Anwareconomics: EPF savings as loan collateral to boost liquidity

There are 2 phases in the scheme, with the 1st phase starting on April 7, 2023, and lasting for 1 year 


MALAYSIA’S Prime Minister (PM) Datuk Seri Anwar Ibrahim announced the use of the balance of contributions in Employees Provident Fund (EPF) members’ Account 2 as a form of support to apply for a personal loan from the banking system for those who need cash assistance. 

There are two phases in the scheme, with the first phase starting on April 7, 2023 and lasting for one year. This phase is applicable to members who are 40 years old and above. The commencement date for the second phase, which will be available to members under 40, will be announced at a later time. 

EPF Withdrawal Without Sacrificing Liquidity

Over the last two years, four rounds of EPF withdrawals have been permitted, including the special withdrawal programme for amounts up to RM10,000 last year, i-Citra in 2021, and i-Lestari and i-Sinar programmes in 2020. These withdrawals have led to a massive sum of RM145 billion being withdrawn in total. 

The special withdrawal programmes have aided the economy in the mud during the Covid-19 era, however the double-edged sword has slashed the pension fund’s assets under management (AUM), down 0.7% to RM1 trillion in 2021. As a result, the local participation rate in Bursa Malaysia has dropped drastically since the Covid-19 era due to the lack of liquidity in EPF, one of Malaysia’s biggest local institution players, causing the lacklustre performance in the past two years. 

Coming into 2023, the government is facing immense pressure from stakeholders to resume the special withdrawal program again. However, Anwar has proposed a brand-new solution that has never been seen in history: using EPF savings as collateral for temporary financing. 

We believe that offering personal financing options to members facing temporary liquidity problems could be beneficial without significantly impacting their retirement savings. At the same time, the implementation will aid EPF’s liquidity since the withdrawal amount will not reflect in the asset book. Instead, it will be used as collateral, and EPF will still have the flexibility to invest the available assets. 

Multiplier Effect to Create Wealth 

In a simple way to illustrate how the EPF loan scheme will assist economic growth. When the public increases spending, it injects money directly into the economy, which can stimulate demand for goods and services, create jobs, and increase economic growth. 

The financing amount available under the scheme is capped at RM50,000, and it is dependent on the member’s Account 2 balance. The repayment period for the loan cannot exceed 10 years. The interest rate for conventional financing and the profit rate for Islamic financing will fall between 4% and 5%. This is considerably lower than the current market rate, which ranges from 8% to 15%.
We view the EPF loan scheme as a 

“win-win-win” situation for all parties. First and foremost, EPF does not suffer from massive withdrawal again and it could ensure that liquidity is maintained at a comforta- ble level. Secondly, when people receive cash, they tend to spend it on things they need or want, which helps stimulate the economy by increasing demand for goods and services. 

In the event of default, the potential credit losses will be rather minimal for banks as the financing is collateralized using EPF Account 2. Thus, the credit risk for those participating banks would be relatively manageable. 

According to EPF’s annual report 2022, approximately two million members categorised under the 41-55 years old are available for the EPF loan scheme. Assuming half of the eligible members successfully apply for the financing using their Account 2 and fully consume it into the real economy, it will be a massive injection amounting to RM14.5 billion (in comparision to the government’s 2023 budget for development expenditure amounting to RM76 billion). 

Reiterate Our Positive View 

We believe that the EPF loan scheme suggested by PM is a positive step towards supporting Malaysia’s economy in the aftermath of Covid-19 pandemic and global recession fear. Our optimistic stance on Malaysia’s economy remains firm, and we anticipate that the positive developments will lead to an upward trend in stock market prices when the global uncertainties subsided. 

Sector-wise, we prefer consumer staples over discretionary players among consumer players because we expect inflationary pressures and the macro backdrop to continue to pressure consumption intentions on durable goods. 

  • The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s editorial board. 

  • This article first appeared in The Malaysian Reserve weekly print edition