However, John started developing a bad habit of spending for his wants rather than his needs and found his income disappearing before the thought of saving it crossed his mind. It wasn’t an issue for John at the time as his outlook and plan in life was to enjoy himself while he still had his youth and to leave the worries of his future and finances to be dealt with as he approached his 30’s.
However, John’s life plan took an unexpected detour with the unfortunate passing of his father three years ago. As the eldest son and only working member of the family at the time, he found himself suddenly saddled with a ton of financial obligations as he assumed the role of sole bread winner of his family of four overnight.
While John’s father did ensure through good financial planning that most of the family’s expenses would be taken care of with his EPF savings, it was neither a sustainable source of household income nor was it sufficient to relieve John from his new role in the family.
After contributing to the family’s expenses, he found himself with a fairly reduced disposable income and while it was still enough for John to live comfortably, he started to find it hard to maintain his old lifestyle.
John’s financial issues started when he was introduced to the world of credit borrowing. Initially, he only used his credit card to pay miscellaneous items such as petrol and the groceries while maintaining a regular repayment of the usual five per cent minimum payment.
By now John was a full-fledged delinquent debtor, as the letters of missed payments started to accumulate in his mail. Fear of being declared a bankrupt gripped him leading to stress and insomnia, thankfully John spotted some Agensi Kaunseling dan Pengurusan Kredit (AKPK) brochures on display in his local bank and was also able to find time to meet with them for counselling on his financial situation straight away.
The AKPK encouraged John to enroll into their Debt Management Program which would stop his debts and ease his cash flow. According to the AKPK, John’s case – as is similar yo many Malaysians’ situation – is not a serious one as he obtained help and guidance while he was still young and single. The AKPK stressed that many users within their Debt Management Program do not have sufficient knowledge on compound interest which is the source of John’s sticky financial situation.
Such real-life examples like John is not uncommon in Malaysia, and even within Sarawak itself. Amidst growing trends of increasing household debt and decreasing household savings, a potential crisis appears to be looming ahead as data suggests a frightening fragility of urban Malaysian households towards financial shocks.
With our current household debt to gross domestic products (GDP) ratio rising to a dizzying 89.9 per cent, amongst the highest within Asia, and an 11 per cent increase in the average number of bankruptcies from 2012 to 2013, it comes to no surprise that financial agencies and bodies are actively attempting to resolve this issue.
The increased number of bankruptcies also included figures showing that the number of bankrupt individuals under the age of 25 tripled from 2013 to 2014. When asked why bankruptcy in general is increasing, Marlene Margaret Nichol, AKPK’s head of Sarawak region believed the main reason to be a lack of financial planning awareness, followed by failure or slowdown in business, high medical expenses, and loss of income.
Looking back at John’s case, it seems to be a very common case as AKPK’s data reported that over 50 per cent of default and debt cases recorded within the AKPK’s database is due to poor financial planning. However, while the reasons Marlene has mentioned following after lack of financial planning can all be classified as financial shocks, Nichol noted that a lack of savings to act as a buffer to soften the effects of financial shocks.
As such, the need for us Malaysians to be able to survive financial shocks is imperative as a recent study on the financial fragility of urban households in Malaysia by the International Islamic University Malaysia (IIUM) found that only 10.8 per cent of households would be resilient to financial shocks.
The study also found that more than 50 per cent of households did not have any savings at all.
Our lack of savings makes us extremely susceptible to experiencing hard times when financial shocks occur as showcased in AKPK’s data regarding reasons for defaults and or debt problems. However, it begs the question: are we living beyond our means and not saving due to a slowing economy or a lack of financial awareness and education?
The study from IIUM believes that the main causation of this is due to a lack of financial knowledge as the study has also reported that those with better financial knowledge and higher levels of education are less likely to be in asset poverty.
“The inability to cope with financial shocks differs across ethnic groups partly due to the wealth disparity and access to sources of funds. Initiatives must be undertaken to assist the households in facing these challenges and for them to exercise financial prudence. Additionally, household debt must be closely monitored to ensure that it is sustainable.” IIUM study added.
Other financial bodies and agencies such as Bank Negara Malaysia (BNM), Prudential and the AKPK seem to share this sentiment as they have attempted to resolve this issue of unsustainable household debt through initiatives on financial awareness and educational programs with a concentration in our youth.
In 2011, a major research initiative undertaken by Prudential across Asia found that only 13 per cent of parents believe their children possess good money management skills – though almost all parents (95 per cent) think it is important to learn them. Young children are very receptive at this age so these values can go a long way in beginning a firm foundation in financial planning.
Looking at purely a financial aspect of the situation, the latest study conducted by the Khazanah Research Institute (KRI) titled “The state of Households II” has provided us data that will allow us to delve deeper into the issue by showcasing that on an aggregate level, our household debt to GDP ratio is still within a sustainable and affordable range.
“The total household financial asset-to-debt ratio has remained above two times over the past five years, while the total liquid financial asset-to-debt ratio has ranged from 1.4 to 1.6 times during the same time period,” the KRI study elaborated.
This indicates that despite a high debt to GDP ratio, on average Malaysian households have a ready pool of funds to meet debt obligations.
A report from the financial times (FT) titled “Malaysia’s household debt: How risky is it?” explained that a high household debt to GDP ratio isn’t necessarily a negative issue as some Asian countries with over 80 per cent of debt to GDP ratio such as Taiwan at 83 per cent, seems to be faring much better than others with a lower percentage.
“Countries where debt has grown gradually and where regulators implemented pre-emptive macro prudential policies are more likely to minimise blows to economic growth,” the FT report explained.
However, this is not the case for Malaysia as our household debt to GDP ratio experienced almost a 100 per cent increase between 2008 and 2014 due to acceleration from Malaysia’s favourable credit conditions and strong consumer demand.
(SOURCE: BNM (2016a))
(SOURCE: BNM (2016a))
This is a worrying figure as it is beginning to look eerily similar to household debt in the US on the eve of the subprime crisis when it peaked at 100 per cent. The saving grace to this is that Malaysia’s nominal GDP in 2014 was only around 40th of the US’s in 2006.
Additionally, BNM Governor Datuk Muhammad Ibrahim previously said that household debt was one of the areas being monitored by the central bank on a regular basis.
“There are many ways of managing high household debt. One of the instruments that we use is the macro-prudential measure, in many forms. We do not prescribe to any particular target (for the household debt), we basically outlined what are the principles that should be adopted by our banking institutions if they want to be prudent.” said Muhammad Ibrahim.
However, this rapidly surging household debt is of concern as it may suggest that “Households are accumulating debt faster than their incomes are growing, which will likely lead to repayment difficulties when the credit cycle turns”, Standard & Poor wrote in a report last year.
The phenomenon is made more apparent as we look back on the KRI report which noted that when segmented into different income classes, lower income brackets face more repayment difficulties.
“We found out that different incomes classes face different financial risks and that households in the lower income brackets have a much higher leverage (debt-to-income) ratio compared to those in higher income brackets” stated the KRI report.
Data from Bank Negara Malaysia (BNM) confers this finding as well with statistics showing households earning less than RM3000 a month having a relatively low share of total household debt (22.6 per cent in 2015) but on average possessing a leverage ratio of seven times their annual income.
This suggests that leveraged households in the lower income segment face more financial difficulties compared to their higher income counter parts.
“By comparison, higher income households have a much lower leverage ratio on average; around three times” added BNM.
One of the most probable causations for this could be that consumerism remains high in Malaysia and as a result lower income group households who cannot afford to buy all these high valued items with cash have resorted to loans and credit to finance their consumption.
This seems especially apparent in the property sector as recent years has shown BNM being quick to reduce housing loan approvals with stricter guidelines and eligibility.
This is showcased in a study done by the Real Estate and Housing Developers Association (Rehda) which found that more than 50 per cent of affordable housing loan applications have been rejected by banks.
The high rejection rate was mostly due to strict lending guidelines imposed by BNM which has in turn lead to slowing property markets.
However, there has been much push recently to change this as during a 21st Malaysian Developer’s Council (MDC) meeting which convened on Aug 5, the MDC stated that “Whilst we understand that the prime intent of BNM for introducing the guideline is to curb household debt, MDC is of the view that BNM should review the mechanism and qualifying criteria to facilitate homeownership especially first time buyers”.
Urban Wellbeing, Housing and Local Government Minister Tan Sri Noh Omar said his ministry would issue the licence under Money Lending Act 1951 (Amendment) 2011, which would allow developers to provide housing loans to overcome difficulties faced by buyers in securing bank loans.
This move would allow property developers to give out up to 100 per cent loans to buyers but it is learned that buyers taking up loans from the developers could be charged an interest rate of between 12 to 18 per cent. There is concern that this move may elevate household debts even further.
As such, it may be more imperative now than ever that we as Malaysian’s increase our financial knowledge before taking on such high risk loans.
AKPK is a wholly owned agency of BNM, their mission is to make prudent financial management a way of life for all Malaysians. They offer this through services such as financial counselling and its debt management program.
With financial counselling, the AKPK welcomes individuals to come talk to them if they have any issues regarding any financial or concerns. It is stressed that seeking help early will be extremely beneficial as if an individual’s situation has deteriorated to bankruptcy, the AKPK is unable to offer any of their services as the bankrupt will then be under the Jabatan Insolvensi’s jurisdiction.
On the other hand, AKPK’s DMP aims to allow users to gain control of their life and debt again through their counsellors who will work with you to develop a personalised debt repayment plan in consultation with your financial service providers.
The POWER! Programme covers sound advice and basics on cash flow management, the basics of borrowing, using credit cards wisely, buying a car and a house, as well as knowledge on managing one’s debts.
Addition, the AKPK would like the public to know that all their services are free of charge due to recent cases of individuals pretending to represent AKPK and offer customers debt restructuring for one per cent of the total loan.
“For the young there is a lot of lifestyle issues especially those who have just started working. That’s why our target audience main target for this power programme are those in the age group of 18 to 30 years old,” said Marlene Margaret Nichol, AKPK head of Sarawak branch.
“Those in the young adult group, before they take their first loan or credit card so they know the all the factors involved and what they can afford. The main thing is affordability.”
Meanwhile, the recent move to allow property developers to offer financial aid for potential buyers is seen as possibly worsening the household debt situation in Malaysia.
On September 8, Minister of Urban Wellbeing, Housing, and Local Government Tan Sri Noh Omar announced that property developers are able to seek money-lending licences issued by his ministry under the Moneylenders Act 1951 and Pawnbrokers Act 1972.
This move, he said, was to help spur the languid property sector and assist buyers who could not afford down payment.
International ratings agency Fitch Ratings warned that the move adds risks linked to rising household debt.
“If it’s allowed, lending to households will be unregulated with weak financial profiles and could undermine financial system strength if not implemented prudently,” it said in a statement on Thursday.
To note, the lending property developers will not be subject to Bank Negara Malaysia (BNM) monitoring in terms of risk management and underwriting standards imposed on banks.
The Urban Wellbeing, Housing and Local Government Ministry said that eligible housing developers could apply for moneylender licence to provide loans to property buyers.
In 2014, BNM banned the developer interest bearing scheme (DIBS) which allowed homebuyers to put down a small amount upfront and pay the rest upon completion.
Real Estate and Housing Developers’ Association Malaysia (Rehda) president Datuk Seri FD Iskandar asserted that a developer credit scheme will help buyers cover at least half the down payment because most bank loans today will only cover 80 per cent of the house price compared to 90 per cent previously.
“What we do is only bridging. No developer, no matter how big they are, can afford to give out a full loan,” he told reporters after unveiling Rehda’s first half-year performance.
He also sought to allay concerns that the initiative could create a debt bubble, saying only major developers with a healthy balance sheet will be allowed to give out loans. Critics said the move could trigger a debt bubble as developers had no way of vetting risky buyers.
FD Iskandar said speculation that developers would charge interest as high as 12 per cent was baseless, but admitted that it would be necessary for the rates to be above conventional loans.
“We will have to charge interest because we would need to recover the loan costs but we can base it on the banks’ BLR (base lending rate). Maybe around two per cent (more),” he said.
Rehda claimed the proposal was made because Bank Negara Malaysia made it difficult for new buyers to get housing loans while also decreasing the loan-to-value ratio, which it said was keeping low-income earners out of the property market.
“We have to sit down and discuss. Of course there are some issues but it’s something we can solve if we sit down together and talk,” he said.
For property players, RAM Rating Services Bhd said it does not expect the property sector to be significantly lifted by the move.
“Most of these players had geared up in the past two years to fund land acquisition and working-capital needs,” it said on Thursday.
“This had resulted in 60 per cent of the sample chalking up hefty debts, with gearing ratios of more than 0.7 times and/or debt-to-revenue ratios of above one times.
“Accordingly, not many developers have the capacity to provide mortgage financing on a large scale,” said RAM in its statement.
“Only developers with strong balance sheets will, in our view, contemplate this option to spur sales.”
Property developers have the discretion over whom they intend to disburse the loans to, as this scheme is open to anyone – not just first-time buyers.
The quantum of the loan-to-value ratio, too, can be set by the developers, with the interest rates capped at 12 per cent for those with collateral, or 18 per cent without.
People who opt for full or partial loans from homebuilders will be those who are unable to obtain the required loan amount through the traditional mortgage financing from banks and as such, will naturally carry a higher credit risk, said RAM.
Already, various incentives and promotions offered by developers since early this year – namely deferred-payment arrangements, minimal down payment offers, and build-then-sell home ownership schemes – are likely to crimp their profit margins and increase working capital requirements, RAM opined.
The developers’ debt level, too, could rise from making this sort of incentives available.
“Offering loans to house buyers who cannot meet the eligibility requirements of banks will, consequently, present further risks to developers in the event of non-payment by the buyer, especially in the absence of collateral,” RAM concluded.
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