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THE REGULATION OF LOANS MADE BETWEEN A RESIDENT AND A NON-RESIDENT

| September 14, 2023

The Financial Services Act 2013 (‘FSA’) prohibits borrowing or lending in a foreign currency (‘FC’) between a resident and a non-resident[1] except with written approval of Bank Negara Malaysia (‘BNM’).[2] BNM is empowered under  Section 214  and Section 261 of the FSA to issue guidance/ notices to regulate the prohibited act of loaning between a resident and a non-resident in a FC.

In exercise of its powers, BNM issued a Foreign Exchange Policy Notice (‘FEP’) to regulate the borrowing in FC between a resident individual and a non-resident.[3] A resident must obtain the written approval of BNM before borrowing in FC from a non-resident that is not approved by BNM under the FEP.

BNM approval has been given to a resident individual to borrow in FC up to RM10 million equivalent in aggregate from a non-resident.[4] Approval is also given  to a resident entity/company to borrow in FC up to RM100 million in aggregate from[5]:      

  1. a non-resident outside Resident Entity’s Group (Group includes ultimate holding entity or parent or head office, branches, subsidiaries etc)[6];
  2. a non-resident Financial Institution (i.e. non-resident entity undertaking financial services); or
  3. a non-resident SPV used to obtain borrowing from any person outside Resident’s Entity’s Group.

Both approvals recognize the need to allow residents to borrow in FC and provides wide berth for a large variety of commercial and private transactions carried out in FC.  

Furthermore, a resident entity/ company is allowed to borrow in FC in any amount from an entity within the Resident Entity’s Group or from the Resident Entity’s Direct Shareholder.[7] A “Direct Shareholder” means a shareholder with at least 10% effective shareholding in a resident entity.[8] This definition does not differentiate between a resident or a non-resident shareholder. This makes foreign shareholder loans easily accessible to the Malaysian subsidiaries or associates of these foreign persons.

[1] Financial Services Act 2013, Schedule 14, paragraph 2.

[2] Financial Services Act 2013, S214(2).

[3] Foreign Exchange Policy, Notice 2, available at https://www.bnm.gov.my/documents/20124/60360/Notice+2_Borrowing%2C+Lending+and+Guarantee.pdf

[4] Foreign Exchange Policy, Notice 2, Paragraph 4.

[5] Foreign Exchange Policy, Notice 2, Paragraph 10.

[6] Frequently Asked Questions (FAQ) for Borrowing by Resident (Notice 2), available at https://www.bnm.gov.my/documents/20124/60360/FAQs_Resident+Ringgit+and+FC+Borrowing.pdf

[7] Foreign Exchange Policy, Notice 2, Paragraph 9.

[8] Foreign Exchange Policy, Preamble & Interpretation, available at  www.bnm.gov.my/documents/20124/60360/Preamble+and+Interpretation.pdf