Introduction To “Friendly Loan”

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Introduction To “Friendly Loan”

November 30, 2020 Contractual Disputes Public Interest Disputes 0

What is a “friendly loan”

A “friendly loan” is a loan:

  1. That is different from those a person obtain from a moneylender or financial institution;
  2. The loan is given on trust i.e. it might/ might not have a written agreement between the parties involved
  3. In order to secure the repayment of the loan, there may be an agreement such as an IOU or security pledged to repayment;
  4. The loan does not need to be done between two familiar parties- two strangers could one day come together and decide to lend/ borrow money between them; 
  5. Usually, the loan is to be repaid within a specified time and with no interests charged to the borrower.


Is it legal?

Surprisingly, yes.

In Tan Aik Teck v Tang Soon Chye, Soon Chye contended that he agreed to grant a friendly loan to Aik Teck. Aik Teck contended otherwise and stated that the monies were received for a totally different purpose and that since they were not friends, the money received could not be perceived to be a friendly loan. The matter was fought all the way up to the Court of Appeal.

The court sided with Soon Chye and noted that a friendly loan need not be between friends. As long as a lender can prove that the money was given to a borrower on a loan basis (and is not caught under the money lending principles, which we will discuss in another article), the court will construe the loan as a friendly loan unless the borrower can prove that the money given to him by the lender was not a friendly loan.

In Rostam Bin Abbas v Ali Dad Bin Fazal Elahi, Rostam sought to recover a sum of monies from Ali for a failure to repay a friendly loan given at Ali’s request. There was actually a signed agreement between the two of them, which Rostam fails to adduce as evidence in court (he could only produce an unsigned and undated copy of the agreement). Ali latched on this and contended that Rostam’s claim was illegal and unenforceable because it was an unlicensed moneylending transaction and that the court should invoke an adverse inference against Rostam for his failure to produce the signed and dated agreement between them.

The court disagreed, noted that even though an agreement is a material document upon which the case is founded upon, it is not fatal to the lender’s case as long as he is able to convince the court, on the balance of probabilities, that both he and the borrower has entered into an agreement (written or otherwise), the court will accept the lender’s claim unless proven otherwise by the borrower.


What to prepare before giving out a friendly loan?

Prepare a written agreement

The prudent thing to do (as in with every other agreement and even though there is no need for one) is to prepare a written agreement outlining the terms of the friendly loan clearly– this would undoubtedly help with the lender’s claim in court in the event a dispute arises as to whether monies were given out on a friendly loan basis vice versa.

Keep a record of everything related to the agreement

Keep a record of anything and everything that is related to the agreement between the parties, such as transactions record, conversations, additional supplementary documents, etc. As noted above, it would help with the claim in the event there is a dispute.

Ensure that the interest imposed is not excessive

The law permits a lender to impose an interest rate on the loan given. However, as noted in Menta Construction Sdn Bhd v SPM Property Management Sdn Bhd [2017] MLJU 526, the interest rate must be reasonable i.e. not excessive/ exorbitant/ unconscionable. The court will intervene (as what happened in Menta Construction when the court rejected the 8.8% interest rate imposed by the lender and replaced it with a 5% per anum interest rate instead) and make adjustments to the interest rate if the court finds that the rate given is unreasonable.

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