Debt is an increasing social problem in most of the countries today, included those developed countries, for instance, United States. According to the statistics from the Federal Reserve, it indicates that the total amount of consumer credit outstanding in the United States in December 2010 is approximately $2.4 trillion. In other words, every man, woman, and child that lives here in the United States has to bear nearly a $7,800 debt since 2010 Census recorded that the residential population of the United States was 308,745,538 on April 1, 2010.
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In addition, the Federal Reserveâ€™s statistics also indicates that the household debt service ratio (DSR) of the United States is at 11.9%, which means that each consumer has to spend approximately 12% of their disposable personal income to make payment on outstanding mortgage and consumer debt. In Malaysia, the latest household debt level is RM 577 billion and stands at 74.5 percent to the gross domestic product (GDP). Bank Negara Malaysia Governor, Tan Sri Dr Zeti Akhtar Aziz said, â€œIn our assessment at this point, the borrowing by households has been on a prudential level but we don’t want to wait till we do have problems.â€?(Business Times 2011, 20 January). A specially designed financial capability program — POWER (Pengurusan Wang Ringgit Anda) has been launched which targeted the young individuals and new borrowers in order to aid them to manage their finance effectively.
Cosma and Pattarin (2010) have expressed that consumer debt is those debts arisen when the creditor does not fulfill the assumed obligations, this without his or the creditor will. US Legal (2011) also defines consumer credit as debt incurred by an individual primarily for a personal, family, or household purpose. In fact, there is a distinction between consumer debt and consumer credit. Consumer credit is defined in the different countries as credit obtained to finance any purchase other than property (Gurdia, 2002). Consumer credit is a broad term comprising all kinds of installment credit as well as non-installment credit except mortgage debt (mostly loans for real estate secured by real estate) (Kamleitner & Kirchler, 2007). Therefore, home equity loans which are used for other purposes than real estate, but secured by a lien on a home also fall under the definition of consumer credit. Although there is a clarification between these two terms, the term of consumer debt will be used synonymous to consumer credit in this article. Yet, consumer debt is also known as household debt.
Debt has bring along with a number of social troubles, for example, relationship breakdown, divorcing, filing for bankruptcy, committing suicide due to unable to get out of the spiral debt situation. Besides, there are a lot of people suffering psychological consequences of debt, such as stress, depression, anxiety, mental health problem, high blood pressure and heart attack. Therefore, it is important to get to understand the reason why people get involved in consumer debt.
Table 1.1: Household Indicators
RM 395.5 billions
RM 429.5 billions
RM 472.1 billions
RM 516.6 billions
RM 581.3 billions
Source: Financial Stability and Payment Systems, Bank Negara Malaysia
As the table above shown, the household debt level is increasing each year and there is an upward trend starting from the year of 2006 till 2010. Besides, the household debt to GDP ratio also broke the 70 percent after 2008 and today the ratio is stands 74.5 percent. There is a contradiction between maintaining the health of economy of nation and reducing the level of consumer debt. A nationâ€™s GDP is often used as a measurement of the health of its economy. Consumer debt begins to negatively affect the health of the nation when it forces consumers to spend less (Howstuffworks, 2011).
There is also the existence of some other contributors that make the consumer debt problem worse, such as democratization of credit, easy accessibility of credit, and governmentâ€™s encouragement of homeownership. The best example of relaxation of credit constraint is credit card. Before the Asian crisis in 1997, credit cards applicants must earn a minimum annual income of RM24, 000 and are in active employment for three months when application for credit card is submitted. After the Asian crisis in 1997, the Bank Negara Malaysia (central bank of Malaysia) relaxed the income requirement to a minimum of RM18, 000 per annum to helped ease liquidity problems among the consumers (Cheu & Loke, 2008) before the new measures on credit card has been released on 18th March 2011 which will be effective on 1st January 2012. Besides, before the new credit card interest structure has been effective on 1st April 2011, credit cardholders only has to make the minimum payment required, which is 5% of total outstanding balance or RM 50 whichever is higher by the payment due date. Late payment charges of a minimum amount of RM5 or 1% total outstanding balance as at statement date, whichever is higher, capped to a maximum of RM50 per account.
Moreover, the â€œbuy today, pay later lifestyleâ€? is almost a fact of life. Through credit cards, consumers are now able to gain easy access to credit which previously was not possible (Cheu & Loke, 2008). Besides, the advent of telephone and internet-banking, and the availability of credit at the point of purchase have increased the accessibility of consumer credit and the speed with which loans can be obtained (Brown, Garino, Taylor & Price, 2004).
In addition, according to the 2011 Budget Speech, the government empathizes with the citizenâ€™s need to own affordable houses, particularly the poor and low-income group. Therefore, the government introduced Skim Rumah Pertamaku through Cagamas Berhad by providing a 100 percent loan which gets rid of the 10 percent down payment for those with household income less than RM3, 000 per month. Yet, the government also gives stamp duty exemption of 50 percent on instruments of transfer on a house price not exceeding RM 350, 000 for those first-time house buyers. In line with the governmentâ€™s efforts to promote home ownership, banks, based on their capacity and business strategy, are encouraged or required to offer housing loans, especially to low income borrowers (Endut & Toh, 2009).
In order to prevent more and more consumers getting into debt trouble, it is essential to be able to determine the factors that contribute to the debt involvement of people. There are many factors have been identified in previous studies in predicting the level of debt and debt behavior, for instance, demographic, psychological, and attitudinal but the effect of the factors on debt forming yield unclear and heterogeneous results. This is due to the reasons of lacking of clearness of measurement, different kinds of debt being focused, and different populations being concerned (Wang, Lu & Malhotra, 2011).
Furthermore, there is a limited range of nations has been found in the debt-related studies, especially Asian countries which included Malaysia. Thus, more representative samples are needed to examine whether previous result are applicable across various nations and cultures.
There are several objectives of this study are developed as following:
To investigate the debt situation amongst of Malaysian
To determine the factors that affect the involvement of people in debt
To assist government and financial institutions in reducing and preventing indebtedness of people
To improve consumersâ€™ awareness regard the debt and increase their financial literacy in making financial decision.
The study of factors that influence people holding debts as well as getting themselves involve into the indebtedness situation is important. Through this study, the government might be benefit by understanding the understanding the real debt situation that Malaysian currently facing. It helps the government to formulate proper and quick actions towards the debt and credit problems in order to solve it.
In addition, this study also contributes to private sector like the financial institutions. It lets the financial institutions to get to know that loosening their lending criteria and making the credit more easily available to consumers not only would result in indebtedness and bankruptcy amongst the borrowers, but also would cause enormous losses for lenders. Yet, it aids the financial institutions to develop and provide better products and services (loans and credits).
Moreover, this study also benefit consumers who already in debt and those going to be in debt. According to Kempson and Whyley (1999b), knowledge of financial products was often remarkably low, and this rendered people especially vulnerable to mis-selling, and deterred them from taking up financial product in the first place. This reflects the current situation that consumers today having. Therefore, via this study, it is important for consumers to equip themselves with financial education and financial literacy skills in order to avoid themselves from making irrational financial decisions.
Credit is the privilege of being able to borrow money without having to pay it back immediately. It allows people to spend now and pay later over time (Livestrong.com, 2011). In macroeconomics perspective, consumer debt occurs when credit is used for funding consumption purposes instead of investment purposes. In other words, what has been purchased no longer has long-term financial benefits and indirectly creates outstanding consumer credit which means consumer debt.
Based on past research, there are a number of factors have been identified in predicting the debt status of people, for instance, demographic, psychological, and attitudinal variables. It is found that six determinants have a significant impact on consumer debt taking. The determinants are: (1) demographic variables (Adcock, Hirschman & Goldstucker, 1977; Lea, Webley & Walker, 1995; Watson, 1998; Chien & Devaney,2001; Kim & Devaney, 2001; Grable & Joo, 2004; Lyons, 2004; Jones, 2005; Perry & Morris, 2005; Yilmazer & Devaney, 2005; Norvilitis, Osberg, Young, Merwin, Roehling & Kamaz, 2006; Borden, Lee, Serido & Collins, 2008; Robb & Sharpe, 2009; Wang, Lu & Malhotra, 2011), (2) locus of control (Davies & Lea, 1995; Lea et al., 1995; Busseri, Lefcourt & Kerton, 1998; Norvilitis, Szablicki & Wilson, 2003; Perry & Morris, 2005; Mewse et al., 2010), (3) debt attitude (Davies & Lea, 1995; Walker, 1996; Watson, 1998; Boddington & Kemp, 1999; Chien & Devaney, 2001; Norvilitis et al., 2006; Borden et al., 2008; Wang et al., 2011), (4) materialism (Walker, 1996; Watson, 1998 & 2003; Lee and Lee, 2001/2002; Norvilitis et al., 2006), (5) financial knowledge (Grable & Joo, 2004; Lyons & Scherpf, 2004; Jones, 2005; Perry & Morris, 2005; Lyons, Chang and Scherpf, 2006; Norvilitis et al., 2006; Borden et al, 2008; Robb & Sharpe, 2009), and (6) Impulsivity (Boddington & Kemp, 1999; Norvilitis et al., 2003; Norvilitis et al., 2006; Wang & Xiao, 2009; Wang et al., 2011)
Indebtedness has been defined as the state of being indebted, without regard to ability or inability to pay the debt (Wordnik, 2011). People often get themselves into various forms of consumer debt, such as credit card debt, housing loans, study loans, auto loans and personal loans with different purposes, value of loan, repayment period and interest rates.
There were different kinds of debts being focused by researches, which included consumer debt (Lea et al, 1995; Walker, 1996; Lee & Lee, 2001/2002; Watson, 2003; Yilmazer & Devaney, 2005; Mewse et al., 2010), student debt (Davies & Lea, 1995; Watson, 1998; Boddington & Kemp, 1999), credit card debt (Adcock et al., 1977; Chien & Devaney, 2001; Kim & Devaney, 2001; Norvilitis et al., 2003; Jones, 2005; Norvilitis et al., 2006; Robb & Sharpe, 2009; Wang & Xiao, 2009; Wang et al., 2011). Studies that related indebtedness to the consumer financial behavior (Busseri et al., 1998; Perry & Morris, 2005; Borden et al., 2008) and financial risk tolerance (Grable & Joo, 2004) were also carried out.
There was a negative relationship between age and use of credit card (Adcock et al., 1977) Similarly, Jones (2005) showed age was the only significant predictor of credit or charge card debt and number of credit or charge cards held, with older students having higher levels of debt and more credit or charge card than younger students. These findings were also supported by the researches that conducted by Watson (1998) and Norvilitis et al. (2006) who also reported that age was the significant predictors of debt and indebtedness. In contrary, Grable and Joo (2004) found that age was not significantly related to financial risk tolerance.
Since the influence of age on debt behavior is still unclear, a hypothesis about age is developed as following:
H1: There is a significant effect on age towards debt taking of people.
Lea et al. (1995) in a study of individuals, who owed money to a public utility company, found that debtors were more likely to be women. Previous study by Lyons (2004) suggested that females had a greater likelihood of being delinquent on their cards as compared with males. Conversely, Robb and Sharpe (2009) showed that there were no significant differences in credit card balance behavior based on gender. Same finding had been found by Norvilitis et al. (2006) and Grable and Joo (2004), gender was not the significant predictors of debt and significantly related to financial risk tolerance.
Since the influence of gender on debt behavior is still unclear, a hypothesis about gender is developed as following:
H2: There is a significant effect on gender towards debt taking of people.
The study of Chien and Devaney (2001) showed the results as that households headed by someone who with more education were more likely to have higher outstanding credit card balances. This finding was supported by Grable and Joo (2004) who found that there was significantly related to financial risk tolerance and was associated positively with risk tolerance.
Since the influence of education on debt behavior is consistent, a hypothesis about education is developed as following:
H3: There is a significant effect on education towards debt taking of people.
The results gained by Chien and Devaney (2001) suggest that households headed by someone who was married would be more likely to have higher installment loans and outstanding credit card balances. Homogeneous finding has been reached by Yilmazer and Devaney (2005) — married individuals were more likely to hold debt than single individuals and Wang et al. (2011) — people who were married were used revolving credit more often. There was a significant relationship between marital status and financial risk tolerance (Grable & Joo, 2004). In addition, Robb and Sharpe (2009) also reported that although marital status had no significant influence on the likelihood of revolving a credit card balance, married individuals were noted as carrying larger log balances as compared with single individuals. These findings are largely supported by prior studies, as both Lyons (2004) and Jones (2005) noted higher levels of debt among married college students, all else equal.
Since the influence of marital status on debt behavior is still unclear, a hypothesis about marital status is developed as following:
H4: There is a significant effect on marital status towards debt taking of people.
Lea et al. (1995) in a study of individuals, who owed money to a public utility company, reported that debtors were more likely to be employed part-time, to be housewives or to be unemployed rather than employed full time or retired. Similarly, Robb and Sharpe (2009) found that employed students were more likely to revolve a credit card balance, though the level of the log balance they revolved was not significantly different from those who did not work. But heterogeneous result has been found. Employed students were no more likely to report engaging in more effective financial behaviors compared to students who were not employed (Borden et al., 2008)
Since the influence of employment status on debt behavior is still unclear, a hypothesis about employment status is developed as following:
H5: There is a significant effect on employment status towards debt taking of people.
There was a positive relationship between income and responsible financial management behavior (Perry & Morris, 2005). Yet, Kim and Devaney (2001) also claimed that disposable income was positively related to the amount of debt. Same results happened on the research of Grable and Joo (2004) — household were significantly related to financial risk tolerance and were associated positively with risk tolerance. Lea et al. (1995) in a study of individuals, who owed money to a public utility company, found that debtors were more likely to be in low income groups. Similarly, later research by Chien and Devaney (2001) also suggested that households headed by someone who with lower income were more likely to have higher outstanding credit card balances
Since the influence of income on debt behavior is consistent, a hypothesis about income is developed as following:
H6: There is a significant effect on income towards debt taking of people.
People whose children were older than six were used revolving credit more often because they had to support both a young child (Wang et al., 2011). Lea et al. (1995) in a study of individuals, who owed money to a public utility company, found that debtors were more likely to have more children in their households. The finding was supported by Chien and Devaney (2001). In their study, the results suggested that households headed by someone who with a larger household were more likely to have higher outstanding credit card balances.
Since the influence of household size on debt behavior is consistent, a hypothesis about household size is developed as following:
H7: There is a significant effect on household size towards debt taking of people.
Lea et al. (1995) in a study of individuals, who owed money to a public utility company, reported that debtors were more likely to rent their homes rather than owning them outright. Same finding had been found by Chien and Devaney (2001). In their study, the results suggested that households headed by someone who were renters would be more likely to have higher installment loans. But on the other hand, Grable and Joo (2004) showed home ownership was not significantly related to financial risk tolerance.
Since the influence of home ownership on debt behavior is still unclear, a hypothesis about home ownership is developed as following:
H8: There is a significant effect on home ownership towards debt taking of people.
According to Cosma and Pattarin (2010), locus of control is related to the perception of oneâ€™s own capacity of controlling the events of life. Internal locus of control identifies the perception of the capacity of controlling events, that is, the belief that situations and results of personal events depend upon decisions and capacities of the individual. Vice-versa, external locus of control concerns the perception that oneâ€™s own lifeâ€™s events depend upon external factors, often perceived as random and, however, not significantly dependent upon the individualâ€™s actions or will.
There is an existence of several researches on the impact of locus of control on debt behavior, but the results are not always comes out to be inconsistent. Lea et al. (1995) in a study of individuals who owed money to a public utility company, found that no significant difference between locus of control and attitudes toward debt but Wang et al. (2011) found that locus of control was negatively related to the frequency of revolving credit use. On the other hand, Davies and Lea (1995) also found that locus of control has no significant association between locus of control and levels of debts, but did report that external locus of control was significantly correlated with a tolerant attitude to debt, which in turn was related to debt same as the finding of Mewse et al. (2010) — a significant effect of locus of control on attitude.
In addition, Norvilitis et al. (2003) reported that locus of control was generally related to attitudes toward money as it was expected at the beginning of the research that the students with more external locus of control will report higher levels of credit card debt. Perry and Morris (2005) also reported a same result as the coefficient on the external locus of control and financial management behavior is significant and negative. Yet, Busseri et al. (1998) also found that the relatively more internal their consumer locus of control scale scores, the more likely were subjects to be planful and purposive in the act of shopping. The more external the consumer locus of control scores, the less likely was subjects to be knowledgeable, thoughtful, and willing to exert themselves when purchasing consumer goods.
Since the influence of locus of control on debt behavior is still unclear, a hypothesis about locus of control is developed as following:
H9: There is a significant effect on locus of control towards debt taking of people.
There is a widespread view that attitudes to debt have changed radically during the Twentieth Century, with a shift from general abhorrence of debt to acceptance of credit as a part of a modern consumer society (Lea et al., 1995).
There are several studies had been conducted which pointed out the significant role of financial attitudes in debt holding. These included research of Davies and Lea in 1995 which reported that higher levels of debt in college students were related to greater tolerance of debt. The authors also found that college students accumulate debt because they believe that their current financial situation is temporary. This was because they have greater expectations on their income after graduating and debt will decrease. Similarly, Watson (1998) also reported that attitude toward debt was one of the significant predictors of indebtedness.
Besides, Walker (1996) also found that attitude towards credit and debt was significant linked with debt and financial management which is similar to the later study, for instance, Boddington and Kemp (2005) who also indicated that there was a significant positive correlation between attitude to debt and the amount of debt people actually had. Thus, higher debt levels were accompanied by greater tolerance of debt. Same result had also been obtained by other researchers — Chien and Devaney (2001) which reported that those with favorable specific attitudes toward credit were more likely to have higher outstanding credit card balances and Borden et al. (2008) which showed that studentsâ€™ with avoidant attitudes toward credit cards were less likely to engage in risky financial behaviors. But not all the authors concur. Norvilitis et al. (2006) found heterogeneous results. In their findings, student tolerance attitude towards debt was not significant predictors of debt.
Since the influence of debt attitudes on debt behavior is still unclear, a hypothesis about debt attitudes is developed as following:
H10: There is a significant effect on debt attitudes towards debt taking of people.
Belk (1984) defines materialism as the importance a consumer attaches to worldly possessions. At the highest levels of materialism, such possessions assume a central place in a person’s life and are believed to provide the greatest sources of satisfaction and dissatisfaction in life either directly or indirectly.
Watson (1998) demonstrated that the spending tendency scores were significantly higher for respondents with high levels of materialism compared to respondents with low levels of materialism. The author also reported the same result in his study later in 2003. The highly materialistic respondents had attitudes which were significantly more favorable toward debt than respondent with low levels of materialism. Although highly materialistic people had larger amounts of debt than people with low levels of materialism, no significant differences were found between the two groups (Watson, 1998). Yet, the author also reported that materialism was not a significant predictor in indebtedness. In the study of 2003, Walker resulted that high levels of materialism have more favorable attitudes toward borrowing money than individuals with low levels of materialism. Besides, he also found that people with high levels of materialism are more likely to exhibit behaviors consistent with positive attitudes toward debt — use of installment credit and outstanding debt.
Study about materialism was also carried out by Lee and Lee (2001/2002) which demonstrated that consumers’ approval of the use of credit for luxury purchases is an important indicator of their level of indebtedness. Similar result had been obtained by Walker (1996) in his study which showed that materialism was significant linked with both debt and financial management. Conversely, Norvilitis et al. (2003) found heterogeneous finding — materialism was not the significant predictor of debt.
Since the influence of materialism on debt behavior is still unclear, a hypothesis about materialism is developed as following:
H11: There is a significant effect on materialism towards debt taking of people.
According to Investopedia (2011), financial literacy (is assumed synonymous to the term of financial knowledge in this article) is defined as the possession of knowledge and understanding of financial matters. Financial knowledge can be gained through formal education, seminars, and informal sources such as from parents, friends, and work as well as through negative personal experience.
In a series of studies, Lyons and Scherpf (2004) and Lyons, Chang and Scherpf (2006) that advocated financial literacy education which can aid in cultivating consumerâ€™s financial knowledge, found that more knowledgeable about personal finance consumers will make more responsible financial behaviors. There are also the other researchers concur — Perry and Morris (2005) demonstrated that individuals with higher levels of financial knowledge are more likely to engage in responsible financial management behavior and he coefficient on financial knowledge was significant and positive.
Consistent to prior research, Norvilitis (2006) found that lack of financial knowledge was one of the significant predictors of debt. Same finding had been obtained by Grable and Joo (2004) who found that financial knowledge was significantly related to financial risk tolerance. But in the findings of Robb and Sharpe (2009) which investigated student credit card debt found that even students with higher levels of financial knowledge had significantly higher credit card balances. In addition, Jones (2005) demonstrated that there was not a significant relationship between credit knowledge and use of credit among college student. Students who had higher levels of debt or access to credit or charge cards were not significantly more or less knowledgeable about credit. Similarly, Borden et al. (2008) also indicated that financial knowledge was not a significant predictor of either effective financial behaviors or risky financial behaviors. Therefore, it appears that simply having knowledge about effective financial practices may not translate into consistent prudent behaviors.
Since the influence of financial knowledge on debt behavior is still unclear, a hypothesis about financial knowledge is developed as following:
H12: There is a significant effect on financial knowledge towards debt taking of people.
Impulse buying is an immediate experience, often concurrent with a feeling of excitement and urgency. It compels a consumer to buy a product at that moment instead of cautiously contemplating a purchase. It is different from unplanned buying because it involves an experiential urge to buy. An impulse comes on as a sudden urge that drives a person to a certain behavior, such as buying an item instantly without thought and without delay. Yet, impulse buying also comes from an acute loss of control when shopping (Wang and Xiao, 2009).
Norvilitis et al. (2006) found that delay of gratification (supposedly indicating impulse buying) was the significant predictor of debt. Another research that was studied by Wang et al. (2011) found that self-control and deferring gratification were negatively related to the frequency of revolving credit use, but impulsiveness was related to. Besides, impulsiveness was positively related with the frequency of petty installment use while deferring gratification was negatively related to.
Impulsivity was generally related to attitudes toward money as it was expected at the beginning of the research that the students with higher levels of impulsivity will report higher levels of credit card debt (Norvilitis et al., 2003). In the contrary, Wang and Xiao (2009) found that the score of impulse buying in the debt group is significantly higher than the no-debt group but the relationship between impulsive buying and credit card indebtedness is not significant. In addition, Boddington and Kemp (1999) found that there were no significant relationships between the impulsive buying scale and concern over debt or total debt outstanding. But there was a significant correlation between scores on the attitude to debt scale and impulsive buying. Those who were accepting of debt were more likely to buy impulsively.
Since the influence of impulsivity on debt behavior is still unclear, a hypothesis about impulsivity is developed as following:
H13: There is a significant effect on impulsivity towards debt taking of people.
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