Financial Knowledge, Debt Literacy and Over-Indebtedness

Abstract

Malaysia is a country that aims to become a high-income status nation by 2020. Though, Malaysia currently is facing with over-indebtedness problems, an increasing trend in consumer loan demand, high household debt-GDP ratio, and also with a high number of bankruptcies. With regards to these issues, therefore this study is conducted to investigate the causes of over-indebtedness, specifically among the young generations. This study applied a face to face survey and interviewing eight young workers in one of the public universities in Malacca, Malaysia. The results indicate that low in financial knowledge and debt illiteracy are not the causes of over-indebtedness for the sampling frame. An individual with good financial knowledge and debt literate, also associated with high debt and overindebtedness. Moreover, home and car loan are the dominant contributors for individual over-indebtedness, due to the perception that home and car are the needs in today’s life. These findings had brought a new dimension in exploring the causes of over-indebtedness, where research on over-indebtedness should not only focus on the linking of financial literacy (financial knowledge and debt literacy) with consumer debt, but then should consider other contributing factors that give effect to individual over-indebtedness. It is hoped that this study may perhaps give benefits to regulatory bodies in formulating policies related to consumer debt in realizing the government’s intention to become a high-income status nation by the year 2020.

Keywords: Consumer credit; Debt literacy; Financial knowledge; Financial literacy; Over-indebtedness; Young generation

JEL Classification: M