Pawnbrokers in for a strong financial year

The pawnbroking business has been the fastest growing segment in the financial services sector in Malaysia. — Bloomberg

THE festive period and the rally in gold price is leading many with gold-based items to the 790 or so licensed pawnbroking service providers in the country.

Newspaper reports stated cash-strapped traders have been pawning their gold ornaments and jewellery to fund their Ramadan bazaar stalls while some borrowers may have taken the opportunity offered by the price rally to move into cash temporarily.

Spot gold price is trading at a historic high of US$2,233 a troy ounce at press time, up some 10% since the start of the year, and if it can continue to hold to the gains for longer, pawnbrokers in the country, including listed ones like Pappajack Bhd and Evergreen Max Cash Capital Bhd, could be in for a strong financial year if their lending heads north in correlation with the value to the underlying pledged items.

The sector’s business model is fairly straightforward. With pawnbrokers collateral-backed micro loan rates capped at 2% per month, the incentive is to lend more to make more.

While a sharp drop in gold could risk the inventory’s value held by brokers, they mitigate the risk via the loan margin on the pledged items, StarBizWeek was informed.

“Our pawn loan business has recorded an increasing trend recently due to the gold price hike. We will offer our pawn loan based on the pledge’s value (i.e. gold price); the pawn value will be increased when the gold price increases.

“Our primary income is derived from the interest revenue; the higher the loan deployed the more interest income will be generated. We mitigate risks through the loan margin.

“We monitor the loan margin against the gold price, so when there is a sharp rise or fall, we may lower the loan margin.

“However, this will be a short-term measure and we will revert to normal loan margin when the price is stable,” Pappajack chief executive officer and managing director Jack Lim Boon Hua said in a written reply.

Normally, a customer can expect to receive 60% to 80% of the market value of his or her item as a loan, which usually runs up to six months.

The risk of default is low more so when the price of gold is high, according to Lim.

“The demand for pawn loans is due to short-term financing requirements; the factor of gold price may play a part but not a major factor of pawn loan demand.

“The primary factor of redemption is due to the capability factor to settle short-term financing (pawn loan), for example, three or six months.

“In general, customers would prefer to redeem their pledges when the gold price is high,” he explained.

Tradeview Capital Sdn Bhd chief executive officer Ng Zhu Hann said gold was up in anticipation of rate cuts in the United States and other major economies but noted that the price action is ahead of the curve.

“Gold is playing the role of the safe haven and becomes a top choice for consideration, especially for those who are not sure what to expect when it comes to putting their money.

“There is no way to correctly time your investment and putting your money in gold is storing the value in the face of concerns of erosion of purchasing power of fiat currency,” he said.

The fresh inflows into gold could likely be Russian and East Asian monies looking for safe-haven investments after bitcoin has appreciated back to near record levels, according to high-net-worth investor Ian Yoong.

He added that the sovereign risk level in East Asia has risen considerably in the past couple of years.

Even without the sharp gold price jump, the pawnbroking business has been the fastest growing segment in the financial services sector in Malaysia, with a compound annual growth rate (CAGR) of 5.2% from RM8.3bil in 2017 to RM10.7bil in 2022 (including in the Covid-19 pandemic years).

Independent market researchers forecast the local pawnbroking industry to grow at a CAGR of 5.9% between 2022 and 2024 to reach RM12bil in 2024.

Pappajack itself saw its revenue jump to RM109mil in financial year 2023 (FY23) from RM70mil in FY22, with earnings doubling from RM10mil in FY22 to RM20.1mil in FY23. It was making a profit margin of 18.4% in FY23 as compared to 14.2% in FY22.

Pappajack has some 37 outlets now, up from 25 when it was listed in April 2022, and plans to open more.

“We will continue to identify the strategic location for business expansion and widen our business networks. Our staff are trained to understand customer needs and provide a quick solution for their financial needs, so we will continue to focus on this area,” Lim said.

The high growth can also be looked at from the angle of whether they have sufficient capital to cater to demand, said Zhou Hann.

“Pawnbrokers with established track records usually are financially sound and have likely covered their capital outlay already. So they have the luxury to pick and choose their customers including timing to accept or refuse the gold products when customers come to them.

“For chain pawnbrokers that have been aggressively expanding in the past few years, they are more desperate for business to obtain earnings to cover their expansion outlay.

“This would mean they may be less able to choose and pick the timing or customers, especially if they just opened a new outlet – they will need to find ways to breakeven as soon as possible even at the expense of profit margin,” he warned.