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PSP 3203-1













Household debt is defined as the amount of money that all adults in

the household owe financial institutions. It includes consumer

debt and mortgage loans.Household debt can be defined in several ways,

based on what types of debt are included. Common debt types include

home mortgages, home equity loans, auto loans, student loans, and credit

cards. Household debt can also be measured across an economy, to

measure how indebted households are relative to various measures of

income (e.g., pre-tax and disposable income) or relative to the size of the

economy (GDP).

The burden of debt can also be measured in terms of the amount of

interest it generates relative to the income of the borrower. For example,

the Central Bank of Malaysia, Bank Negara Malaysia (BNM) a measures

the "household debt service ratio" (DSR), an estimate of the ratio of debt

payments to disposable personal income. Debt payments consist of the

estimated required payments on outstanding mortgage and consumer

debt. The BNM also measures the "financial obligations ratio" (FOR), which

adds automobile lease payments, rental payments on tenant-occupied

property, homeowners' insurance, and property tax payments to the debt

service ratio.

Homeowner and renter FORs are calculated by applying homeowner

and renter shares of payments and income derived from the Survey of

Consumer Finances and Current Population Survey to the numerator and

denominator of the FOR. The homeowner mortgage FOR includes

payments on mortgage debt, homeowners' insurance, and property taxes,

while the homeowner consumer FOR includes payments on consumer

debt and automobile leases.

The biggest portion of the Malaysian household debt goes to paying

off housing loans followed by passenger car loans, personal use, securities

purchase, and credit cards. Malaysians take on increasing amount of

housing loans because of rising house prices, low or negative interest

rates, and speculative activities. Banks and other financial institutions

have encouraged borrowing by offering low down-payment, some as low

as 5% of the value of the property, while developers provide marketing

incentives in the form of payment of certain transaction costs and

interest- free financing during the construction period.

There are strong indicators to suggest that house prices and ability to

service housing loans have been overstretched in Malaysia. A ratio of

house price to household income of 3 to 4 times is internationally

acceptable but this ratio has risen to over 6 times and over 8 times in

Kuala Lumpur and Penang Island respectively.

Next to housing loans, car loans form the second largest category of

household loans. This is due to Malaysias misguided national car policy

encouraging car ownership, to support Proton at the expense of a good

public transport system. As a result, ordinary Malaysians are burdened

with significant car loans that consume a large part of their income. In

fact, car loans are stretched over a long period to enable borrowers to pay

off their loans, such that the cars become obsolete no sooner when the

loans are fully repaid.


From the latest data by the Bank Negara Malaysia showing that

household loans achieved a slower growth rate in 2016. However,

economists and analysts think that the household debt-to-gross domestic

product (GDP) ratio may see improvement for 2016, its sustainability for

further improvement over the next few years could be tough. With seven

consecutive years of rising household debt to GDP, the ratio is estimated

to have eased marginally from 89.1% (2015) to around 88.5% (2016).

The higher inflation in 2017 could be a risk to debt service ability, as

higher inflation adds to the cost of borrowing. If the denominator in the

equation that is GDP growth comes below the pace of household loans

expansion, then the household debt to GDP ratio could be steady or even

rises. With nominal GDP growth of around 5%-6%, household debt-to-GDP

ratio will be in the range of 85%-90% of GDP in 2017 (2015: 89.1%).

Distribution of Household Debt

As at end-2015, the largest share of debt (about 40%) is owed by

individuals in the top 20 income group3 (Chart 1).

The average debt level for borrowers in this group is more than twice of

that observed for other borrower groups (Chart 2).

The debt servicing capacity of this group is reasonably healthy as

indicated by more prudent debt service ratios (Chart 3).

Relative to other income segments, a large share of this debt is secured,

with about 77% of debt taken out for the purchase of properties and

principal-guaranteed investments which contribute towards individuals

wealth accumulation (Chart 4).

Borrowers in the more vulnerable income segments, represented in the

analysis by individuals in the bottom 40 income group, accounted for only

11.4% of total debt. Borrowers in this group are more likely to face

difficulty servicing their debt in the event of a payment shock, given

thinner buffers. This is somewhat mitigated by the lower proportion of

debt financed under floating or variable rate schemes compared to other

income groups (Chart 5).

More than half (53%) of borrowings by this group, however, remain

sensitive to changes in interest rates which can have a disproportionate

impact on debt repayment capacity given the low absolute income levels.

About two-thirds of total debt is acquired by those living in major

employment centers. Most of these borrowers are of the age between 30

and 40 years old in the 40-60 income groups. As expected, a significant

portion of debt is for the purchase of residential property. This is followed

by debt for vehicle purchases and personal use, corresponding to the

need for greater mobility and higher expenditures associated with raising

young families and urban lifestyle choices. Following the implementation

of responsible financing measures by the Bank in 2012, the share of

financing represented by individual borrowers in the 40-60 income groups

has shown some pick-up as credit providers tightened lending standards

for the lowest income groups. This has also been an area of greater

supervisory focus by the Bank in recent years. Given the profile of debt

taken out by borrowers in this group as noted above, close attention by

lending institutions to ensure robust affordability assessments continues

to be warranted.


i) Private consumption

Private consumption is defined as the value of the consumption

goods and services acquired and consumed by households. Private

consumption also called personal consumption or consumer expenditure.

These three terms are all the same thing. The private consumption

excludes interest payment, purchase of land and building, transfer abroad,

all business expenditure and spending on second-hand goods. There are

difference between expenditure and consumption where expenditure take

place when consumer purchased goods and services while consumption

may take place over a several years. There are a few major that will

influence the level of consumption which is income, price expectations,

interest rate and consumer credit.

First is the income of the consumer. As we know, consumer will

spend more if they have higher personal incomes. Having a lot of money

will tend consumer to spend their money by buying their unlimited needs

and wants. They will did not realise and forget that they will lose their

money which is their money will be decrease if they are often spending

their money with the wrong ways. If they just want to satisfied their

unlimited wants, they will got nothing because the important is they have

to control their wants and focus with their needs first. If not, their personal

incomes will be finished just like that not realise the situation happen.

The second is price expectation. This is the situation which is

consumer aspect that the price will be increase or decrease. This situation

will tend people to buy or just leave the place. Experience shows that

consumers tend to save more and spend less during periods of high

inflation. They may bring spending forward, however, if they expect a one-

off increase in prices because of inflation or higher indirect sales taxes.

They will just need to spend more money during inflation so that they will

just postpone it and wait for the price decrease.

Next is about interest rates. The consumers will not tend to make

loans during higher interest rate and this situation will encourage

consumer to save money. This is because of higher interest rate will make

them have to spend more from the actual price. It will make them loss

their money just for things that in higher interest rate.

The last is consumer credit. Consumer credit includes purchases

obtained with credit cards, lines of credit and some loans that can cause

to over expanse. For instance, household that have credit cards will tend

to use their card intentionally. They will do not realise that they are

making over expanse just because they did not use their cash money.

They just use their card to buy their goods and services and actually at

the same time their debts are increase.

ii) Progressive financial liberalization

Financial liberalization refers to the deregulation of domestic

financial markets and the liberalization of the capital account. Proponents

of financial liberalization believe that deregulation would bring about a

host of benefits which would boost economic growth. However the

emergence of a more diversified and competitive banking system has

resulted in downward pressure on interest rates, expanded credit

coverage and increased loan amounts, while the strengthened risk

management of household credit portfolios has enabled financial

institutions to lend more to households.

In other hand, progressive financial liberalization actually is a loan

that simplified by particular bank. These bank make the facilities just want

to help their customer that have financial problem. The bank will give loan

to all people that need and ask their help. Unfortunately, this situation

causes problem which is all people that were allowed to make a loan

without limit amount although they have a low income. It is inappropriate

if they have a low income but get a large amount of loan. This is because

this situation will put them into a trouble situation which is they had to

pay all of debt in long term of their live.

For example, loan that provide by the bank are such as housing

loan, vehicle loan, wedding loan and others. The bank just wants to help

the household that need money to pay their needs. These loans actually

could help the household but at the end they will be hard for them to think

that the truth is they have a lot of debt. The household must think first

that they are affordable to repay all debts or not. From this situation, the

household must start saving and spend less for other expenditure or

consumption. This can help the household to have a saving for the future.

iii) Unemployment

Unemployment is one of the factors that increase the household

debt. This is because as we know, unemployment rates in our country

become higher year by year that we unable to control. A high

unemployment rate means there is less income for all households and

thus a greater desire for loans to finance consumption. Thus, it leads to a

rise in household debt. Defaults on payment will occur as borrowers will

find it difficult to maintain their mortgage payments through periods of


Unemployment has a negatively significant relationship in the short

term. Households tend to increase borrowing when faced with increases in

spending or situations of low employment. If the household is unemployed

thats mean they not have fixed income to support their live. In live, the

important thing is our income which is our money but a person who did

not have income will through their live with trouble. Without money it will

be hard for us to continue our live that need us to use money to buy any

goods or services.This problem that encourage the household to make

loan because they did not have any job that can give them income.

Unemployment problem must be solved by the household

themselves. They must try to find a job and make sure that they will

receive income to avoid them from continue making a loan and have a lot

of debt. Having a lot of debt will inconvenience the household to pay back

in the future. Loan that they had made from the bank or other agency will

put their live in bad situation because they had to pay all the loans. This

will increase the possibility of financial constraints and discourage

households from borrowing because the households might be unable to

repay loans.


Household debt levels have risen rapidly in many countries over the past

decade. The data on households showed that the majority of Malaysians

are very vulnerable to the crisis in their families due to high household

debt. Many will find themselves in a crisis of household debt, can be

caused by job loss, physical or mental injury and other factors. So,

household debt give many effect. There are good effect and bad effect.

4.1. Bad Effects

i) Decrease the standard of living

Low income household group (household income of less than RM 3000 per

month), which is 40% of Malaysian households, this is the biggest victim

of the current economic situation. Nearly 50% of Malaysians do not have

any savings because their income had to be used to pay household debt

such as loans to buy a house and car, credit card debt and personal loans

and if this happen they just be able to live a life of 3 months only. More

and more workers are forced to have two or three jobs to ensure survival

of their families. This cause family time and rest time is decrease. So the

longer the working hour, the more the standard of living decreased.

ii) Increase the gap of income

now days we have high inflation and Goods and Services Tax (GST).This

two is related to household debt. From the statement by the Minister of

Rural and Regional Development Datuk Seri Mohd Shafie that the Goods

and Services Tax (GST) is able to decrease the income gap. But this are

contrary with Dr Dzulkefly Ahmads opinion, he says that GST is increasing

the gap of income because group income and corporate taxpayers (the

riches)will get a reduction or tax cuts. So while they get an increase in

income, but, the poor will not benefit from any income tax deduction and

this will cause income gap between rich and poor increased. GST also

increase the expenditures and this lead to household make a debt.

Besides that, for the inflation, 20% in Malaysia is the richest groups of

household, they only need to allocate 10% of their income for food and

the poorest people (40% of Malaysians household) have to spend more

than 30% of their income on food. While the rich enjoy high quality food

with a low load, the poor people had to be very thrifty and bear the high

loads. This same as earlier, that the poor had to spent more to pay

household debt. Thus, this increase the gap of income between rich and


iii) Increase in unemployment and loss of income

This is related with the economic situation, that also plays a major role in

the lives of ordinary people who are in debt. Export that being reduced are

giving a negative impact on the manufacturing firms and the government

had to take austerity measures that are very difficult to be accepted by

Malaysian. The situation gives trouble to large companies, especially from

the manufacturing sectors, that employs many low-wage workers. they

willing to shut down operations and moving to another country just for

pursuing a better profit. If this happen hundreds of thousands of factory

workers facing job losses and this reflected in the increased levels of

household debt. If they lose their source of income how the can pay their

loans and credit card.

iv) Real estate prices rise dramatically.

Property developers will build and sell houses to those who did not

deserve like what happened at Developer-interest-bearing scheme (DIBS

that make the buyer no need to pay anything until the house is completed

in 2010-2014.The developers will continue to build and sell new projects

at a price that is more expensive because they are able to create their

own market demand due to the existence of those who unable to buy this

house from the financial view. This is where the main cause of these

things will happen. Property(real estate) developers also been more

creative in marketing their products. Cash rebate is a powerful weapon to

attract buyers to be interested in buying property from them. The

developers will give a high cash rebate. For example, they will a set price

higher than the market price of one unit like property worth RM 800

thousand is being sold for RM 1 million, the RM 200 thousand is given to

the buyer in the form of a cash rebate is just to draw our attention. Given

the record of the transaction is valued at 1 million. This cause the other

projects around the region will make the price as a benchmark.

v) Banks tighten credit for all other types of loans

As the credit markets seize up, many banks that were very easy on their

lending standards suddenly become very cautious on a variety of different

loans. The small businesses depending on these loans and lines of credit

to fund their day-to-day operations then become illiquid. This leaves small

businesses unable to pay their immediate bills, which forces them into


vi) Interest and foreclosure rates increase .

With many borrowers already in the debt, increases in interest rates lead

to a cycle of rising foreclosures as homeowners had to follow the added

financial pressure. This causes many homeowners to walk away from their

homes and file for bankruptcy as a way to reduce their debts.

vii) Consumers had to tighten up spending

As the economy slows and unemployment starts to rise, many consumers

either slow or reduce spending to cope with the slowdown. This causes

retail sales to fall and consumer confidence to drop.

viii) Households with insufficient savings when they retire

For example, households that use money more in the past, will face this

problem if they did not recognising the long-run consequences. Like, fail to

recognise that the cost of shelter is rising along with the price of houses.

Hence they may need to make substantial adjustments that troubled their

consumption paths later in life.

4.2. Good effects

i) Individuals can borrow money

They can borrow money to buy a house and to purchase durable goods

such as a car or kitchen appliances, therefore improve their standard of

living. In other words, debt allows people who do not have the upfront

money that needed to buy a car, house or to enrol on a course, to borrow

it today knowing that they will have sufficient income to pay off that loan

in instalments in the future.

ii) Smooth the consumption of goods and services

The permanent income or life-cycle model states that consumption

depends on the expected lifetime income of an individual. For example,

younger people will borrow money like borrow for studying, in the

expectation that they will receive higher earnings in the future when they

will be able to pay back the borrowed money.

iii) Provide stability to the whole economy

Stability for economic can be build by smoothing out spending during

periods of temporary falls in income. Having a high level of debt among

households and private businesses is often seen as a sign of financial

development, and more advanced economies do generally have higher

private debt levels than developing economies, because more demand

more income. An increase number of lending individuals will also boost

economic growth in the short term, as individuals will have more money to

spend on goods and services, potentially leading to increased business

revenues, profits and hiring. So household debt just .give more

consequences than benefit.


Spending our money seems like such a great way to have fun, especially

when we have the credit to take care of the essentials we need and the

gadgets we want. However, in a short time it will putting ourselves in

financial trouble. We have to take steps now to avoid debt worries later

on. All parties must work together for their own self interest.

Recently, Central Bank has adopted ways of prevention so that the ratio of

debt to income at a level that can be controlled. Three preventive

measures enforced by the Central Bank with immediate effect is firstly to

limit the duration of the personal loan from 25 years to 10 years. Then,

funding for housing and non-housing sector has reduced loan repayment

period from 45 years to 35 years. Next, pre-personal financing on products

are now prohibited. This means that banks and non-banks are not

permitted to offer loans via telephone and short message service. All

personal loan to buy a product must get approval from the Central Bank.

An individual also should have their own alternatives to overcome this

household debt. If we did not take any action now, then nobody will do it

for us.

i) Budget Plan

Creating spending plan allows you to determine in advance whether you

will have enough money to do the things you need to do or would like to

do. It allows you to create a spending plan for your money, it ensures that

you will always have enough money for the things you need and the

things that are important to you. Keeping track of your expenses and

limiting unnecessary expenditure will also could result in being able to pay

off your debt faster. Spending less and saving more is often easier said

than done and this why we need to plan our budget.

ii) Automatic Debit

A money transfer scheduled on a predetermined date to pay a recurring

bill. Automatic bill payments are routine payments made from a banking,

brokerage or mutual fund account to vendors. Automatic payments can be

made from a checking account or credit card. This forces you to pay your

bills on time and avoids extra penalties that add to your debt load. Paying

your bills in full prevents debt increases that can build up before you know


iii) Find ways to earn more

By finding a ways to earn money can increases our financial health and

can overcome household debt. Having a second job can increase your

income to get ahead in uncertain economic times and are not limited to

an additional paycheck. It also can Keeping busy forces you to be more

productive and often reduces discretionary spending as you don't have

the time to shop or go out on the town.

iv) Refinance your mortgage

Refinancing mortgage is done to allow a borrower to obtain a better

interest term and rate. The first loan is paid off, allowing the second loan

to be created, instead of simply making a new mortgage and throwing out

the original mortgage. For borrowers with a perfect credit history,

refinancing can be a good way to convert a variable loan rate to a fixed,

and obtain a lower interest rate. Borrowers with less than perfect, or even

bad credit, or too much debt, refinancing can be risky. Refinancing our

mortgage also can enable us to reduce debt payments and save money

through lower interest rates.

v) Keep up with Constant Loan Repayments

A constant payment allows us to have both the interest and principal paid

in full on the last payment. Keeping up with constant loan repayments

prevents us from falling deeper into debt with a build-up on interest. The

failure of repay your loan can have serious financial consequences both

now and in future, and can damage your ability to acquire credit for many


vi) Re-negotiate for more favourable terms with creditors

Negotiating with creditors is subsequently far easier than it has

been previously, as this provides stricken debtors with an opportunity to

reduce their financial burden without spending outside of their existing

means. By opening the lines of honest communication with each

individual lender, you can explain your exact circumstances and ask them

to consider revised terms that will benefit you going forward. Whether this

involves an adapted payment schedule or the implementation of a

reduced interest rate, it can help you to pay off your debt without

incurring more.

vii) The Bottom Line

While it is not possible to repay your debts without investing

money into the process, you should avoid spending unnecessary

sums of cash in the pursuit of a financially liberated future. Costly

financial products, unwarranted charges and unmanageable payment

plans will only add to your debt over time, so your ability to acquire

knowledge as a consumer and pay attention to detail will ultimately

help you to achieve more effective results.


Household debt has grown strongly in recent years, with aggregate

gearing and debt-service ratios increasingly exposing households to

deteriorating conditions in asset process, incomes and interest rates. At

the microeconomic level, some categories of households are coming

under increasing stress with tighter credit conditions acting negatively on

highly geared households.

From the financial stability perspective, as household lending

continues to play an important role in banking system, a more

comprehensive and responsive risk management system is critical in

preserving the soundness of each banking institution and the resilience of

the banking sector as a whole. This is to ensure that banking institutions

are able to effectively manage the risks at all times and under all

economic conditions. In terms of monetary policy, when setting the policy

rate it is imperative to take into account the increased potency of

monetary policy as a result of the increased sensitivity of household

consumption and debt servicing capability to interest rate changes.

Although the household must justify their needs for financing, the

financiers need to play a big role in curbing the expansion of household

sector loans. With the Bank Negara Malaysias target of GDP growth over

the next three consecutive years set at an annual rate of 4 to 5 per cent,

wealth generation and further consumption are encouraged, and efforts to

lower debt levels would appear to be heading to the opposite direction.


i. Siti Hanifah Borhan Nordin, Lim Sheng Ling and Muhammad Khairul

Muizz Abd Aziz. (2016). Looking Beyond Headline Household Debt

Statistics. Refer to

ii. NurHuda Nizar. (April,2015). Determinants of Malaysian Household

Debt: Macroeconomic Perspective. Refer to


iii. Lewis Humphries. (2013, 30 July). How To Reduce Your Debts

Without Spending Unnecessarily. Refer to

iv. Debt Fix. (2017, 28 February). How To Get Over Your Debt Hangover.

Refer to