Factors Influencing Generation Y Bankruptcy in Malaysia

Background of study

Bankruptcy is a legal term for when an individual or business unable to pay their outstanding debts. In Malaysia, an individual who resided in Malaysia at least one year and owes debts which amount at least RM30, 000 for a default period of six months can be declared as a bankruptcy. According to Law of Malaysia 2006, when an individual has declared bankruptcy, they have to comply with some rules and regulation until they pay off their debts. Below is what will happen once a person is declared bankrupt:

a) Appointed

A GDIA person will be assigned to the Director General of Insolvency (DGI) once declared as a bankruptcy. The DGI will administer all of the individual’s assets and manage it to repay the outstanding debts.

b) Travel Ban

A bankrupt, unable to travel out of Malaysia without written permission from the DGI or obtaining a court order which allows the individual to travel overseas.

c) Limited Credit Line

Existing bank account of a bankruptcy will be deactivated and they are not allowed to spend more than RM1000 on their credit card or obtain any credit more than RM1000 from any creditor.

d) Asset Taken Away

When a person declared as a bankruptcy, his assets such as car and houses will be taken and control by GDI.

e) Employment Restricted

Some professions’s job will not be able to work by a bankrupt. For example, Lawyer, Accountant, Quantity Surveyor and Doctor. Beside, a bankruptcy is also not allowed to own a business. So in the other word, there is no entrepreneurship is allow once an individual has been declared a bankrupt.

According to Reuters Business & Financial News dated 07 September 2015 reported that Malaysia, which aims to become a ”high-income status” nation by 2020, is seeing an increase in the number of young people grappling with higher debts than they can handle. The increase in the number of Gen-Y bankruptcy has become one of the major concerns of the Malaysian government. This study aims to determine what are the factors influencing young generation bankruptcy in Malaysia. This study provides theoretical and empirical evidences which, given a useful information for the young generation as well as financial institutions in order to increase their awareness regarding the bankruptcy issue.

Problem Statement

Bankruptcy is a common issue that happens in every country. According to a news dated on 17 August 2018, reported that comparing with other develop country like Singapore and the United Kingdom, Malaysia bankruptcy statistics are slightly higher. In the same reports show that, Malaysia recorded on average 0. 36% of the population declaring bankrupt, in comparison with 0. 31% in Singapore and 0. 23% in the United Kingdom. According to Liew Vui Keong Minister in the Prime Minister’s Department, a total of 64, 632 Malaysians between the ages of 18 and 44 declaring bankruptcy since 2013 and there were 4240 cases reported from January to April 2018. A high rate of Gen-Y bankruptcy in a country shows a sign of large-scale problem in an economy such as depression or recession. According to a previous study, Gen-Y is a large population, and their buying power is making them an attractive target for many consumer industries. When there are a large number of bankruptcy Gen-Y, then this group of consumer will become more conscious when they spend and this will finally cause an economic downturn. Besides, higher rate of Gen-Y bankruptcy may also cause a social issue such as, bankruptcy can ruin a families. According to Anna V. Haotanto 2018, bankruptcy can cause a couple to divorce, and the parties who declared as a bankrupt normally will lose the custody of their child. Last but not least, a high rate of Gen-Y bankruptcy reflecting on a social ethical issues of a country. The negative impact of bankruptcy has gained the Malaysia government attention on the total number of Gen-Y bankruptcy in Malaysia. According to The Star newspaper dated 15 Aug 2018 reported, Malaysia government realizes and show they're concerned over the situation which 64k Malaysian Gen-Y has declared bankrupt since 2013. Even though the latest bankruptcy statistics among Malaysia show decline in the number of bankruptcy.

Literature review

Definition of Gen-Y and Bankruptcy

According to Jacquelyn, the word “bankruptcy” is a legal process initiated by an individual or a company due to the inability to settle debts owing. Bankruptcy happens when a person is unable to settle his debts (known as a Debtor) owed to the people or the party who loan him the money. The parties who gave out the loan are known as a creditor. For example, a banking institution or even company giving out hire-purchase schemes.

According to the Business Dictionary, Gen-Y are the generation of people who born during the 1980s and early 1990s. The name of Gen-Y is based on Generation X that preceded them. Gen-Y is also known as “echo boomers” because they are the children of the parent born during the baby boom (the “ baby boomers”). In the same time, Gen-Y is also known as Millennials echo boomers, internet generation, I Gen and net generation because Gen-Y is children born during the time period have constant access to technology (computers, cell phones) in their youth and they are the generation which enhance with technology knowledge.

Gen -Y Bankruptcy in Malaysia

Young bankruptcy is a common issue that happens in every country. According to Asia News dated 24 Aug 2018 reported that 64, 632 Malaysian aged between 18 to 44 have been declared bankrupt over the last five years. In the other word, this number represents that almost 60% of the cases reported in the Malaysia Insolvency Department is Gen-Y. In the same article, Malaysia Insolvency Department Director General Datuk Abdul Rahman Putra Taha said that most of the bankruptcy cases in Malaysia were primarily caused by the inability to sustain car loan, personal loan, housing loan and business loan.

Credit card and bankruptcy

A credit card is a card issued by a financial institution that allows its user to borrow pre-approved fund at the point of sale in order to complete a purchase. Nowadays every individual can easily obtain credit card base on their income and occupation. As the result, the number of credit card holders had reached about three million on last century. Previous studies have shown that people are willing to spend more – as much as 83% when they paying with a credit card than cash. According to New Straits Times dated 3 Dec 2017, many young graduates never notice that credit card change their buying behavior. They think that having many credit cards is an indicator of success. Beside, in line with the development of information technology, New Straits Times newspaper dated 09 July 2017 reported that a survey conducted by Overseas Bank Limited (UOB) Malaysia found that Gen-Y who grew up with the internet, mainly used their credit card to buy airline tickets and book hotel accommodation. They also used their credit cards to purchase products from fashion and retail outlets through the World Wide Web. This has led to a 26 per cent rise in credit card spending among card member aged between 26 and 35. Finally, the rise in credit card spending has relied high-cost borrowing among Gen-Y, and according to an interview in this study, high cost borrowing or also known as credit card debt may trap Gen-Y toward bankruptcy.

Uma Murthy & Paul Anthony Mariadas (2017), explore the factors bank policies on credit card to be the causes of bankruptcy of Gen-Y. Nowadays, many card issuing bank companies trying to sustain their marketplace by offering different types of incentive and benefits. For example, incentives such as annual fee waiver, cash rebate, point redemption and even airline miles. Furthermore, some bank even lower down their minimum requirement for credit card application. Other than that, according to Uma Murthy & Paul Anthony Mariadas credit card issuing also provide attractive repayment policies where if customer able to pay back the debt in the grace period of time, there will not any interest charge. Otherwise, 1% interest of total outstanding will be charged. According to a news reported in The Star Online news (2017), Bank Negara Malaysia (BNM) has taken various measures to ensure that only eligible and capable individual were given a credit card to control the level of credit card debt. Beside, Bank Negara has also issued a Guideline on Responsible Financial Practices to require financial institutions to ensure that the loan or credit card is given to an individual who able to pay.

Attitude toward money and bankruptcy

Attitude toward money is another major factor that leads to Gen-Y bankruptcy. We defined attitude toward money as the meanings, feelings, values and beliefs attached to money. According to the pass literature report, the attitude toward money will actually affect an individual spending behavior. Based on the finding of Duh Helen Inseng (2016) money attitude dimensions variedly affect compulsive buying. In the same report, researchers stated that Bonsu (2008) suspects that outcomes of consumer behavior like credit card abuse, compulsive buying, consumer debt accumulation and bankruptcy may emanate from high scores of certain money attitude dimensions. Uma Murthy & Paul Anthony Mariadas has stated in their report that, according to Alias (2010), Malaysian consumers spend even though when the price of goods and service has drastically increased in the past few years. In this case, the researcher found that 53% of actually don’t pay credit card in full. Azira, Juhaida & Hanita (2017) investigate factor influencing young adults “debt in Malaysia”. The studies found that according to previous studies, poor money management skills are one of the predictors of debt. Normally, people with weak toward money management have serious debt.

Poor financial planning and bankruptcy

According to Avadhut, financial planning is the process of meeting an individual life goals through a systematic and disciplined arrangement of your personal finances. With the above definition, we realize that a poor financial planning individual will not meet their life goals. According to a report on Borneo Post, Azaddin Ngah Tasir, the Chief Executive Officer of AKPK said that base of AKPK’s data, 43. 3% of those people seeking help was people who poor in financial planning. Previous studies, found that poor financial planning is one of the significant psychological variables associated with the level of debt and bankruptcy. A poor financial planning is one of the predictors of debt.

Joyce (2013) stated that, lack of investment decision, serve as a factor of poor financial planning. According to Joyce, Gen-Y Malaysia respondent are relying on their personal investment and saving for their retirement fund. At the same time, Joyce stated that a wrong investment decision may also lead Gen-Y bankruptcy.