Lending Transaction involving non-Malaysian Currencies: Some Practical Tips

When one acts as a Malaysian counsel advising a foreign entity in a banking transaction in Malaysia, certain issues need to be considered. Here are some practical tips for navigating such transactions:

1. Approval from Bank Negara Malaysia (BNM) (Central Bank of Malaysia)
Under the recent amendment to ECM10 (Foreign Currency Credit Facilities and Ringgit Credit Facilities from Non-Resident), a company in Malaysia is free to obtain credit facilities denominated in foreign currency from:

(a) a licensed onshore banks;
(b) a licensed international Islamic banks;
(c) another company in Malaysia which is part of the same corporate group in Malaysia;
(d) the parent company outside Malaysia, that is not a bank; and
(e) a supplier outside Malaysia.

However, credit facilities obtained from entities outside Malaysia which are denominated in foreign currency, cannot exceed RM100mn in aggregate on corporate basis. If this limit is exceeded, prior permission would need to be obtained from the Controller of Foreign Exchange of BNM. The borrower is then required to register the foreign currency credit facility with the Controller at least seven (7) working days prior to the drawing down on the credit facilities.

2. Power and authority
A thorough check of the company’s memorandum and articles of association or constituent documents is required to ensure that it has the power to perform its obligations as a borrower or a lender. The necessary board resolutions also need to be obtained. A company search should be conducted on the borrower at the Companies Commission of Malaysia to confirm that:

(a) the borrower is validly existing under the laws of Malaysia (e.g. duly incorporated under the Companies Act 1965); and
(b) that no winding-up order has been made against the borrower.

3. Withholding tax
According to the Income Tax Act  1967 the interest payment of each loan repayment payable to a non-resident lender is subject to a 15% withholding tax rate, unless there is a different rate prescribed in the “Double Taxation Agreement” between Malaysia and the non-resident lender’s country of origin.

4. Filings
Any power of attorney granted in any of the security documents has to be registered at the High Court of Malaya for it to be enforceable in Malaysia.

5. Exchange controls
The current exchange controls in Malaysia do not restrict the ability of the borrower to transfer funds outside Malaysia to satisfy their payment obligations to the foreign banks.

Noreeta Binti Mohd Noor
senior associate, financial services

Azmi & Associates
14th Floor, Menara Keck Seng, 203 Jalan Bukit Bintang,
55100 Kuala Lumpur, Malaysia
Tel: +6 03 2118 5000 ext 5065   Fax: +6 03 2118 5111
www.azmilaw.com   E-mail: munirah@azmilaw.com