It is critical for our future generations to receive financial education from a young age, both at home and in school, as bankruptcy has far-reaching consequences not only for the individual but also for society and nation. — Photo: AZHAR MAHFOF/The Star
WHILE the number of bankruptcy cases in the nation have been on a decline due mainly to the Second Chance Policy initiative, the fact remains that it is still a problem that has to be managed before the implications get more serious.
Although the overall numbers have shown a downtrend since the pandemic began in 2020, more cases may be reported this year. In the first half of 2024 alone, there were some 2,800 cases, which is more than half of last year’s total.
One way to manage bankruptcy is to identify the root cause and prevent it. Several key parties are responsible for this, including the government, but preventive measures must start at home — and from young.
Data from Malaysia’s Insolvency Department indicates that almost half of new bankruptcies are a result of personal loans, followed by business loans and other types of loans.
The typical defaulter tends to be male aged between 35 and 44, according to the data. This profile is plausible as men in this age group tend to be providers for young families and may be more careless with their spending as they want to provide material things for their children.
They may also be more open to taking risks when it comes to making investments. This may cause them to run into money problems, especially if they are not financially savvy.
According to current laws, an individual can file for bankruptcy if they cannot repay a debt of RM100,000 or more to their creditor.
Carmelo Ferlito, senior fellow at the Institute for Democracy and Economic Affairs (IDEAS), contends that the home plays just as important a role in financial literacy as schools.
“A certain sense of parsimony, frugality and prudence should be instilled at home, rather than letting children learn it as an academic topic later on,” he says.
He says literacy initiatives can always come later, but individuals need preliminary work from young — in the realm of households.
Yap Ming Hui, founder and managing director of Whitman Independent Advisors Sdn Bhd agrees, saying that children learn a lot from observing their parents.
“For instance, whether it’s holidays, food or clothes, if parents spend moderately and make thoughtful choices, children will learn to do the same. Ultimately, children watch how you behave every day. If you avoid excessive spending and make conscious decisions, they will likely adopt similar attitudes towards money,” he says.
Yeah Kim Leng, professor of Economics at Sunway University and part of an elite economic advisory committee for the government, says the need to address bankruptcies and financial distress has been recognised early by the government with the setting up of Credit Counselling and Debt Management Agency (AKPK) in April 2006.
“The financial literacy thrust was given a big boost with the establishment of the inter-agency Financial Education Network co-chaired by Bank Negara Malaysia and the Securities Commission with members comprising AKPK, Ministry of Education, Perbadanan Insurans Deposit Malaysia, Employees Provident Fund and Permodalan Nasional Berhad.”
He says the government’s Second Chance Policy is an important initiative to destigmatise bankruptcies and enable distressed individuals and their families to recover from misfortunes.
“Bankrupts, especially those affected by unfortunate circumstances and who are committed to rebuild their lives and financial well-being, should be given a second chance.”
He admits that there is a delicate balance between easing the policy such as increasing the debt threshold and relaxing discharge conditions, and creating inappropriate incentives for bad behaviour to not honour debt obligations.
Close monitoring
A closer analysis of the Second Chance Policy’s impact is needed to determine whether benefits outweigh costs. In addition, it is necessary to analyse other determinants such as the effectiveness of ongoing financial literacy programmes.
The Insolvency Department aimed to discharge at least 130,000 bankruptcy cases by the end of October, but 142,510 cases have now been discharged, exceeding the original target.
Federation of Malaysian Consumers Associations CEO Datuk Paul Selvaraj points out there are many attractions these days that could promote irresponsible financial behaviour. This include Buy Now, Pay Later (BNPL) schemes which have grown rapidly.
Citing information from the Consumer Credit Oversight Board website, he says there are currently about 2.9 million active BNPL users.
“If consumers are living beyond their means, the consequences can be far-reaching not only for the person but also for society and the nation.
“Household debt in Malaysia is already high, thus society can be considered vulnerable to any personal and economic shocks.”
Malaysia’s household debt stood at RM1.53 trillion at the end of last year, with the household debt to GDP ratio at 84.2% compared to 82% in 2018. As a comparison, the ratio in Singapore is 53.3%.
Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia, explains that recent government reforms to manage bankruptcy cases include raising the bankruptcy threshold from RM30,000 to RM100,000, automatic discharge and immunity for social guarantors from bankruptcy proceedings.
“Since the Budget 2024 announcement last year, the Second Chance Policy has also been extended to young people aged 40 and below with debts not exceeding RM200,000,” he notes.
He points out that while it is noble to reform bankruptcy laws, moral hazards could arise.
Like Yeah, he reckons that policymakers must draw a line between assisting those who genuinely need help and penalising those who abuse the system.
This article first appeared in Star Biz7 weekly edition.
