Nowadays in Malaysia, many car owners cut back on maintenance expenses, due to a shortage of cash. The economy has made it difficult for many consumers to manage their current expenses, so additional costs can be challenging for most.

This is why solutions like Buy Now Pay Later or BNPL have gained popularity across the region, but with it comes the concerns of overspending as well as the lack of regulation.

According to the latest Financial Stability Review by Bank Negara Malaysia (BNM), Malaysia has seen a steady growth of the BNPL model in 2022, with 44 per cent of users between the ages of 18 and 30. However, not all BNPL services are Shariah-compliant for three reasons: the presence of interests, the involvement of prohibited goods and the misalignment terms and conditions that do not adhere to Islamic permissibility standards.

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To find out more, we spoke to Hui Yik Seong, Founder of Direct Lending. The company just announced a partnership with PETRONAS AutoExpert to introduce a Shariah-compliant, fully digital car service instalment plan for Malaysian car owners. PETRONAS AutoExpert has adopted a Shariah-compliant Buy Now Pay Later (BNPL) model for car servicing and repairs. Customers can spread their car service and repair expenses by allowing payments to be paid over a maximum 12-month period.

To better understand how this works and what impact it will have on the industry, here’s what Yik had to share.

Congrats on the partnership. Can you elaborate on what it entails?

Thank you! Our partnership with PETRONAS AutoExpert aims to simplify and increase flexibility in managing car service and repair expenses by allowing Buy Now Pay Later (BNPL) payments for car repairs and services to be spread over a maximum of 12 months.  

Leveraging our digital capabilities, we provide a seamless, Shariah-compliant financing solution directly to PETRONAS AutoExpert customers nationwide across all their 55 service centres. This gives car owners a convenient and affordable way to deal with unplanned car repair or maintenance expenses. 

The partnership also expands our reach and lends additional credibility to our offerings by associating us with a reputable brand like PETRONAS. Not only that PETRONAS AutoExpert will benefit from this innovative offering at no cost for a minimum period of two years, but all PETRONAS staff members will now be able to enjoy a lower financing rate when using the instalment plan at any PETRONAS AutoExpert centres. 

What gap in the market are you filling with this solution?

We are addressing a significant credit and convenience gap. According to a study by BNM, 75% of Malaysians find it difficult even to raise RM1,000 of immediate cash for emergencies; The Sun Daily reported in July 2022 that cash-strapped owners skimping on servicing cars and un-serviced vehicles are more likely to be involved in traffic accidents. 

Our auto service financing solution alleviates the financial burden of car owners to deal with unexpected car repair bills, as the car is a necessity for most Malaysians to go to work or to run a business. We provide car owners with a convenient, affordable, and Shariah-compliant financing option for essential car repairs and maintenance, thus promoting financial inclusion. 

Direct Lending auto service financing has a dual-facet impact:  this financing also helps to grow sales and enhance the cash flow of the car workshops, many of which are micro, small, and medium enterprises, as more car owners can afford to repair and service their cars by using this financing.

How does BNPL work in a Shariah-compliant manner?

In the traditional financing model, interest and late payment fees can accumulate or compounded quickly. This conflicts with Islamic financial principles, where Islamic teaching refrains followers from giving, receiving, or benefitting from any interest. Our Shariah-compliant auto service offering is endorsed by Amanie Advisors, a leading global Islamic Finance Advisory firm led by the renowned Shariah scholar Tan Sri Dr. Mohd Daud Abu Bakar. The facility adheres to the Islamic principles of ethical and responsible lending, making our financing solution more accessible to a larger Malaysian population seeking ethical financing options.

For example, our late payment charge is not compounded, charging 8% (consists of a compensation / Ta’widh (1%) and a penalty / Gharamah (7%)) per annum only on the overdue payment and the majority of our late payment charge is channelled to charitable bodies. This distinguishes us from other lending institutions that charge higher monthly interest rates and gain from them. In addition, to provide flexibility to consumers, we also allow customers to settle early, and a rebate/ discount will be provided.

As a digital loan solution, how do you use technology to manage the process and keep risk at a minimum?

We employ a range of advanced technologies, including AI and machine learning algorithms, to assess the creditworthiness of applicants in real time. This allows us to make quick and accurate decisions about who to lend to and if they are worthy. By harnessing the power of these technologies, we’re not only streamlining our operations but also significantly reducing the risk associated with lending, especially to borrowers who cannot repay their loans. Our proprietary risk assessment model evaluates multiple data points beyond traditional credit scores, including bank transaction histories. This allows us to offer loans to “credit underserved” individuals who do not have a credit history. We understand that a lack of credit history should not prevent deserving individuals from accessing financial opportunities, and our model helps bridge this gap. 

We are thrilled to report that less than 3% of the outstanding financing in our portfolio is overdue for more than 60 days. This impressive finding highlights our commitment to responsible lending and the effectiveness of our technology-driven risk assessment to gauge an applicant’s ability to repay a loan accurately.

What’s next for Direct Lending?

We aim to continue expanding our partnership network, refining our solutions and offering more value-added solutions to stakeholders in the aftermarket ecosystem, such as car owners, workshops and manufacturers/ suppliers of car workshops. For car owners, we aim to make vehicle maintenance and repair more accessible and convenient. 

We are uniquely positioned to provide financing to car workshops. We have a strong relationship with car workshops and deep insights into their sales. This gives us a unique understanding of their needs and challenges. By leveraging our relationships with car workshops, we hope to help car workshops optimize their operations and manage working capital more effectively especially considering that many of them are micro, small and medium-sized enterprises. We also aspire to create mutually beneficial partnerships with manufacturers and suppliers of car workshops. We believe that by working together, we can streamline the supply chain and drive innovation within the industry.

While our current focus is on the local market, we recognize the immense potential to bring our solutions in the aftermarket to other Southeast Asian countries. We see an opportunity to replicate our successful model and bring our innovative solutions to a broader audience. This expansion will serve as a strategic growth move for our company and contribute to the overall development of the automotive industry. We are excited about the prospect of making a positive impact on a wider scale and fostering financial inclusion beyond our borders.