Is it legal to give friendly loan with interest?

Can I Charge Interest in a Friendly Loan Agreement?

In the world of business, friendly loan agreements between friends, investors, or business partners are not uncommon, even though most of us are not licensed moneylender. Often, these loans include an interest charge on the principal sum. But is it legal to charge interest on such loans?

In Malaysia, while moneylending is not outrightly prohibited, it becomes problematic if interest is charged and the lender is not a licensed moneylender. This could potentially violate the Moneylenders Act 1951 (MA).

Key Provisions of the Moneylenders Act 1951:

• Section 5: No one shall carry on the business of moneylending unless licensed under the Act.
• Section 16: Any moneylending agreement by an unlicensed moneylender is unenforceable.
• Section 2: “Moneylender” means a person who carries on or advertises or holds himself out as carrying on the business of moneylending.
• Section 2: “Moneylending” means lending money at interest, with or without security, by a moneylender to a borrower.

Consequences of Illegal Moneylending

Violating Section 5 of the Act can result in severe consequences, including the inability to recover the principal sum and any associated losses. Courts will not assist illegal moneylending activities in recovering any principal sum, as doing so would promote unlicensed moneylending and harm public interest. Unlicensed moneylenders are deprived of their illegal “principal loan sums,” interest, and any ill-gotten gains from their unlawful business.

Rebuttable Presumption under Section 10OA

So the issue is what kind of moneylending would amount to carrying the business of moneylending? Previously, proving business of moneylending required evidence of continuous or repeated transactions, and it was the borrower’s burden to prove in defence. However, the new provision of Section 10OA has shifted burden of proof to lender, it provides that in any proceedings against any person where it is alleged that such person is a moneylender, proof of a single loan at interest made by such person shall raise a rebuttable presumption that such person is carrying on the business of moneylending.

The judiciary explored various factors to interpret and determine whether the rebuttable presumption of moneylending could be countered. These factors included whether the lending was a one-off activity and whether the interest rate charged was excessive.

However, in 2023, the Federal Court took a strong stance against unlicensed moneylending in the case of Triple Zest Trading & Suppliers & Ors v Applied Business Technologies Sdn Bhd [2023] 6 MLJ 818, holding that:

“[56] To successfully rebut the presumption under s 10OA of the MA51, the respondent must prove on the balance of probabilities that by entering into the loan agreement with the appellants, it was not engaging in an act of ‘lending of money at interest, with or without security, by a moneylender to a borrower’, which is the meaning ascribed to the word ‘moneylending’ by s 2 of the MA51.”

This implies that any form of moneylending that involves any return may find difficult to escape the presumption of being classified as a moneylending business under the Act. It is crucial to understand that the definition of “interest” is broad, encompassing any amount exceeding the principal paid or payable to a moneylender, regardless of the terminology used. In the case of Triple Zest Trading, the lender had lent a loan sum of RM800,000.00 with a promised return of another RM800,000.00 in addition to the loan sum, this is a 100% interest. This is one of the reasons which has led the court into holding that the presumption has failed to be rebutted.

Broader Implications 

The definition of “interest” under the Act is broad, encompassing any amount in excess of the principal, regardless of how it is named. This wide definition means many forms of return on loans may fall under the presumption of moneylending business.

Courts look at the substance of the agreement rather than its label. Various agreements, such as sales and purchase agreements or investment contracts with promised returns, can be considered moneylending in disguise. For instance:

• Lee Kuang Gen v Tan Sri Dato’ Seri Dr M Mahadevan: A sale of gold agreement was held to be a moneylending agreement in disguise.
• Azman bin Ibrahim v Aminah bt Muslim & Ors: An investment agreement with a promised return was also held to be a moneylending agreement in disguise.

While the presumption under Section 10OA is rebuttable, the burden of proof lies with the lender to demonstrate that the loan does not constitute moneylending as a moneylender under the Act. Therefore, when offering a friendly loan:

• Avoid Excessive Interest: Do not impose exorbitant interest rates.
• No Profit Expectation: Do not provide loans with the expectation of high returns.
• Transparent Agreements: Clearly document all terms and ensure they comply with legal standards.
• Seek Legal Advice: Consult with a legal professional to ensure the loan agreement is lawful and enforceable.

In any event, it remains to be seen as to how the judicial interpretation of Section 10OA will develop. 

Author: Patrick Tan, Partner the firm

patrick@tnhlaw.com.my

Disclaimer:

This article is intended for informational purposes only and does not constitute legal advice. Every situation is unique, and specific legal advice should be sought based on the particular circumstances. Readers are encouraged to contact us at Tang Hong & Lock if they require legal advice or have any questions regarding the content of this article.