Malaysia debates allowing cash-strapped citizens to use pension funds as loan backstop

PM Anwar says the loan option allows quick financing without members dipping into their pensions but analysts say loan applicants already face high default risk

Anwar has been under pressure for a fresh round of withdrawals from the pension fund, after his predecessors allowed four rounds of withdrawals in 2020-2022

Reading Time:3 minutes

The EPF has warned that further withdrawals could precipitate a pension crisis. Photo: Bloomberg

Published: 9:30am, 24 Mar 2023

Malaysia’s government needs to carefully weigh the risks of allowing members of a national private pension fund to use their savings as “support” to secure personal loans, experts have said, as Prime Minister Anwar Ibrahim pushes ahead with the plan to help households in financial distress from the Covid-19 pandemic.

Anwar this week defended the move, saying that it was one of several measures that the government is considering to help households get back on their feet without allowing further withdrawals from the Employees Provident Fund (EPF), as had been done during the pandemic years.

The prime minister on Tuesday told parliament that the loan option presents an avenue for quick financing without members needing to dip into their pension, with the assurance that they will continue to earn interest from their savings and that it cannot be seized by banks to recoup the loan in case of a default.

Customers at restaurants in Kuala Lumpur. Photo: Bloomberg

“The biggest risk is that many of the loan applicants may already be facing an income crunch to pay for existing loans, hence there’s a high default risk,” said Hafidzi Razali, associate director with political risk consultancy BowerGroupAsia.

Anwar, who became prime minister in November after a deeply divisive national election, has been under pressure from the opposition and public for a fresh round of withdrawals from the pension fund as households grapple with persistent inflation crimping income recovery from two years of strict pandemic curbs that all but halted the economy.

His predecessors allowed four rounds of withdrawals between 2020 and 2022, resulting in an outflow of 145.5 billion ringgit (US$32.8 billion) at the end of 2022, according to government data.

The EPF has warned that further withdrawals could precipitate a pension crisis. The fund’s data showed the median savings of members in the B40 category – which covers the bottom 40 per cent income earners – was just 785 ringgit as of December 31, after the withdrawals in 2020 to 2022.