retirement savings”.
At the time of writing, both MBSB and BSN had yet to revert on questions from The Edge seeking clarity on whether interest would be charged on late or non-repayment and how that would be calculated. It is also not immediately certain whether the concession interest rates for ther FSA2 are based purely on the EPF Account 2 balance or whether there are back-to-back arrangements with the government to lower their cost of funds.
If treated the same way as other loans, borrowers who do not service the FSA2 loans would incur late interest of 1% a year on the overdue instalments (not compounded).
Personal loans surge?
Whether the FSA2 interest rates should be even lower than market rates, as risk is limited, given that the banks will be paid eventually, if not on schedule, is a different debate altogether, as there could be a causality effect on the banking system — something that would hurt all parties if banks are reluctant to lend.
The FSA2 profit rate of Standard Base Rate (SBR) + 1.75% a year or 4.5% a year currently is, for instance, 130 basis points lower than the profit rate of SBR + 3.05% a year charged by another MBSB Islamic personal financing scheme called Mumtaz PF-i, according to data on its website.
With interest charged on personal loans typically being 8% to 15% a year, it is perhaps no surprise that EPF members are given only one year to apply for the FSA2 loans with concession rates and can make only a one-time application with one of the participating banks, even if the approved amount is below the RM50,000 limit.
It remains to be seen whether there would be a significant impact on personal financing being taken under FSA2 instead of at normal rates at other banks.
The RM722 million in FSA2 personal loans being approved within a week at MBSB alone is sizeable, considering that total personal loans approved by the local banking system ranged from RM1.01 billion to RM2.21 billion a month between July 2021 and February 2023, while total personal loans applied for in the same period ranged from RM3.61 billion to RM6.37 billion a month, according to Bank Negara Malaysia data (see chart).
What is clear is that these EPF savings-backed loans are not meant for the poorest among private sector wage earners, since many have a balance of less than RM3,000 in their EPF Account 2 after the pandemic-time withdrawals. The government, which has pledged inclusive growth, should be looking at helping them via social services or targeted cash transfers with avenues to graduate from them, if not already.
It should continue to resist incessant calls for more EPF withdrawals, looking instead at options that strike a balance between helping the people today and ensuring they have adequate retirement savings down the road.
What if the OPR goes up on EPF savings-backed FSA2 loans?
Members of the Employees Provident Fund (EPF) who choose to take up personal loans with lower than market interest rates provided under the EPF Account 2 Support Facility (FSA2) should still see a net benefit compared to if they had been allowed to withdraw the same amount prematurely from their retirement kitty, even if interest rates increase by a full percentage point.
Both MBSB Bank Bhd’s Ihsan-i and Bank Simpanan Nasional’s BSN MyRinggit Insan-i FSA2 loans currently charge a profit rate of 4.5%, being 1.75% above the standard base rate (SBR) that is benchmarked against the central bank’s overnight policy rate (OPR), which is currently at 2.75%, according to information on the banks’ respective websites.
The monthly repayment is low in the first year as only the interest needs to be serviced, before principal repayments kick in from the 13th month, according product disclosures for MBSB’s Ihsan-i facility (SBR + 1.75%) that caps profit rates at 15% (see Table 1).
At the current OPR of 2.75%, the FSA2 profit rate of 4.5% (SBR + 1.75%) means that someone who borrows the maximum RM50,000 over 10 years, for instance, would only need to pay RM187.50 a month in the first year before the monthly repayment jumps to RM564 from the 13th month onwards.
Monthly repayments for that same RM50,000 ten-year loan should only go up by about RM10 in the first 12 months to RM197.92 per month if Bank Negara Malaysia were to raise its OPR by another 25 basis points to 3% this year, a back-of-the-envelope calculation shows.
In total, an EPF member would have to pay RM63,149 over 10 years for that RM50,000 loan, incurring RM13,149 interest at a 4.5% profit rate. But he or she would still have a net benefit given that the RM50,000 in EPF savings today would have grown above that repayment amount by the end of year seven and grow to RM74,012 — or RM10,863 more than the amount paid to service the FSA2 loan — even if the EPF only declares a dividend of 4% per year throughout the 10 years, back-of-the-envelope workings show.
The difference goes up to RM18,296 over 10 years if the EPF pays at least 5% dividend per year every year over the decade to grow that RM50,000 to RM81,445 at the end of the 10th year. These gains are reduced slightly due to the RM1,375 one-time takaful fee (2.75% of the loan) deducted from the disbursed amount but remain significant (see Table 2).
This is true even if the OPR (and SBR) goes up by a full percentage point to 3.75% to increase the profit rate on the FSA2 personal loans to 5.5% — even if the EPF only declares a dividend of 4% per annum — due to the compounding power of savings set aside over time.
A 5.5% profit rate would increase the monthly personal loan repayment by about RM42 in the first 12 months to RM229.17 per month and raise the amount due by about RM24 a month to RM588 per month from the 13th month onwards. In total, the EPF member would have to pay RM66,254 over 10 years for that RM50,000 borrowed, incurring RM16,254 interest at a 5.5% profit rate.
For the shortest FSA2 loan tenure of two years, however, borrowers could be worse off initially if EPF dividends are not significantly above the profit rate charged over the loan tenure due to fees associated with the loans, our back-of-the-envelope calculations show.
An EPF member who takes up the minimum loan of RM3,000 but chooses a repayment period of three years (instead of two years) should see a small positive savings balance versus the repayment amount.
Even at a dividend rate of 4% to 4.5% per year, savings of RM3,000 with the EPF would grow to between RM3,375 and RM3,423 by the end of year three. That is just above the total repayment of RM3,279 in total over the three years (RM3,361.50, including one-time maximum 2.75% takaful fees) for an EPF member who borrows RM3,000 at a 4.5% profit rate under FSA2 — paying RM11.25 a month for the first 12 months and RM131 per month from the 13th to 36th month.
If the RM3,000 is borrowed over the maximum 10 years, he or she would be repaying RM3,731 over 10 years at a 4.5% profit rate (RM3,907 at a profit rate of 5.5%) — lower than the RM4,441 to RM4,659 that the same RM3,000 would have grown to even if the EPF only pays 4% or 4.5% dividend a year over the 10 years.
All that assumes that the FSA2 loans are serviced as per the agreed repayment schedule.
Notwithstanding the positive difference in savings with the EPF, after deducting interest payments on FSA2 personal loans secured with one’s own EPF Account 2 savings at lower than market interest rates, there is still a great need to expand the social safety net in preparation for an ageing society and ensure that more EPF members have enough savings to retire.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's App Store and Android's Google Play.