It is not uncommon that parties have had to resort to court intervention when it comes to money-lending transactions. When is a loan considered a friendly loan, which is not caught within the definition of the “business of moneylending” under the Moneylenders Act 1951 (“Moneylenders Act”) and when is it considered illegal, as it is entered in contravention to the Act?
The first point would be to look at section 5(1) of the Moneylenders Act which provides:
“(1) No person shall carry on or advertise or announce himself or hold himself out in any way as carrying on the business of moneylending unless he is licensed under this Act.”
Further to the above section, section 2 of the Moneylenders Act sets out a series of definitions, which include the definition of “money-lending” itself:
““moneylending” means the lending of money at interest, with or without security, by a moneylender to a borrower”
“Interest” is defined under the same section as:
““interest” does not include any sum lawfully charged in accordance with this Act by a moneylender for or on account of stamp duties, fees payable by law and legal costs but, save as aforesaid, 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”
The law also requires that the moneylending agreement be in writing as it is clear in its definition under the Act, as follows:
““moneylending agreement” means an agreement made in writing between a moneylender and a borrower for the repayment, in lump sum or instalments, of money borrowed by the borrower from the moneylender”
Even for a licensed moneylender, in the absence of a written agreement on the terms of the moneylending, it would be unenforceable pursuant to section 16(1) of the Moneylenders Act:
“No moneylending agreement shall be enforceable unless the agreement has been signed by all the parties to the agreement and a copy of the agreement duly stamped is delivered to the borrower by the licensee before the money is lent.”
Picture this scenario :–
B is not a licensed moneylender under the Moneylenders Act. B lends you a sum of RM 500,000 but requires you to pay RM 800,000 (which is higher than the sum lent). It can be implied that the transaction carried out by B would fall within the definition of moneylending under the Moneylenders Act and consequently, B is in contravention of the Act for carrying on the business of moneylending without license.
A friendly loan is to be contrasted from the normal borrowing from a moneylender. Most importantly, the difference is that there shall be no interest imposed on the loan (see the Court of Appeal in Tan Aik Teck v Tang Soon Chye [2007] 6 MLJ 97).
At this juncture, it also pertinent to note that proof of a single loan at interest is sufficient to raise the presumption that one is in the business of moneylending pursuant to section 10OA of the Moneylenders Act, which 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.”
The burden will then shift to the moneylender to show or adduce evidence to rebut the presumption that it is not in the business of moneylending.
Returning to the earlier scenario, such a loan agreement would be unenforceable according to section 15 of the Moneylenders Act. For ease of reference, section 15 states:
“No moneylending agreement in respect of money lent after the coming into force of this Act by an unlicensed moneylender shall be enforceable.”
As a concluding remark, in the words of the Court of Appeal in Mahmood Ooyub v Li Chee Long [2020] 1 LNS 660, an unlicensed moneylender cannot under the guise of not being covered under the Moneylenders Act take shelter in the freedom of contract in that parties can create contractual obligations not prohibited by the Act.
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