This chapter involve of introduction and background of study on relationship between credit card, personal loan and housing loan towards increasing number of bankruptcy in Malaysia. The purpose of this research is to know the relationship between the three independent variable with the increasing number of bankruptcy in Malaysia. Other than that, most of people will face the situation on financial problem or in accurate word is bankruptcy, but the point now, whether the factors that cause a person to become bankruptcy. This chapter also includes the background of study, problem statement, objectives of the study, scope of the study. Besides that, it also briefly discusses the significance of the study and limitations during the process in completing this study.
Based on information got from Insolvency Department (2012), state of insolvency manager said that, start from 2005 until June 2012, the total number of bankruptcy cases is increase to 243,823. There are 10 categories cause of bankruptcy from 2005 to June 2012 which the higher percentage s caused by car purchase that is 25% compare to other categories.
According to city center bar of justice et al (2007), Prospect filed for bankruptcy is not something that people want to consider. However, sometimes one's financial situation took a turn for the worse, usually due to circumstances beyond their control, such as illness, unemployment or divorce. At that time, charging for individual bankruptcy to eliminate debt loads may destroy the most appropriate course of action. It is a measure of law and the right to take when the situation requires it. In addition, bankruptcy is one of the options available under the bankruptcy to those who cannot pay their debts or cannot come to a satisfactory payment arrangements with people they owe money to their creditors.
Based on previous studies by Vlad (2011), there are other factors associated with financial failure due to excessive use, the level of long-term debt with a relatively high cost loans under capitalization to start that is not enough. Apart from that, the NazniNoordin (2012), they said that by holding the credit card number and personal loans among young executives is a common scenario now. Some people claim that having a credit card number, it will reflect the socio-economic ladder. Without releasing the effects of excessive use of credit cards, more and more young executives bankrupt due to credit card debt.
Besides that, according to Department of Insolvency Malaysia, the creditor may file for bankruptcy action against you if the debt owing is more than RM 30,000. So, to avoid this problem happen, debtors need to take earlier action in handling the debt before the authority bodies declare a person as bankruptcy.
Background of the study
The existence of several bank in Malaysia created more advantage for people especially to employee and entrepreneur to get sources of capital or extra money for life spending. Previously, most of people need the extra money to pay complete necessary so they need to apply loan from bank as sources to get money.
In addition, the government has shown a lot of banking institutions as a convenience to the people whether to invest, save, or to apply for credit cards, home loans, personal loans, car loans and other services provided by the bank. Rather, this study is to identify the relationship between credit cards, personal loans and mortgages to increase the number of bankruptcies in Malaysia. Based on the official website of the Government of Malaysia, bankruptcy is someone who has formally declared that he could not pay what he owed. In Malaysia, the minimum debt for bankruptcy is to start Rm 30000. Apart from that, Malaysia bankruptcy law based on English law and come under the Bankruptcy Act 1967.
Besides that, e-insolvency is a service provided by the insolvency department of Malaysia. The purpose of e-insolvency project is to facilitate individuals in checking their bankruptcy status and company's liquidation status via the internet through e-insolvency portal
Finally, based on this study, it can open the mind to the debtor to take precautions to avoid bankruptcy debtor status. About the NazniNordin (2012), they said that the increase in credit card has brought a lot of side effects to the users, especially for those under the age of 30. This is because credit card affect them in their excessive expenses because it is more convenient and easier for users to pay by credit card instead of carrying cash with them.
Problem Statement
Nowadays, majority of the worker whether young or senior worker, most of them not be missed from a loan of the bank. Majority of them can apply the loan from bank for several purposes such as credit card, housing loan, car loan, business loan and personal loan. Meanwhile, insolvency department of Malaysia was established as a place for the debtor to make reference for their status in order to avoid bankruptcy declared. Here, issue that arises is about the rise in the number of bankruptcy, while among the debtors are of the people who have jobs. The question is, is this problem related to the failure of a debtor to manage the use of credit cards, personal loans, and housing loans and bankruptcy
The increasing number of bankruptcy in Malaysia becomes a major problem to the government and bank institution since the total amount of loan available to the borrower is depended on the loan repayment. From the previous research, the increasing number of bankruptcy in Malaysia due to several factors. This problem is very interesting because as the researcher, I also involved in this problem to find the most accurate source for reducing risk for all parties. So, this research done to measure whether the factors such as using credit card, overdue personal loans, and overdue housing loans among borrower are influenced for increasing number of bankruptcy in Malaysia.
Research Objective
The main objective of this study is to examine the factors that influence of non-performance loan among new worker. This study was proposed to seek the following objectives:
1) To examine the relationship between each independent variables with dependent variable on increasing number of bankruptcy.
2) To study which is most variable that influence to the number of bankruptcy.
Scope of the study
In this research, all data collected at Department of Insolvency website and Department of Insolvency Branch Kelantan, from 2005 to 2011 in quarterly. This project paper studies conducted about the relationship between credit card, personal finance and Housing finance loan toward increasing number of bankruptcy in Malaysia. This study covers the period of three years ranging from 2005 to 2011. This is because that is the most of data needed for this study that is available within the period. Besides, the country involve is Malaysia. The data were analyzed in order to support the findings using Time Series and the result made must be efficient and effective for this research paper
Significance of the study
Banking Institution
For the corporation, this study provides the clear reasons why the individuals declared as bankruptcy. So they can know the problems and try making improvement for their system or in term of policy, they may be tightened existing policy to ensure that all the debtors are selected and able to pay back the loan.
Researcher
This is the best way for the researcher to apply all those theories that have been learned in class and from the experience. As a Finance student, this study will be the good advantages for them to apply all those theories that have been learned in class. Through this study, they might gain the knowledge and share their ideas and findings regarding to the area of study.
Debtor
The debtor will get the beneficial from this study because they will alert in all their action to avoid be declared as bankruptcy. Other than that, debtors can reduce the usage of credit card and plan a good management for their personal loans and housing loan because if they make a mistake it will give big problem to them.
Limitation of the study
Limited Number of Literature Review
The amount of previous research related to the bankruptcy is very limited. It is very difficult to find any other supported journal that can affect the number of bankruptcy in Malaysia.
Availability of the Data
It means that the data is getting from insolvency department of Malaysia, so it is hard because we need to follow the procedure and use the application letter that prove by UiTM to ensure that they are confident that we are from the right. Besides that, sometimes the data having wrong numbers typing made by the analyst this can affect the whole results. Other than that, the data collected may be limited and not all data they safe in system. This means that there are some data we can find and some data that we cannot find as there no is new data are available. The data also can be inconsistent or missing. In addition, from the inconsistent or missing data it will affect the results of this study.
Operational definitions (Five Keywords)
Credit card
The previous study by ArpitaKhare (2012), Credit card use represents a customer lifestyle and increase in the standard of living. However credit card use remains limited. Other than that, credit card also classified as sources of money which enables the customer to make payments later. This is a medium for customer to use in emergency time and it also god facility which customer no need to bring cash together to make payment.
Personal Finance
All financial decisions and activities of an individual, this could include budgeting, insurance, savings, investing, debt servicing, mortgages and more. Financial planning generally involves analyzing your current financial position and predicting short-term and long-term needs. In addition, personal finance looks at how your money and future is managed. Often individuals will seek advice from financial planner, but the use of software or website is also an option. For example personal finance would include monitoring your spending, budgeting for an emergency fund, and paying down debt. (Investopedia.com, 2012)
Bankruptcy
Base on The Malaysia Government's Official Portal, A bankruptcy is someone who has officially declared that he cannot pay what he owes. In Malaysia, the minimum amount of outstanding debt among to initiate bankruptcy is Rm 30,000. Other than that, Malaysia's bankruptcy law is based on English law and comes under the Bankruptcy Act 1967.
Car Purchase
A loan that is required to purchase something, such as car purchase are considered to be purchase loan.purchase loan are usually repaid over a designated point of time and are issued with some sort of fixed or variable interest rate. ( investorword, 2006)
Debtor
A company or individual who owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower. If the debt is in the form of securities, such as bonds, the debtor is referred to as an issuer. However, most debts for business or commercial purposes must be in writing to be enforceable. If the agreement requires the debtor to pay a certain amount of money, then the creditor does not have to accept a lesser amount. Also, if there was no actual agreement but the creditor has loaned money, performed services or provided the debtor with a product, that debtor must pay the creditor,(investopedia,2012).
Literature Review
DEPENDENT VARIABLE
Number of bankruptcy
A bankruptcy is someone who has officially declared that he cannot pay what he owes. In Malaysia, the minimum amount of outstanding debt amount to initiate bankruptcy is RM 30,000 (mygovernment,2012). Meanwhile, regarding to E.Cirmizi et al (2010), the 2008 financial crisis was followed by a global economic downturn, credit crunch, and reduction in cross-border lending, trade finance, remittances, and foreign direct investment, which adversely affected business around the world. The consequent increase in the number of firm insolvencies in the financial and corporate sectors highlights the importance of efficient bankruptcy law.
INDEPENDENT VARIABLES
Credit card
The increase of credit card has brought many sides effects to the users especially to the people aged below 30. This is because credit card influence them in making the excessive spending because it easier and convenient for user to pay with credit card rather than bring cash with them, Nazni .N (2012). Meanwhile, many author have the same opinion and believe that inefficient of using credit card will influence debtors be declared as bankruptcy ( Nazni.N,2012; S.Agarwal& C.Liu,2003; J.Stavins,2000). In contrast, perhaps the research done by Nazni.N (2012) is different to the work done by D.G Vlad (2011) which is the economic condition and behavioural influences on increasing of bankruptcy levels. Other than that, this study supported by Alias (2010), which he found that more than 10 million of these consumers have arrears amount RM 24.4 billion but only 30 per cent of them pay back the balance in full for every months.
Personal loan
The previous study by W.Fan and M.J.White (2003), individuals who fail manage the loan are potentially declared as bankruptcy. The notion is well supported by Nazni.N et al (2012) which the increasing number of personal loans among young executives is a normal scenario right now but they act without realizing the impact of inefficient usage of personal loan which they were declaring bankrupt due to personal loan debt. Furthermore, the important reason in personal loan failure occurs when there is mismatch between debtor's knowledge and management skill requirement, economics issue problem (D.G. Vlad, 2011). In addition, according to Department of Insolvency (2012), madam Rohaiza said that personal loan is the second higher percentage which is influence of increasing number of bankruptcy in Malaysia. Unfortunately, this situation happen because of themselves which they misuse the money for other activity.
Car purchase
The previous study by A.Garvett (2006), consumer debt has increased dramatically over the past 30 years. Consumer debt, which is include mortgage and personal loan (such as credit card, car purchase, and housing loan). other than that, this statement is supported of the test results by Hilson (2006), which said that the increasing of bankruptcy is positive related to default payment of vehicle hire purchase and bank credit risk. Other than that, those statement is match with idea by Eugene M. Bland (2007), which they noted that there are difficulty making payment had been caused bankruptcy for low and middle income home owners and that people who lose their jobs often begin to charge everyday expenses on credit card in order to make their car payment. Furthermore, surveyed chapter 13 bankruptcy files in Corpus Christi and Harlingen, Taxes, and asked them to identify the main reasons for the financial problem that led them to declaring bankruptcy. The most important reason identified in that-study was house payment/property taxes, vehicles payment and overspending with credit card. A part of that, the final support is based on Insolvency Department (2012), which justify that the most number of bankruptcies in Malaysia is influence by default payment of vehicle purchase. Among 10 categories that caused bankruptcy is vehicle purchase which is the highest percentage advance of others which related with bankruptcy.
Research Methods
This research conducted the research design which consists of the purpose of the study, unit of analysis and time series .The best results in this research come from the appropriate and in line with established procedures. It starts from how researcher gets raw data and process that data to generate an excellent result. In this section, the researcher will explain the flow of study to ensure that the findings follow the standard..In addition, each method conducted by researcher will explain the reaction between the independent variable and dependent variable.
RESEARCH DESIGN
Research design is one of item in research methodology which there are several aspect are purpose of the study, the study setting or location, type of investigation, the extent to which it is manipulated and controlled by the researcher, time horizon and the level at which the data will be analyzed or unit of analysis.
DATA COLLECTION
To obtain a good results and has no gaps in stata software, the researcher used secondary data collection method to gather as much as possible data for the research project.
This research conducted using secondary data obtained from department of insolvency Malaysia that comprises of Malaysia country. The four variables selected are number of bankruptcy, car purchase, personal loan and credit card. The data on each variable elements needed such as number of bankruptcy as dependent variable, car purchase, personal finance and credit card will be use to compare the changes within the number of bankruptcy for 7 years time period starting from year 2005 until year 2011. All of the data represents banking system and financial institution as an aggregate indicator for country.
Model Specification
This research identified the framework of number of bankruptcy in Malaysia . It attempts to quantify the contribution of different determinant cause of increasing number of bankruptcy in Malaysia. It uses the time series data set from 2005 to 2011 in quarterly data. Consist 1 dependent variable and 3 independent variables will be experiment in this research. The simple linear model may be written as follows.
Lnnobi= α+Ln β1cpi+ Ln β2pli+ Ln β3cci+µi
NB - Number of bankruptcy
α - Intercept term
β1, β2, β3β4 - slope of the line
CP,PL,CC - Car Purchase, Personal Loans, Credit Card
Ui - Error terms
The model is derived into logarithm model as the result can be used to determine the elasticity of each variable. When the researcher used logarithm model, the interpretation for this research will used in percentage.
THEORETICAL FRAMEWORK
INDEPENDENT VARIABLES DEPENDENT VARIABLE
Figure : Theoretical Framework
Figure above presented the framework for this study is to give an overview on the relationship between variables. The variables can be divided into two categories which are dependent variable and independent variable. As for this study, the dependent variable debated will be the famous number of bankruptcy while the other three variables will fall under independent variable categories which are Car Purchase (CP), Personal Finance (PF) and Credit Card (CC).
HYPOTHESIS
Hypothesis Statement
Hypothesis is a tentative, statement, and testable which forecast on what you expect to find in your important data. Besides that, after established the relationship among important variables in theoretical framework, we need to test whether the relationship that has been theorized is true or not. According to Sekaran (2010) she defined hypothesis as logically conjectured relationship between two or more variables expressed in the form of testable statements.
Model Hypothesis
H0: There is no significant relationship between changes in independent variable and dependent variable.
H1: There is a significant relationship between changes in independent variable and dependent variable.
There are two hypotheses testing in explaining the relationship between the independent variable and dependent variable in this study. Hypotheses that are going to be tested are stated as below:
Number of Bankruptcy and Car Purchase
Ho= There is no significant relationship between Car Purchase and Number of Bankruptcy.
H1= There is a significant relationship between Car Purchase and Number of Bankruptcy.
Number of Bankruptcy and Personal Finance
Ho=There is no significant relationship between Personal Finance and Number of Bankruptcy.
H1=There is a significant relationship between Personal Finance and Number of Bankruptcy.
Number of Bankruptcy and Credit Card
Ho: There is no significant relationship between Credit Card and Number of Bankruptcy.
H1: There is a significant relationship between Credit Card and Number of Bankruptcy.
Data Analysis
This research has several steps before the researcher get the result. There are two software that will be used by the researcher relate with this research. Microsoft excel used for raw data to modify before insert to Stata software. Stata Software would be used to obtain the result from raw data.
In Stata Software, there are several test need to be done according to the suitability of the research. All the variables data will be converted into natural log value after insert in Stata Software. Since the research is using the time series analysis, there are four level of analysis involved which is stationarity test, co-integration test, stability test and granger causality test.
