A debt dilemma

MALAYSIANS have a borrowing problem. It’s true. Whether we like it or not, many face the problem.

To compound matters, incomes are nowhere near comfortable enough to deal with this lingering issue.

Bank Negara’s Financial Capability and Inclusion Demand Side Survey 2024 reveals some interesting trends.

It says that financial knowledge among Malaysians has improved, meaning they should know that taking on more debt is bad if you cannot afford it.

But the behaviour and attitude says other things.

“Low and/or unstable income, combined with rising living expenses, are also found to impede the ability to practise sound financial management, such as paying bills on time and saving money for the future.

“While many attempt to live within their means, (the) rising cost of essentials like food and utilities make it increasingly difficult to keep within budget, as expenses often exceed planned limits.

“Consequently, Malaysians prioritise meeting immediate needs, leaving little room for long-term saving or financial planning,” the report says.

Those words are a damning reflection of the reality on the ground.

For years, food inflation at 17.4% a year was more than salary increases, which clocks in at a growth rate of 7%.

To make matters worse, the bottom 40% income group (B40) spends 52% of their income on basic necessities. The middle 40% income group (M40) spends 37%, and the top 20% (T20) 32%.

This means that as the price of basic necessities rise faster than wages, it will affect the B40 more as that group spends most of their money on these necessities.

The report, which is based on a survey towards the end of last year, also points out that 26% of Malaysians tend to run short of money compared with 14% in 2021, pointing out that the situation is getting worse.

The main reason people are running short of cash, coming in at 56%, is simple – they don’t make enough money.

Fluctuating income accounted for 37% of respondent’s reasons and increased cost of necessities is 33%.

The report says that financial well-being involves the ability to meet financial obligations, handle income changes, reach future financial goals, and make financial decisions that enhance quality of life.

“Better personal financial management can boost financial resilience and positively influence one’s perception of their financial situation”.

But it all starts with the amount of money a person has or makes.

If people are always shuffling their finances to just buy the necessities, that struggle is never going to get better.

The report highlights this by looking at financial resilience. It says that 37% of Malaysians have enough money to cover lining costs for three months if their incomes are disrupted.

The reports, however, shows that Malaysians are less prepared to cope with financial shocks, with 61% reporting difficulty securing RM1,000 in emergency cash and that 35% of Malaysians indicate they lack sufficient financial protection when faced with adverse or catastrophic events.

This data indicates that things are getting worse over the past few reports.

Malaysia’s household debt was at 84.2% of gross domestic product at the end of last year, indicating an elevated level over the past decade or so. It is at such a high level that banks can be satisfied with consistent profits for some time as long as bad debts are kept at a low level.

The appetite for debt is quite ferocious with Buy Now, Pay Later (BNPL) schemes becoming more popular. BNPL is generally for small ticket items, with each transaction below RM100.

The growth of those schemes is becoming more noticeable.

According to government data, BNPL schemes chalked up transactions worth RM7.1bil in the second half of last year (2H24)from RM4.9bil in 1H24.

At the end of last year, it was reported there were 5.1 million active BNPL users with most aged between 21 and 45 and with incomes less than RM5,000 a month.

This indicates that the B40 are more susceptible to using BNPL schemes.

Then, there are the digital banks in the country.

Their place in the financial pyramid is to satisfy financing needs of loans below RM3,000.

These banks are supposed to fill the needs of the underserved in the country, but with household debt in the 80% range, I doubt there are many more underserved people in the country.

With the large banks not letting the digital banks muscle in on their territory, there is certain stiff competition in dishing out loans to any remaining “underserved” segments in the country.

This is also not considering the rise of pawnshops to facilitate a different perspective of lending in the country.

The proliferation of lending channels and high debt levels among Malaysians is certainly a worry as there has been no let-up in terms of granting access to financing in the country.

As long as Malaysians diligently borrow and have yet to tap other avenues for funding such as their insurance and takaful policies, they will always face a big risk from the economic shock that can cripple employment in the country.

Plus, there needs to be a way to figure out how incomes can outpace costs, without which the indebtedness of the lower-income Malaysians will only continue to grow.