For many, when they hear about a licensed money lender in Singapore, they think of people who charge outrageously high interest rates and prey on the weak and needy.
But in reality, licensed money lenders were never meant to be sharks or wolves preying on Singaporeans.
The laws that govern them are supposed to be there for a good reason. As outlined in Licensing of Moneylending Businesses Act, Singapore, the objective behind licensing is to set up specific criteria which must be met before someone can get a license to carry out a money lending business.
According to the Act, this includes prohibiting moneylenders from charging “excessive interest” to ensure that licensed moneylenders do not engage in excessive interest rates.
How Do Money Lending Laws Work?
1. The Moneylending Act and Licensed Moneylenders
The Act sets up criteria for licensing, which include:
a) The minimum amount of capital must be deposited with the Registry of Moneylenders as security against loans (currently, it is $30,000 as set by the Registry).
b) An applicant is required to show a certain level of ‘financial standing.’ It includes his track record in business, ability to repay debts, past involvement in money lending activities, etc.
c) A clear criminal background check before license approval.
d) An ongoing requirement for all licensed moneylenders to have their records available at the Registry for inspection.
e) Other ongoing requirements, including proper account keeping procedures, maintenance of lists of borrowers, etc.
2. The Moneylenders Rules
The Act also sets up the “Moneylenders Rules,” which outline more requirements for money lending. Some rules apply specifically to licensed moneylenders, such as:
a) Licensed moneylenders must not charge interest exceeding $21/day per $100 loaned (Note: $ = SGD). It is usually referred to as the Maximum Interest Rate.
b) Licensed moneylenders can only lend a maximum of 4 times their paid-up capital and unencumbered assets. For example, if you have deposited $30,000 with your licensee, you may take out loans totalling no more than $120,000. If you have deposited an additional $20,000 with your licensee, you may take out loans totalling no more than $80,000.
c) Loans are generally for periods of not more than six months.
d) A licensed money lender Singapore must put up a minimum deposit of 2 per cent interest on any loan amount given to an individual. For example, if you borrow $5,000 from a moneylender, he must pay you at least $5010 when the loan expires. This is usually referred to as the ‘cooling-off period.
A licensed moneylender lends someone $5,000 for six months at 3 per cent per month ($300/month). Since this is over the MIP rate of 21 per cent, the moneylender must pay the borrower at least 2 per cent interest annually. $5010 x 1.02 = $5022 (the minimum amount that must be paid back).
3. Civil and Criminal Penalties for Non-Compliance with Moneylending Laws
If a licensed moneylender does not meet licensing requirements or charges excessive interest rates, he can be fined up to $30,000 or jailed up to 3 years for each offence under the Act.
Licensed moneylenders are also liable on conviction to a fine of up to $10,000 for each count under the Moneylenders Rules. If convicted on more than one count, they can face an additional fine of up to $20,000 for each count. Unlicensed moneylending activities are also an offence under the Act punishable by a fine of up to $50,000 and imprisonment for three years.
What is Excessive Interest?
The amount of interest paid on loans determines whether it is excessive or not. The Registrar of Money Lenders (who administers the Act) will decide what interest rate amounts to “excessive” interest based on prevailing economic conditions.
Currently, a licensed money lender in Singapore can charge an annualized credit fee in line with the MIP (Maximum Interest Rate). As you can see from Rule 1(a), this maximum loan chargeable in one day must not exceed 21 per cent for each $100 loaned.
This is commonly called “21 per cent per month” since it calculates to an annualized rate of 42 per cent.
Therefore, you can still see advertisements for up to 42 per cent interest rates on loans. However, it must be noted that this is not the proper amount of interest charged since it includes other fees such as loan processing fees and late payment fees, which effectively reduces the Total Cost of Borrowing (TCOB); that is, you pay much lower than 42 per cent.
The MIP rate should frequently change to reflect current market conditions according to the Registrar of Moneylenders. Rates may also vary depending on how much a borrower owes or his ability to pay back.