What’s the deal with household debts?

JOHN* is your average lad: A 24 year old bank teller earning a monthly salary of RM1,718; a bachelor living with his parents and as such is able to lead a comfortable life without worries of financial obligations or burdens other than the monthly repayments of his car loan.

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.

However, he started seeing credit cards as an easy source of money and set about obtaining more and more.

Within two years, he found himself saddled with six maxed out credit cards and an outstanding debt that would only continue growing despite John’s continued regular payments of five per cent.

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. Lack of financial literacy

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.

Fiona Liao, Prudential Assurance Malaysia Bhd (PAMB), chief brand officer believes that this is a correct step as good money habits for children need to be inculcated at an early age.

When asked for justification for this view, Liao cited that, “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,” Liao added.