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Table of Contents
Introduction......................................................................................................................................3

1.0 Definition of Household Debt...................................................................................................3

2.0 The problem of household debt among Malaysians..................................................................4

3.0 Effects of Covid19 on household debt.......................................................................................7

4.0 Programmes, services and policies which can be implemented to solve bankruptcy issues in
Malaysia...........................................................................................................................................8

4.1 Course on prioritized financial spending...............................................................................8

4.2 Progressively revise payment terms.......................................................................................9

Conclusion.......................................................................................................................................9

References......................................................................................................................................10

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Introduction
Household debt entails the amount of liabilities which an individual has in relation to their
overall income. This is an economic phenomenon which measures the proportion to which a
household is earning, saving and spending. This paper discusses the issue of household debt in
Malaysia within the context of the COVID-19 global pandemic. The paper critically discusses
the definition of household debt, and discusses the effects of the pandemic on household debt.
The paper closes by giving recommendations are given on how the bankruptcy issues in
Malaysia can be solved.

1.0 Definition of Household Debt

Household debt is the cumulative amount of outstanding payments within a single home (Zabai
2017). In this case study, household debt primarily constitutes the loans which Malaysians
borrowed to finance the purchase of residential properties. This is the cumulative amount of each
person’s liabilities and they may be from different sources and in different amounts. Household
debt indicates the creditworthiness of the individuals in the household, however, when this
amount continues to rise, it is a high predictor of macro-economic crisis (Yahaya & Sarwe
2019). When there are multiple households with high levels of household debt, it is an indicator
of an economy which under financial strain, and would be most probably headed for a crash.
Household debt takes on different forms such as credit cards, student loans, mortgage payments
together with home and auto loans. Household debt is measured per household, and then it can
be measured across a region or population in relation to their income before or after their taxed
income. It can also be measured in relation to the overall size of the economy of the country
(Nizar 2015).

Debt is primarily defined as the liabilities which one has to pay in interest or principal to another
party at a current or future date. In the context of this study, debt encompasses the liabilities
which a borrower has to pay to the creditor at a current or future date (Alpanda & Zubairy 2019).
This arrangement is not infinite, but it often has a time frame, and periodic dates on which
installments towards the debt will be due. The ability to pay the agreed installments on time
indicates good creditworthiness, where the borrower can qualify for new sources of financing.
On the contrary, inability to pay installments towards the date on the agreed dates indicates poor

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repaying capacity, and may disqualify the borrower from acquiring new sources of financing
(Mian et al 2020).

Household debt has different types and categories which include. The most common type of
household debt is mortgage loan, which is a long term loan taken by an individual to finance the
purchasing of a house (Lombardi et al 2017).

2.0 The problem of household debt among Malaysians

A high debt ratio is a predictor of impending financial decline, because it indicates that the
individual is unable to save much, and is instead spending more. While the individual may have
other assets of high value which they use as their collateral, a high debt ratio indicates a level of
financial vulnerability. The home ownership campaign launched by the government was a high
driver for the rise of household debt in Malaysia (Coletta et al 2019).

Household debt restricts one from having access to new financing (Mat Isa 2020). When the
borrower continues to borrow, or has a large debt which they are paying off, they would have
limited power to have new sources of financing availed to them. The lender would assess their
current obligations and note that from their current income and obligations, they would be unable
to comfortably take up another debt. This is detrimental in case the borrower may need to be
financed for an emergency cause, or have additional obligations to meet and they do not quality
for new sources of financing (Alter, Feng & Valcx 2018).

Household debt is associated with unemployment. Unemployment indicates that the individuals
have limited earning capacity, thus they would be limited in their ability to pay back any existing
debts which they have. When the existing debts are not paid up, this would be a loss incurred by
the creditors, and this begins to upset the financial system within a country. Therefore, this
would be a negative by product of household debt, where previously legible borrowers no longer
have the means to pay off their existing debt (Ramli 2019).

Household debt is problematic because it contributes to the rising levels of inflation. Inflation is
the overall rise in the cost of living, where the individual prices of goods and services rise per
specific period. Therefore, household debt indicates that individuals have access to external
sources of financing other than their income. When they have access to financing, the providers

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of goods and service have the incentive to raise their prices. The prices begin to rise, because the
sellers understand that the consumers have credit cards thus they can pay for the goods even
when they do not have the cash on hand, or they can borrow loans to make once-off payments to
purchase the goods (Zaman Huri 2020). Therefore, when sellers understand that the consumers
have other sources of external financing which makes them to raise prices without hesitation,
which inadvertently rising the levels of inflation. It creates the illusion effect in the economy as
if there is much disposable income, yet it is not income but debt instead. This then leads the
economy to grow and when it reaches an unsustainable level, borrowers have exhausted their
financing options and cannot pay back their existing debts and then suddenly, the seemingly
thriving economy is in a recession (Zainal & Omran 2018).

Household debt is also an issue when lenders do not adequately assess the creditworthiness of
the borrowers. It is essential for borrowers to be adequately assessed whether they qualify for
financing, to reduce the risk of bad debts, and to reduce the chances of straining the overall
financial condition of the borrowers (Azman et al 2017). However, it is noted that there are
several incidents where the creditworthiness of borrowers was loosely assessed. This has led to
people who are not in a strong financial position getting access to financing which they later
have difficulties in paying back, and eventually defaulting in their payments. Therefore, this
places a strain on the personal finances of the lenders due to entering contracts which they are
unable to cope with, thus household debt becomes a problem (Yunchao et al 2020).

However, there is also another incidence of household debt which the borrowers do not directly
engage creditors with proof that they are able to repay the debt, which is student loans (Ajis
2020). Malaysian citizens have access to student loans which they can repay after they finish
their studies and secure employment. However, due to changing economic conditions, the
employment rate fluctuates and employment opportunities for tertiary graduates are scarce.
Therefore these tertiary graduates start out their careers with lingering household debt which
they have to repay. While school loans are effective in assisting the Malaysian citizens to fund
their education despite having limited means, their effect on the household debt cannot be
disregarded (Yusop et al 2020).

This makes Malaysians who take college loans vulnerable to having strained finances because
after they gain employment, they are susceptible to getting additional lines of financing such as

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credit cards, auto loans and mortgage loans, which would place additional liabilities on their
finances. Therefore, the premise behind this concept would be that household debt among
Malaysians is a problem because they have numerous sources of finances to start with and often
limited opportunities to grow their income and repay their debts and liabilities (Mohd Zain et al
2017).

Household debt is a major drive for economic boom and bust cycles. The household debt has the
short term effect of boosting the Gross Domestic Product (GDP) of a nation. Household debt is
also a key indicator of the intensity of an impending recession. While an economy can sustain
high volumes of debt, the impending recession would be in a relative proportion to the amount of
debt. The household debt servicing costs can be relied upon as a indicator on how the banking
systems are under stress and likely to be unable to incur default payments and contribute to the
recession. This refutes previous predictors and models that suggest high debt is an indicator for
future growth. While in the short run the effects of household debt may seem progressive and
positive, after a certain lag the negative effects are bound to set in (Khan, Abdullah & Samsidin
2017).

Household debt is another issue in Malaysia, where individuals who borrowed to invest in
housing schemes incurred losses due to over saturation of the market, low demand and rising
interest rates (Mirza et al 2019). Individual borrowers were approached by several construction
companies about the opportunities in investing in the housing sector, with the guarantee of
promising returns and profits. These borrowers took up the opportunity, and there were
numerous housing and construction projects for both domestic and commercial usage (Zakaria,
Jaafar & Ishak 2017).

Due to consumerism, individuals feel the need to make more purchases to living a more fulfilling
life. Therefore the cycle continues, where the need to have more goods and services fuels the
need to acquire more goods. The most common types of goods which were purchase on credit
were durable goods such as cars, innovative electronics and technology gadgets. The decisions
which a household has in its borrowing activities have a large bearing on both the short-term and
long-term welfare. When household debt is on the upward trend and rising in volumes, that
household would most likely end up in a financial breakdown due to overwhelming obligations
(Cai et al 2020).

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3.0 Effects of Covid19 on household debt
In the months prior to the pandemic, Malaysian financial system was witnessing a gradual
increase in bankruptcy and insolvency cases (Gupta & Bansal 2020). When the pandemic set in
and the economy downscaled and underwent lockdown; the issue of household debt also evolved
in certain ways which are discussed as follows:

COVID-19 resulted in a decline in household debt growth in Malaysia from 5.5% to 4% in the
first quarter of 2020. This is due to the reduced level of borrowing to finance home mortgages
and motor vehicle purchases. Due to the shock of the pandemic, consumers were temporarily put
off purchasing durable goods such as homes and vehicles, and were engrossed in smaller
purchases for convenience goods and time to restructure their spending pattern. There was this
slight decline in the growth rate of household debt in Malaysia (Tiftik 2020).

However as the pandemic has been progressing, with limited economic activity and rising
consumer needs in household, there was an increase in debt. There was a 4% increase in
household debt in the third quarter of 2020. Household debt contributed to 87.5% of the Gross
Domestic Product, which is an alarmingly high proportion. This increase was an effect of the
temporal economic contraction which has occurred in the first quarter of the year 2020. The debt
mainly consisted of loans for personal properties (55.9%), personal use (14.2%) and motor
vehicle purchases (12.3%) (Jamaluddin et al 2020).

As the year 2020 approached the fourth quarter, household debt remained high but there was an
increase in new borrowers. There was an overall 30% decline in borrowings approvals, which
was valued at RM88.9 billion. The decrease in borrowing approval was an acknowledgement
that there was a decline in earnings and overall disposable income per household. While there are
households which experienced an increase in their earnings due to operating in essential services,
the general consensus for the Malaysian citizen was reduced economic activity and a declining
income. There was also a 16.3% decline in the loans which were issued out to households.
Currently, the total household debts in Malaysia amount to RM2.75 trillion, and it is mainly
constituted by financial assets owned by the households. The decline was reflective of the
general perspective on how local and global economies would perform in light of the distorted
economic activity on a global scale (Jantan et al 2020; Utz et al 2020). Financial institutions

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were quick to take on precautionary measures and selective lending once it was evident that the
pandemic had induced a drastic decline in economic activity (Karim & Ariff 2020).

4.0 Programmes, services and policies which can be implemented to solve bankruptcy
issues in Malaysia
It is necessary for both individual and commercial borrowers to responsibly use their lines of
credit. It is also essential to implement programmes and policies which will enlighten both the
lenders and the borrowers on how they can address the issue of bankruptcy.

4.1 Course on prioritized financial spending

Bankruptcy issues can be addressed by holding courses which comprehensively teach on
prioritized spending. This is derived from the observation that bankruptcy is not a result of lack
of income, but rather failure to pay of liabilities first when one gets their earnings. It is observed
that mostly when one files for bankruptcy, they would have a high amount of goods and products
which are depreciating assets or have little economic value yet they were purchased at a high
price. Therefore a comprehensive course which teaches the priority in which one can pay their
expenses in a way that avoids bankruptcy would be ideal (Yerkes, Schirma & Finch 2018; Skeel
2020).

The course content would include how one can assess their sources of income and have a fair
estimate of their average income. The next step would be having an accurate representation of
their expenses so that they can be fully aware of their obligations and liabilities. The next phase
would be to understand the implications of each obligation and liability, then setting priority in
which they can be paid off. This course would make consumers understand the consequences of
foregoing debt payments, and how they can circumvent these incidents while still meeting their
other existing expenses and obligations. The course can also teach how borrowers can refinance
their outstanding debt at a lower interest rate. There can also be discussions on how knowledge
of certain ratios, such as the fixed income ration; can aid in the borrower in having knowledge
about their capacity to pay off their debts or inability to do so, and take according action before it
reaches the option of filing for bankruptcy (McGregor 2020; Syan et al, 2020; Martin 2020).

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4.2 Progressively revise payment terms
For the lenders, bankruptcy issues can be addressed by being flexible in debt repayment
processes. The lenders should assess the repayment capability of their borrowers, and devise
creative and effective ways to ensure that the borrower can settle their payments (Hawkins
2020). It is necessary for the lending institutions to be strict with their borrowers, but this often
causes distress and eventually they file for bankruptcy, and the lender fails to recover their
money from the borrower. However, there is need to include debt deferral when the lender
realizes that their borrowers are having difficulty in paying; a deferral should be considered first
before filing for bankruptcy. The lenders should also avoid giving additional credit to borrowers
who have previously shown difficulty in repaying their own debts (Ali et al 2017).

Conclusion
In conclusion, household is a macro economic issue which needs to be constantly addressed,
given the high proportion it contributes to the GDP of a nation. The pandemic has altered the
access to financing, yet also increasing the levels of household debt. Therefore it is essential to
have programmes in place that will help in circumventing defaults in loan payments and eventual
bankruptcy. The issues which Malaysians face with household debt should also be addressed, to
prevent this debt from adversely affecting the progress of the economy.

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