Friendly Loan Agreement

Friendly Loans: the right way

At times, your friends, family members, relatives or acquaintances borrow money from you due to financial difficulties. As a result of the close relationship between you and the borrower, you pay a sum of money to the borrower as a friendly loan. The borrower promised you that he/she will settle such sum of money within a certain period. 

When the deadline is close, you repeatedly demanded the borrower to repay the loan sum but to no avail. Both of your relationships turn sour. What rights and remedies could you resort to under the law?


Written Agreement

It is prudent that you enter into a written friendly loan agreement with the borrower. The agreement shall be signed by both parties. 

The agreement must consist of comprehensive terms and conditions, among others:

(a) Details of the Lender;

(b) Details of the Borrower;

(c) Amount of the Loan Sum;

(d) Late Payment Interest, if any; 

(e) Deadline and Mode of Settlement by the Borrower.

Money Lenders Act 1951

Licensed money lenders will be governed under the Money Lenders Act 1951. All loan agreement prepared by the licensed money lenders shall follow the formats and interest rate as prescribed under the MoneyLenders Act 1951.

On the other hand, a friendly loan agreement is valid and enforceable under the law provided that:

(a)      The Lender is not a habitual money lender or running a business of money lending which requires some sort of continuity or repetition of similar transaction (seeNgui Mui Khin v Gillespie Bros [1980] 2 MLJ 9)) (Federal Court); and

(b) A friendly loan agreement must not be in furtherance of unlawful purposes.


An agreement shall be stamped pursuant to Section 52 of Stamp Act 1949 in order to be admissible as evidence in the Malaysian Courts. An agreement may be stamped within 30 days of its execution if executed within Malaysia or within 30 days after it has been first received in Malaysia, if it has been executed outside Malaysia. An agreement is still valid under the law even if it is stamped late provided that the party who relies on this document in the court pay the stamp duty and penalty to the Inland Revenue Board of Malaysia (see the Federal Court case of Malayan Banking Berhad v Agencies Service Bureau Sdn Bhd [1982] 1 MLJ 198).

The excerpts of calculation of the penalty for late stamping can be found at the website of Inland Revenue Board of Malaysia vide The excerpts are reproduced as follows:

Penalty (Stamp Duty)

If it is not stamped within the period stipulated, a penalty of:

(a)      RM25.00 or 5% of the deficient duty, whichever is the greater, if stamped within 3 months after the time for stamping;

(b)     RM50.00 or 10% of the deficient duty, whichever is the greater, if stamped after 3 months but not later than 6 months after the time for stamping;

(c)     RM100.00 or 20% of the deficient duty, whichever is the greater, if stamped after 6 months from the time for stamping;

          may be imposed.

(the above rates are effective from 1/1/2003)


You should keep all records of original bank transfer slips, bank statements and all  relevant social media messages like Whatsapp and Wechat, emails and all correspondence between the parties. 

Recently, the High Court in Mok Yii Chek v Sovo Sdn Bhd [2015] 1 LNS 448  recognised that the Whatsapp messages can be admitted as evidence in the Court. 


You should conduct some background checks on the borrower such as properties which are registered under his/her names, solvency check, bank accounts details.


Further, as a Lender, you are entitled to lodge a lien-holder caveat over the borrower’s property. Lien-holder caveat is a statutory lien entered by the Lender with whom the issue document of title to any land has been deposited as security for a loan. It is effective upon registration at the relevant land registry and shall continue in force until it is removed or the debt is settled or the Lender obtained a court order for sale of the property (Section 330(5) of the National Land Code 1965). 

The criteria for creating a lien-holder caveat are as follows:

(a) The registered proprietor (the Borrower) must deposit the original title of the Property with the Lender;

(b) The registered proprietor must intend to create a lien-holder caveat; and

(c) The Lender must register the lien-holder caveat together with the original title, all relevant forms and documents and prescribed fee at the land registry.

The effect of the lien-holder caveat is that it freezes any dealings to the land concerned. However, it only vests the Lender with equitable interest and not proprietary right in the land. In the event of default of the Borrower, the Lender shall proceed to the court to obtain a judgement against the Borrower (Section 281(2) of the National Land Code 1965). Thereafter, the Lender is entitled to apply for a court order for sale of the property (Section 253 to 269 of the National Land Code 1965 and Order 42 of the Rules of Court 2012).

It is the writer’s personal opinion that this approach is best applied to a property free from encumbrances with individual or strata titles.


Demand / Negotiations

Should the Borrower defaults payment of the friendly loan, you may engage a lawyer to demand against the Borrower for the outstanding loan sum. 

Small Claim Procedure : Claim less than RM5,000-00 (Optional)

If the total claim amount is RM5,000-00 and less, you may file a legal action personally through the small claims court. The small claim procedure is summarised below:

(a)   Submit Form 198

The Applicant is required to submit four (4) copies of the Form 198 to the Registry of the Magistrates’ Court with the prescribed fee of RM10.00. The Registrar will seal all copies of the form and set a hearing date for the matter. 

(b)   Service of Forms

The Applicant shall serve a sealed copy of the Form to the Borrower by hand.

(c)   Hearing

On the day of hearing, the Applicant shall attend the hearing before a judge with formal office attire.  

Civil Courts

Alternatively, you may engage a lawyer to file a legal suit against the Borrower at the relevant civil courts. You shall seek legal advice from a lawyer in respect of the procedures and costs of the civil suit.

Upon obtaining a judgment in your favour, the Borrower shall settle the judgment sum immediately. In the event the Borrower has failed to comply with the court’s judgment, you may enforce the court judgment by way of execution proceedings within 12 years from the date of the judgment. 

Execution Proceedings

There are various types of execution proceedings in Malaysia:

Insolvency Proceedings

If your Borrower is an individual, you may file bankruptcy proceedings against him/her, provided that the outstanding judgment sum amounts to RM50,000-00 and above. If your Borrower is a corporate company, you may file winding-up proceedings against the borrower, provided that the outstanding judgment sum amounts to RM10,000-00 and above.

Writ of Seizure and Sale

In the event you are aware that the Borrower owns any movable or immovable property such as a house, a car and other collateral, you may apply for a court order to seize and sell the Borrower’s property to satisfy the outstanding debts. 

Garnishee Proceedings 

You may also attach or seize the Borrower’s money due and payable which is in the hand of the third party. 

Judgment Debtor Summons

By this action, the Borrower will be brought before the Court. Your solicitors may examine his or her means of repaying your judgment debt. The Borrower is required to produce proof of income and expenses. The Court may grant the appropriate orders during the hearing. Despite successful service of all court documents on the Borrower and he/she fails to appear in the Court, the Court may issue a warrant of arrest against him/her. 

If the Borrower fails to act in accordance with the court orders, the Lender can issue a Judgment Notice against the Borrower whom is required to show cause why he/she disobeys the court orders and why he/she should not be sent to prison.      

Court Order for Sale

As discussed earlier, the lien-holder caveat holder may obtain a court order to sell the borrower’s property and recover the judgment debt through the sale proceeds. 

The content on this website does not constitute legal or other professional advice or an opinion of any kind. It is provided for general information purposes only. 


 By Chloe Lim & Carmen Leong