KUALA LUMPUR (May 16): Exposure to buy-now-pay-later (BNPL) risks should be integrated into household debt metrics to keep a lid on consumer borrowings, according to Khazanah Research Institute.

The scheme has expanded access to credit to younger generations, those without a credit history and individuals in less urbanised regions, most of whom are in the lower-income group, the think tank also known as KRI said in a report titled The Financialisation of Our Lives published on Thursday.

However, the exclusion of BNPL “can create a distorted picture of household debt, particularly as exposure to BNPL increases,” KRI warned. “On a macroeconomic level, this can lead to rising household debt that poses systemic risks to the financial system.”

BNPL targets younger and lower-income borrowers — 44% of users are aged between 18 and 30 — with more than 80% earning less than RM3,000 per month, data from Bank Negara Malaysia showed.

Usage of BNPL recorded an average of 21% quarterly growth in transaction volume and 16% in transaction value over the first nine months of 2023.

KRI stressed that exposure to BNPL should be captured in total household debt. However, household debt metrics currently only take into account traditional forms of debt such as housing loans, credit card debt and personal loans, among others.

The think tank also urged regulators to establish clear and transparent guidelines for BNPL providers on interest rates, fees, disclosure requirements and lending practices.

Regulators should also require BNPL providers to conduct credit assessments to ensure that their customers have the financial capacity to meet repayment obligations, KRI said in its policy recommendations.

“While one of the attractions of BNPL is the simplified and expedited credit approval process, this convenience should not come at the expense of robust credit assessment,” KRI said.

Furthermore, KRI said policymakers should collaborate with consumer associations and educational institutions to develop and disseminate educational materials on BNPL.

KRI also pointed that BNPL has raised concerns on the potential risks associated with overextension of credit to “less financially literate” populations, and that it has catalysed increased spending, especially for non-essential goods and luxury items.

Last month, BNM said the Consumer Credit Act (CCA) — which aims to regulate the practices of non-bank entities offering credit services to consumers, including BNPL providers — is being reviewed and expected to be brought to the Parliament this year.