Exploring the Pros and Cons of Using EPF Savings as Support Facility: A Critical Analysis

I am not too comfortable with the government suggestion to make EPF saving as Support Facility for loan or financing. I have concerns about the proposal. Here are a few reasons why:

First: It may increase the debt burden of EPF members who may not be skilled in financial management. Allowing EPF savings to be used as supporting facility could make it easy for them to fall into unhealthy debt, as evidenced by data and facts from AKPK.

Second: The proposal requires further clarification and context for it to be accepted. The Prime Minister has given an example of someone with RM 1 million in EPF savings who needs to pay off a business debt of around RM 180,000 to RM 200,000. He suggests using EPF savings as support facility to borrow from financial institutions to pay off the business debt, so that the EPF savings are preserved and the business debt can be settled.

To make the proposal more rational and practical, at the very least, I suggest the following:

a. The government should not immediately allow EPF savings to be collateralized, but first may consider allowing limited withdrawals by qualified EPF contributors, similar to the current arrangement where they are allowed to withdraw a portion of their savings from account two for specific purposes such as hajj, education, and first home purchase. We could add several other pressing circumstances for limited withdrawal for those who truly need the money.

b. If the proposal is to be implemented, it should only be available as collateral for savers who have accumulated RM 500,000 or more. Those with less may be more detrimental than beneficial as they may be trapped into unhealthy debt for consumption and purchasing necessity items, which will likely make those items more expensive if the interest rate is included in the borrowing principal. This could lead to bad debts.

c. Additionally, the collateral suggestion would only be acceptable if the members who want to use this facility are amongst entrepreneurs who need funds to maintain their stock and inventory of products that have already been sold. That is, they are facing a capital problem to prepare and deliver finished products. If this is the category that wants to use EPF savings as collateral for loans or financing, it can be considered. This can be included in the category of Good Debt.

d. The government should select several willing financial institutions which are willing to offer financing rate based on reducing balance at a fixed rate of 4%, and must not be based on reducing balance floating rate, if not, the financing or loan will be much more expensive and result in a real loss to the members as compared to if they are to withdraw their own money.

e. Flat rate rule 78 must also be avoided. For flat rate rule 78, it cannot be at a rate of 4%, because 4% flat rate is about 7.45% fixed rate for a 5-year financing. This flat rate is not really "Muslim" friendly because it discourages early settlement.

f. To those who are qualified as above, the government should highlight that borrowing from a third party which offers a 4% financing fixed rate on reducing balance would result in at least slight benefit to EPF members. For example, with a 4% fixed rate on reducing balance, and let's say EPF provides a 5% dividend per annum on average, it can be at the very least give slight benefit for qualified EPF members as they can still earn at least a 1% dividend per annum while preserving their EPF savings and manage to get immediate cash for good use and?neccessary causes. However, they would have to work really hard to find the money to pay off their debt.

g. Government also must require the financial institutions to offer Shariah compliant packages so that there will no compounding penalties for late payment.

Dr Zaharuddin Abd Rahman