RECENTLY, Prime Minister Anwar Ibrahim announced a scheme for targeted withdrawals from the Employees Provident Fund (EPF) for those who experienced post-pandemic financial hardship. 

This has caused mixed feelings because the government had already allowed several withdrawals from EPF during the Covid-19 pandemic. Most economists expressed their reservations while others felt this initiative could relieve cost of living difficulties. 

There has been a growing trend in many countries to allow the use of EPF savings as collateral for loans.  

This move would let borrowers obtain loans at lower interest rates since the loan is secured by a safe and reliable asset. Faster loan approvals and access to a larger amount of money would also be possible. Finally, borrowers would also benefit from longer repayment periods, which would mean that repayments could become more bearable and manageable.  

The major drawback is the loss of savings that would result from failure to repay the loan. Borrowers could also face difficulty withdrawing funds during emergencies. Additionally, constant defaults on borrowers’ EPF-backed loans would have a negative impact on country’s overall economy, including increased financial instability and lower investor confidence. 

In India, the use of EPF savings as collateral for loans is a popular option for those who have no other assets to use in its place. Typically, borrowers can borrow up to 75% of their EPF balance. and must repay the loan with interest within a specified period of usually 5-10 years. If the borrower defaults on the repayment, the EPF authority can recover the outstanding amount from the EPF account balance.  

Singapore’s version of the EPF is known as the Central Provident Fund (CPF). To use CPF savings as collateral, borrowers are required to open a CPF investment account at one of the three CPF-approved banks in Singapore. The amount that can be borrowed against the CPF balance depends on several factors, including the age of the borrowers, the type of loan, and the CPF account balance. 

When borrowers use their CPF savings as collateral, the funds remain in their CPF account and interest accrues on the account. The borrower must repay the loan with interest within the repayment period, which can range from several years to several decades. If the borrower defaults, the CPF Board is entitled to collect the outstanding amount from the CPF account balance. 

In Sri Lanka, borrowers may get a loan of up to 75% of their EPF balance, subject to lending criteria. Just as in India, borrowers must repay the loan with interest within a specified period, usually between 5-10 years.  

In Malaysia, the EPF plays an important role in determining whether members are eligible for the current scheme by reviewing member applications before it allows borrowing from participating banks.  

Members must have at least RM3,000 in their Account Two to participate. Implementation is done in two phases. The first phase starts on April 7, 2023 for members who are 40 years and above, while the second phase is meant for members below 40.  

Currently, there are only two participating banks, namely MBSB Bank and Bank Simpanan National, with the maximum financing amount set at RM50,000. The banks will decide what kind of loan products they want to offer. The term of the loan is between 5 to 10 years with an interest rate of 4-5% for both Islamic and conventional modes as compared to 8-10%, the current interest rate. Under this scheme, members would continue to have access to their savings and benefit from compound interest on Account Two until they reach the age of withdrawal, which is either 55 or 60 years old. 

Generally, it can be said the use of EPF savings as collateral is beneficial. Malaysia could learn from other countries in this regard. India and Singapore’s schemes necessitate regulation and special acts to protect the interests of EPF contributors and ensure transparency and fairness to all parties. 

The Malaysian government should be careful that it does not prevent access to credit by those who need assistance the most, such as low-income earners or people with less stable employment, who are often unable to pledge their EPF savings as collateral. 

It is therefore imperative that the government, especially policy makers, carefully consider all these risks and impose stringent regulations or special acts on the use of EPF savings as collateral if they plan to use this scheme in the long run. – April 12, 2023. 

* Normala Mohd Adnan reads The Malaysian Insight. 

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.