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Unlike his predecessor, Mahathir Mohamad’s government is trying to tackle the root causes of bankruptcy. Can a government expenditure guide solve the problem?

By Joelyn Chan

Malaysia Finance Minister Lim Guan Eng drew attention to the plight of 100,610 Malaysians who declared bankruptcy between 2013 and 2017. 60% of them were between 18 and 44 years old. Based on the Malaysia Statistical Handbook 2018, people aged 25 to 44 account for 32.5% of the population. They make up the largest age group. It reflects badly on the government when its young and working population goes bankrupt.

Between 2011 and 2015, the key reasons for bankruptcy in Malaysia were hire-purchase loans, housing loans and personal loans. In 2016, Najib Razak’s government introduced more stringent hire purchase loan approval criteria. In that same year, the government also revised its Bankruptcy Act. The threshold for the debt for bankruptcy proceedings was increased from RM30,000 (US$7,380) to RM50,000 (US$12,280).

While they may have reduced bankruptcy statistics, neither of these measures tackled the root causes of bankruptcy. However, this looks set to change as Mahathir’s government explores lasting solutions to Malaysia’s bankruptcy issue.

The Malaysian government is providing financial planning assistance

On March 4, 2019, the finance minister noted that low financial literacy among young Malaysians is contributing to the high bankruptcy rate. To address the issue, the government launched Belanjawanku – the Malaysian Individual and Family Expenditure Guide. The plan provides Malaysians with guidance on where to spend their earnings to ensure they live within their means and allocate a portion of their finances to savings and retirement funds.

It needs fine-tuning. Belanjawanku does not mention alcoholic beverages, tobacco, or education expenses. Also, according to the guide, a married couple with two children will spend RM6,620 (US$1625) per month. That amount is almost double the median household monthly expenditure.

Average Monthly Expenditure (RM) Per Household by strata vs Suggested budget plan

Source: Malaysia Statistical Handbook 2018, Belanjawanku

Raising the retirement age could also help

Lim noted that Malaysians’ retirement savings are inadequate. He estimated many would run out just five years after retirement.

In Malaysia, the average life expectancy is 75-years-old. In 2000, it was around 72-years-old. Bankruptcy rates have worsened as life expectancy has increased and people need to rely on retirement savings for longer. Raising Malaysia’s retirement age from 60 to 65 could help alleviate this situation. The nation’s Minimum Retirement Age Act, passed in 2012, increased the minimum retirement age from 55 to 60.

In the suggested guide, the highest saving amount is RM400 (US$99). Assuming a Malaysian begins saving the recommended RM400 (US$99) per month at the age of 25, they have 35 years until the retirement age of 60. That only gives him a total cash saving of RM168,000 (US$41,260), which is still insufficient.

The final amount per person is even lower if a couple jointly saves RM400 (US$99). As of 2019, Malaysia’s Employees Provident Fund (EPF) estimates that an individual requires savings of at least RM240,000 (US$58,940) by age 55 in order to retire comfortably.

Tough times ahead for Malaysia’s seniors

While Malaysia’s government tries to improve financial literacy amongst the younger generation, it needs a plan to help its ageing population. Based on the EPF 2017 Report, two-thirds of contributors aged 54 have an average savings of RM43, 872 (US$10,774). This meagre amount will not last long into their retirement years.

Inactive contributors of EPF aside, there are also self-employed and freelancers, who are not covered by any formal social protection programme. These are vulnerable groups at risk of going bankrupt.

Belanjawanku is a valuable first step. The document needs fine tuning to provide comprehensive guidance, but in its current form, there are still important takeaways for Malaysia’s youth. However, to fully guarantee the long-term financial stability of Malaysians, the government must revisit the retirement age and strengthen financial assistance for the elderly.