Khazanah Research Institute says time for household debt to reflect exposure to BNPL

KUALA LUMPUR, May 16 — Companies that offer buy-now-pay-later (BNPL) may have widened financial inclusion to households ignored by traditional lenders, but at the same time raises the debt exposure of high-risk borrowers who may have little financial literacy, Khazanah Research Institute (KRI) said today.

In its report on the booming BNPL industry, the local think tank said companies that offer deferred payment schemes may have democratised credit access, spurred increased spending especially for non-essential goods and luxury items, bolstering growth in the retail industry.

Yet this easy access has also fuelled concerns about responsible lending practices and the potential risks associated with over-extension of credit to less financially literate populations.

“By providing a simplified and often instantaneous credit approval process, BNPL has expanded the reach of credit to younger generations, those without a credit history, as well as individuals in less urbanised regions, most of which fall within the lower-income bracket,” KRI said.

“While this has democratised credit access, it has also raised concerns about responsible lending practices and the potential risks associated with over-extension of credit to less financially literate populations. On a macroeconomic level, this can lead to rising household debt that poses systemic risks to the financial system.”

Malaysia's BNPL market is projected to be worth approximately US$2.19 billion (RM10.3 billion) in 2024, according to estimates from ResearchGate, a notable increase from previous years driven by the rising penetration of e-commerce and a growing consumer base for BNPL services.

There are at least seven major BNPL service providers actively operating in Malaysia currently, according to a recent report by The Star, with the number expected to increase as the market grows and more financial institutions partner with BNPL companies or launch their own services.

Much of the sector's growth is debt-financed but it's unclear how much exposure these companies have piled up over the year as they extend service coverage to more vendors.

KRI said policymakers should include BNPL debt as one of the indicators measuring household borrowing as one of several policy recommendations to rein in the industry and mitigate exposure for low-income borrowers.

“At present, exposures to BNPL are not captured in total household debt. In ensuring household debt is kept in check, there is a vital need to integrate BNPL exposures into household debt metrics, which currently only include traditional forms of debt such as housing loans, credit card debt, and personal loans, among others,” it said.

KRI called for stronger regulation and enhanced disclosure requirements to compel BNPL providers to provide clear, concise, and easily understandable information about the terms and conditions of their products.

“One of the primary policy options to mitigate the risks of BNPL involves strengthening regulatory oversight. Existing regulations in Malaysia's financial system may not fully encompass the unique attributes of BNPL products, leading to potential regulatory gaps,” it said.

Regulation should include cross-border regulatory collaboration, it added.

“Given the global nature of many BNPL providers and the integration of e-commerce across borders, policymakers must also consider cross-border regulatory collaboration. Harmonising regulatory approaches and sharing information across jurisdictions can enhance oversight and ensure that consumers are equally protected, irrespective of the domicile of the BNPL provider.”