Is Microfinancing Legal in Singapore?
Microfinancing is an important financial tool across the world to support small businesses, low-income individuals, and micro entrepreneurs. The traditional way of obtaining loans is through a bank, but this can prove bureaucratic and slow. Some individuals and small enterprises may need small, fast, flexible funding that traditional banks do not easily provide. This is where microfinancing can fill the gap by giving out small loans quickly to those who need them.
This article explains:
- How microfinancing works
- Whether microfinancing is legal in Singapore
- Who can get microloans in Singapore, and from where
- Loan limits for a microloan
- The pros and cons of microfinancing
- Practical tips for anyone considering microfinancing
What is Microfinancing and How Does it Work?
Microfinancing generally refers to a banking service provided to low-income individuals and small enterprises (micro-entrepreneurs). It generally entails the provision of small loans (microloans) for small and medium-sized enterprises (SMEs). Microfinancing also allows individuals to park a small amount of savings or to obtain affordable insurance coverage for lower insured sums (microinsurance).
Microfinancing is different from loaning money from a bank traditionally, which tends to take longer and is more stringent in giving out loans. This is because the banks’ source of funds is from depositors, so banks have to be more careful with what they invest in, should depositors choose to withdraw their money. In contrast, you can receive your loan through microfinancing as quickly as 24 hours.
Microfinancing is usually conducted through digital platforms. Examples of these include Funding Societies, a financing platform headquartered in Singapore which focuses on SME loans and microloans, and GXS Flexiloan, a local platform launched by Grab to provide small loans to borrowers.
Is Microfinancing Legal in Singapore?
Microfinancing is legal in Singapore if the microloan provider is a licensed moneylender or considered an “exempt moneylender” by the Ministry of Law (MinLaw). Under the Moneylenders Act, any person who lends a sum of money in consideration of a larger sum being repaid is considered a moneylender.
Licensed moneylenders’ place of business must be managed by a “Test-Qualified Manager” – i.e. a person who has passed the Moneylenders’ Written Test and whose appointment as manager has been approved by the Ministry of Law. Currently, the grant of any new moneylending licenses is suspended. A list of licensed moneylenders can be found here.
Licensed moneylenders are subject to the following regulations:
| Regulation | Explanation |
| Interest cap | Maximum 4% per month on principal |
| Late interest | Maximum 4% per month, but only on the overdue portion, not on the total outstanding balance |
| Administrative & late fees | Admin fee capped at 10% of principal and late fee capped at S$60 a month |
| Total charge rule | Sum of interest, admin fee, and late fee cannot exceed the principal |
| Advertising/marketing restrictions | Licensed moneylenders are restricted in how they can promote themselves: for example, they cannot solicit loans via unsolicited calls, WhatsApp, or social media. |
| Customer verification | Face-to-face verification is required at approved places of business |
| Customer screening | Due diligence checks on customers to mitigate risks of facilitating money laundering and terrorist financing |
Exempt moneylenders are individuals or companies that have been granted an exemption by MinLaw from complying with the regulations set out in the Moneylenders Act, such as the regulations listed above. Before granting an exemption to any applicant, MinLaw carefully examines the applicant’s lending model to ensure that borrowers get safe access to credit with proper protections in place. Exempt moneylenders can only engage in a limited scope of moneylending activities, such as lending to specific borrowers or for specific purposes. Such lending should have potential benefits, such as providing an avenue of safe credit to meet a specific need.
An example of an exempt moneylender is GFin, a subsidiary of Grab, which manages Grab’s Partner Cash Advance. This program provides Grab’s partners, such as Grab private-hire drivers, with cash advances of up to $15,000 for a tenure of up to 12 months. It was put into place to benefit Grab’s partners because individuals such as Grab drivers might not qualify for traditional loans due to their irregular income as a gig-economy worker. This can be considered a form of microfinancing as it gives small, quick loans to people who may not qualify for bank loans.
It is a criminal offence to carry out unlicensed moneylending without an exemption from MinLaw. Individuals guilty of the offence will be fined between $30,000 and $300,000 and jailed for up to 4 years. Corporations will be fined between $50,000 and $500,000.
Who Can Get Microloans in Singapore and From Where?
| Borrower profile | Alternative loan type options |
| Low-income households needing emergency funds |
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| Small business owners/entrepreneurs who cannot access traditional bank loans |
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| Gig economy workers and freelancers |
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| Merchant-partners |
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Individuals who have been declared bankrupt before may find it harder to obtain a microloan. Although licensed moneylenders are less stringent than banks, they still perform credit checks on borrowers.
What are the Loan Limits for a Microloan?
For unsecured loans, borrowers are limited to the following limits:
| Borrower’s annual income | Singapore Citizens and Permanent Residents | Foreigners residing in Singapore |
| Less than $10,000 | $3,000 | $500 |
| At least $10,000 and less than $20,000 |
$3,000 | |
| At least $20,000 | 6 times monthly income | 6 times monthly income |
Secured loan limits depend on the provider, as there is no cap for secured loans. For example, Funding Societies offers microloans of up to $150,000 for SMEs.
Microloan providers can only charge interest of up to 4% per month on the outstanding principal. Late interest is also capped at 4% per month, but only on the overdue amount. This interest rate cap applies to all non-bank moneylenders in Singapore. Do note that non-bank moneylenders tend to charge higher interest rates than banks.
Repayment schedules also vary according to the microloan provider. For example, GXS Flexiloan offers microloans with a repayment tenure of 2 to 60 months with monthly repayments available. On the other hand, Funding Societies provides microloans with a repayment period of 6 to 18 months with monthly repayments.
What are the Pros and Cons of Microfinancing?
Pros of microfinancing
Financial inclusion
Microfinancing provides financial inclusion for underserved communities that find it difficult to get a traditional bank loan. These include low-income individuals and gig workers, and micro-entrepreneurs. Microloans allow these people to get emergency funding or money for advancements.
Fast processes
Microloans also have fast application and disbursement processes, which help people in urgent need of money. The funds from microloans can be used for a variety of different purposes, such as capital, business expenses, or emergency expenses. If you are a micro-entrepreneur, microloans may be more attractive than a traditional bank loan, as the quick loans allow you to start or expand your business without delay.
Safer option than unlicensed moneylenders
Licensed microloan providers are also regulated by MinLaw and subject to legal caps on interest and fees, which makes microloans a safer borrowing option than borrowing from unlicensed moneylenders. Unlicensed moneylenders (such as “loan sharks”) charge exorbitant interest and fees, and may even use harassment tactics if borrowers do not pay on time.
Cons of microfinancing
Risk of over-borrowing/over-indebtedness
There is a risk of over-indebtedness if borrowers take multiple microloans from various sources. As microloan providers are not as stringent as traditional banks when it comes to risk assessment, borrowers might find themselves faced with heavy debt stress if they take too many microloans. Borrowers will therefore have to keep track of their debts to ensure they do not take too many loans that they are unable to repay. If they cannot repay microloans, borrowers may find themselves unable to take future microloans as microfinancing providers perform a credit check on borrowers before approving loans.
Risk of borrowing from unlicensed moneylenders
Borrowers must also be careful to only take microloans from licensed moneylenders, or they might face predatory practices from unlicensed moneylenders. Unlicensed moneylenders such as loansharks may charge exorbitant interest rates and may resort to physical threats to demand repayment.
Higher interest rates than banks
Interest costs for microloans, although capped at 4% per month, also tend to be higher than bank loans. Over time, these interest costs can add up, and the borrower might not be able to repay the interest on time.
Microloan amounts may be insufficient
Microfinancing providers also tend to give out smaller loans, which may not provide enough capital to meet a borrower’s business needs. This would mean that you might need to take multiple microloans or supplement the shortfall from bank loans in order to meet your capital needs, and this may, in turn, lead to other risks discussed above, such as overindebtedness.
Practical Tips for Anyone Considering Microfinancing or Taking a Microloan
When considering microfinancing or taking a microloan, always check the List of Licensed Moneylenders and List of Exempt Moneylenders maintained by MinLaw to ensure that you only borrow from licensed or exempt moneylenders. If a moneylender offers to lend you money via social media, SMS, or WhatsApp, these are likely to be unlicensed lenders. If you encounter such offers, you should report suspicious lenders to the authorities.
Also, make sure that you understand the terms of repayment when considering a microloan. Ensure that you have a detailed breakdown of the interest rates, admin fees, and late payment fees and that any other terms are clearly explained in a language you understand. You should also make a repayment schedule to model monthly or weekly obligations to ensure that you are able to repay the loan and interest. Before committing to the loan, you must ensure that your cash flow or income can support the repayments over the full tenure of the loan.
If in doubt, consider consulting a lawyer before taking a microloan to make sure you understand the full obligations of the loan to avoid inadvertently agreeing to contract terms that you cannot fulfil.
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Microfinancing is available in Singapore and offers a vital alternative for small businesses and individuals who cannot easily access traditional banking. Regulations are imposed on microfinancing providers to ensure that they act with transparency and proper conduct, and that borrowers are protected against exorbitant rates.
If you are thinking of taking a microloan, you should consider the following:
- Ensure that the microfinance provider is a licensed moneylender
- Understand the fees involved
- Evaluate your repayment capacity
- Avoid unlicensed lenders who may engage in predatory practices
For tailored legal advice or advice on more complex microfinance arrangements (especially for SMEs), you may wish to consult a lawyer through our Find a Lawyer service. A lawyer will help you gain clarity on your obligations and rights so that you make the best decision for yourself and/or your business.