High debt, low pay

MALAYSIAN households have nearly RM1.38 trillion worth of debt, exceeding what the federal government owes to its creditors.

Between 2018 and 2021, the household debt in Malaysia has jumped by almost 17%, and this has raised concerns about the country’s debt-servicing ability especially in times of crisis.

This is further exacerbated by the fact that most Malaysian households have low saving buffers.

According to Bank Negara, 76% of households have savings that can only cover less than three months of living expenses.

The situation is worsened by the increasing cost of living factor and imprudent lifestyle choices. The low-income bottom 40% (B40) households are the worst affected.

The B40 group has a net income of RM230 per month in 2019 after accounting for expenditures and financial obligations, according to Bank Negara.

The middle 40% and top 20% households, on the other hand, have a monthly net income of RM1,127 and RM4,081, respectively.

With inadequate saving buffers, most Malaysians have no proper “safety net” and it is not surprising that many had to tap into their retirement funds as they were hit by salary-reduction and job-loss over the past two years.

The high household debt is also a problem when it comes to Malaysians seeking house loans.

In its recently published 2021 annual report, Bank Negara points out that 65% of borrowers already have either car or personal loans.

This may constrain the prospective borrowers’ capacity to take on a housing loan, it adds.

The total household debt is contributed by hire purchase and personal loans, as well as credit card debt which stood at 28%.

Experts say that expensive car prices, partly due to the high taxes, as well as the lack of financial management skills, have contributed to skyrocketing hire purchase and personal loans, as well as credit card debt.

Bank Negara has cautioned that excessive debt accumulation could affect households’ spending power.

Within the region, Malaysia has one of the highest household debt-to-gross domestic product ratios at 89%, compared with 9.9% in the Philippines, 17.2% in Indonesia, 69.7% in Singapore and 89.3% in Thailand.

While the central bank says that households’ capacity to repay remain supported by targeted assistance and prudent lending standards, this does not change the fact that over-indebted borrowers remain vulnerable.

Speaking with StarBizWeek, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid says the high household debt-to-GDP ratio should serve as a reminder that knowledge on financial literacy is critical.

“This is to ensure that all Malaysians would be able to make a sensible financial decision, be it on spending, savings, investment and risk management,” he says.

Meanwhile, a financial adviser opines that the high household debt in Malaysia is the result of structural issues in the economy.

The lack of cheaper housing options, despite projects announced by the federal and state governments, are causing Malaysians to take on high mortgage loans.

It is noteworthy that about 55% of household debt is contributed by housing loans.

House prices in Malaysia are unaffordable across most states. Interestingly, Melaka is the only state with an affordable housing market.

Centre for Market Education chief executive officer Dr Carmelo Ferlito says the national push for home-ownership has resulted in high household debt.

He opines that the real issue that the policymakers should deal with is household debt not home ownership.

In the past decade, the government has been pushing for the affordable housing agenda via various financing schemes such as My First Home, Youth Housing and MyHome.

Under the 11th Malaysia Plan, the government had announced plans to build 606,000 affordable houses for the low and middle-income groups. Meanwhile, under the 12 Malaysia Plan, it was announced that 500,0000 units of affordable housing will be built.

“Like many other problems, the high household debt is an issue that, having reached the proportions it has now, cannot be solved overnight or with short-term measures and the prolonged lockdowns have aggravated the issue.

“It is very challenging and I think we have to recognise that there are two major issues – the rising cost of living and lack of financial literacy.

“In the long term, educational solutions aiming at increasing financial literacy are very important to build a culture that value savings more than consumption. People should buy a car or a house consistent with their level of income and rediscover the importance of virtuous consumption habits,” he says.

Ferlito also urges the government to address the rising cost of living issue.

Malaysia needs an economic strategy that aims at generating sound, investment-led growth and containing inflation by decreasing the quantity of money in circulation, he says.

Echoing a similar view, Bank Islam’s Mohd Afzanizam says there is an urgent need to ensure that the economy is competitve and that it will provide more opportunities for households to earn a better living.

This in turn is expected to spur higher income growth, better jobs and business opportunities as well as stable prices.

“The way I see it, household debt is merely a symptom rather than a cause.

“So we may need to find out the real cause for the elevated levels of household indebtedness rather than treating the symptoms,” he says.