When pawn becomes queen: Pawnshops morphing into loan royalty for young Singaporeans

Is this eternal or just ephemeral?

Pawnshops used to be the easy go-to place when Singaporeans need cash on the dot by pawning or surrendering valuable items such as jewelries and thereby getting a percentage of its original value. Times have indeed changed, as not only are pawnshops starting to resemble commercial bank branches, but they are also making a large client base out of the younger generation.

According to OSK DMG, pawnbroking, which is regulated and licensed under the Pawnbrokers Act in Singapore, is a readily available source of credit due to the fact that it is a form of collateralised loan that allows an individual to get a certain percentage of the value of the item pawned. 

Here's more from OSK DMG:

Compared against credit cards, which charge rates that are much higher than the maximum 1.5% per month that pawnshops are allowed to charge, it is a cheaper source of funding too. People turn to pawnbrokers instead of banks when they are in need of a short-term loan, as: i) pawnshops have no requirement for credit checks or proof of salary, on top of ii) their fast processing times.

The number of pledges received at Singapore pawnshops increased by 47% to 4m in 2012 from 2.7m pledges in 2007.

In addition, loans disbursed by Singapore pawnshops surged 343.8% to SGD7.1bn in 2012 from approximately SGD1.6bn in 2007.

The trend is likely to continue due to a few factors such as the availability of cheap credit fuelled by easy monetary policiesfrom central bankers in advanced economies since the global financial crisis.

Meanwhile, lower-middle income families are also turning to pawnshops to fulfill their short-term cash flow needs.

Singapore’s population has been increasing at a steady rate over the past 10 years – to 5.3m in 2012 from 4m in 2000 – and is projected to grow to 6.9m by 2030.

The segment of the country’s population aged between 25 years and 64 years, comprising the bulk of the pawnbroking industry’s customer base, is estimated to have increased to approximately 2.3m in June 2013 from 1.9m in 2000.

Malaysia’s population is also projected to increase by 10.0m to 38.6m in 2040 from 28.6m in 2010. The growth of Singapore and Malaysia’s populations enhances the potential of the pawnbroking industry.

The ideal market environment for most pawnbrokers would be: i) when there is gradual rise in gold price, or ii) when gold price remains stable with minimal volatility.

The share prices of the listed pawnbrokers have taken a big hit lately, with prices of ValueMax Group (ValueMax) (VMAX SP, BUY), MoneyMax Financial Services (MoneyMax) (MMFS SP, NEUTRAL) and Maxi-Cash Financial Services (Maxi-Cash) (MCFS SP, NEUTRAL) falling 22%, 15% and 20% respectively till date from Oct 2013.

Gold prices have since recovered and stabilised at USD1,100-USD1,300/ounce. The sharp decline in gold price has already been reflected through impairments made to inventories of the pawnbrokers.

We expect gold price to continue to remain stable around thecurrent level, which translates into earnings recovery for the pawnbrokers. ValueMax is our preferred pick in the sector due to i) cheaper valuation compared to its peers, ii) greater growth potential from expansion into Malaysia & high value pawnbroking, and iii) a fixed dividend policy.