This article first appeared in The Edge Malaysia Weekly on September 23, 2019 - September 29, 2019

Bank Negara Malaysia’s Financial Stability Review for the first half of 2019, released last week, highlighted a worrying trend.

The review noted that the exposure of banks and non-bank financial institutions to a vulnerable segment — that is, borrowers earning less than RM3,000 per month — has continued to decline over the years.

However, it said that “the leverage of these borrowers has risen steadily, largely due to housing loans which have been made accessible under various loan assistance schemes introduced in recent years”.  This group is “susceptible to financial distress given their limited financial buffers to weather potential shocks”, it added.

The central bank disclosed that the leverage of those with an income of less than RM3,000 per month had risen to 8.9 times in the first half of 2019 from 8.8 times and 7.7 times in 2017 and 2018 respectively.

Nevertheless, it said the risk to financial stability remains largely contained, given the low exposure of banks to higher-risk borrowers as they continue to maintain sound lending practices.

Could Bank Negara be referring to housing loans with stepped-up financing features for the purchase of PR1MA homes? Under these loans, borrowers only pay interest for the first five years, with the principal and interest repayments starting from the sixth year. They can also withdraw from their Employees Provident Fund Account 2 for house instalments until they retire or until the loan tenure ends.

The pressure comes in the sixth year when borrowers have to start repaying the principal but this should not be an issue as long as they have jobs.  However, during periods of economic slowdown, job security is not a given.

It is hoped that borrowers are given adequate financial management education when they take up such loans. Otherwise, we could end up creating a debt trap for the poor.

That is why the government and the regulators must be open to new ways to help people buy homes, especially their first homes, beyond the usual mortgage financing.

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