Malaysia to review controversial proposal to let property developers lend to buyers

Private properties in Nusajaya, Iskandar Malaysia.
Private properties in Nusajaya, Iskandar Malaysia. PHOTO: ST FILE

KUALA LUMPUR (REUTERS) - Malaysia is reviewing a move to allow property developers to lend to buyers, after concerns that it may cause a subprime mortgage crisis in a country that already has one of Asia's highest household debt burdens.

Malaysia's cabinet on Wednesday (Sept 14) asked housing minister Noh Omar to review and improve the home financing policy proposed on Sept 8, that would give property developers money-lending licenses.

Mr Noh described the move as a "win-win situation for both developers and house buyers." Home buyers would have an option to borrow from builders, who the minister said can charge interest rates of up to 18 per cent.

The proposal was criticized by bankers, economists and industrialists who feared it would worsen Malaysia's financial woes and add to its alarmingly high household debt.

"More unregulated lenders and subprime borrowers will compound the risk of a debt crisis," Nazir Razak, chairman of CIMB Group, said in an Instagram post on Saturday, adding that it was a "dangerous idea."

The practice of subprime lending - providing loans to those with poor credit history at a higher than normal interest rate - eventually led to the 2008 global financial crisis.

In Malaysia, the housing-loan rejection rate by banks is near a record high, meaning hundreds of thousands of would-be buyers could potentially turn to developers for financing.

Household debt in Malaysia as a percentage of gross domestic product was at around 89 per cent - one of the highest in Asia.

The controversial home financing policy proposal comes at a time when Southeast Asia's third biggest economy is hurting from weak oil prices. Malaysia's economic growth slowed for a fifth straight quarter in the June quarter.

Central bank data shows banks' rejection rate for loan applications for residential property purchases hit an all-time high of 61.7 per cent in January. In July, the rejection rate was 57.3 per cent.

"The scheme is likely to encourage unregulated lending to households with weak financial profiles, and could undermine the strength of the financial system if not implemented prudently," Fitch credit rating agency said in a statement on Thursday (Sept 15), adding it could increase risks associated with rising household debt.

If the financing model takes off, it could boost the Malaysian property market, as financing issues are largely responsible for the rising number of unsold units.

Developers sold 39 per cent of new units launched in the first half of this year, down from 52 per cent in the second half of 2015, according Real Estate and Housing Developers Association (REHDA) data released on Wednesday.

"The problem is (buyers) don't have the capacity to find the margin of financing, " REHDA's president Fateh Iskandar Mohamed Mansor said.

He said Malaysian banks typically offer to fund 75-80 per cent of the purchase and developers could use the new money-lending license to offer to finance the rest.

Mah Sing Group Bhd, a leading property developer, is reviewing the feasibility of money-lending services though it has not had any requests from customers, Group Managing Director Leong Hoy Kum said in an emailed statement.