Bankruptcy Risk among Gen Y in Klang Valley
Chong Li Syan1, Noor Ashikin Mohd Rom1*, Nurbani Md. Hassan1
1 Faculty of Management, Multimedia University, Cyberjaya, Selangor, Malaysia
*Corresponding Author: [email protected]
Accepted: 15 October 2020 | Published: 15 November 2020
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Abstract: Bankruptcies among the young generation have huge impact on the country growth and economy, as they are country future talent in stimulating the economy of the country. The purpose of this paper is to investigate the factors that influencing bankruptcy risk among Generation Y in Klang Valley, Malaysia. The independent variables for this study included spending behaviour, credit card usage and financial commitment. This is a quantitative study using probability sampling method and 209 respondents have given their feedbacks via online form. The findings revealed that that there was relationship between spending behaviour, credit card usage and financial commitment with bankruptcy risk. The factors studied in this paper are highly related to the respondent's personal perception and their own point of view. This research ignores external issues such as economics condition or political issue. The results could be used as a guide for the government, financial institutions and public on the major factors that contribute towards bankruptcy risk among Generation Y. Hence, financial literacy among citizen especially young generation is highly desirable to curb the bankruptcy problem before it becoming a disease.
Keywords: Generation Y, bankruptcy risk, spending behaviour, credit card usage, financial commitment
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1. Introduction
There are increasing number of young generations who had been declared bankruptcy in recent years. This phenomenon is unhealthy and becoming a threat to the individuals, businesses as well as country at large. Selangor was the top of the chart as the state has the most number of people whom being declared bankrupt, with 22,593 cases, followed by Johor 12,028 cases and the Federal Territories 11,687 case according to a Minister in the Prime Minister's Department. Majority of the bankruptcy cases in Malaysia was caused by the vehicle purchases. In April 2016, the Insolvency Department recorded 101,537 cases of bankruptcy in the period 2011 to 2015. A total of 28,374 cases involved those defaulting on car loans (Baharom, 2017). Malaysia set an objective to become a high income status country in year 2020, however, the household debts continuously increasing in recent years.
The debt problem faced by young generation is highly related to the absent of financial skills and also financial management. In fact, young generation experienced slowed growth in their income earnings (Idris et al., 2016).
An individual who has been declared for bankruptcy indicated that he or she has officially claimed that he or she was unable to repay the debt amount owes to the creditor. In other words, bankruptcy can be illustrated as the legal status of an individual or other entity that cannot pay back the debts it owes to creditors (Diana-Rose & Zariyawati, 2013). According
to the Malaysia Department of Insolvency, an individual can be declared for bankruptcy only when a debtor is declared a bankrupt pursuant to an Adjudication Order made by the High Court against the debtor. There are many restrictions imposed on bankrupts; the person was restricted to go abroad and assets will be monitored by insolvency department. Besides that, there is no automatic discharge from bankruptcy in Malaysia. They may be discharged from bankruptcy by the Court or the Director General of Insolvency (DGI) subject to any creditor’s objection (Malaysian Department of Insolvency, 2019). Table 1 illustrates the bankruptcy cases in Malaysia according to age.
Table 1: Bankruptcy Case According to Age Range
Age Range
(Years Old)
2015 2016 2017 2018 2019 Total Percentage
Below 25 122 91 80 139 54 486 0.57
25-34 4648 5183 4785 4139 2603 21358 25.18
35-44 6507 6601 6241 5958 4574 29881 35.23
45-54 4744 4967 4628 4022 3087 21448 25.29
55 and above 2299 2536 2354 2106 1707 11002 12.97
No Information 137 210 139 118 26 630 0.74
TOTAL 18457 19588 18227 16482 12051 84805 100
Source by: Malaysian Department of Insolvency
Table 1 showed that the total bankruptcy reached to 84,805 cases as at December 2019. It is estimated that the number is increasing in later years due to the pandemic of COVID-19 which has affected the whole country and across the world. The second quarter of unemployment rate for year 2020 was reported higher than 2019, as many people lost their jobs due to the worsen economy. The country’s unemployment rate was at 2.32 percent in 2019 and it is reported the unemployment rate is at 4.7 percent in August 2020 (Department of Statistics Malaysia, 2020).
Generation Y tends to acquire new loan to cover their old debt. Eventually, they have to bear more debt and make their life more difficult. Gen Y or Millennials were born between 1980 and 1994, they are currently between 24-39 years old (Alam et al., 2014). Generation Y is technology savvy, has widely access to the internet and technology device. Therefore, they tend to spend more as these mediums allow users to spend their money virtually without having the feeling of spending real money (Zaminor, et al., 2016). The main factors that caused bankruptcy in Malaysia related to the limited financial management and also inability to repay the outstanding loan (Rajna & Anthony, 2011). Hence, the aim of this study is to investigate the factors that influences bankruptcy risk among Generation Y in Klang Valley.
2. Literature Review
Bankruptcy Risk
Bankruptcy came from Latin word “bench” and “break”. The meaning of the bankruptcy expressed as “broken bench” as the debtors unable to repay the debt amount (Luckett, 1988).
Individual who has been declared bankruptcy need to give up all the assets and belongings according to the Bankruptcy Act 1967 in Malaysia. Individual is not allowed to open a bank account as well as travel abroad without the permission of Director General of Insolvency (Selvanathan et al., 2016). Bankruptcy allows debtors to be exempted from repaying the debt. On the other hand, there were authors who claimed that bankruptcy play a role in
claim for self-bankruptcy when they faced financial difficulty. Subsequent to this matter, there are increasing number of individuals who tend to declare themselves for bankruptcy whenever they unable to repay the loan.
Spending Behaviour
Remund (2010) claimed that psychographic factors are the main reason that affected people’s financial management. This occurred when people unable to control their spending. They are likely to spend their saving for impulsive purchase without thinking about the consequences.
Omar et al. (2014) highlighted that people with low self-esteem is more likely to purchase expensive and luxury products in order to repair their value or increasing their self-esteem.
They claimed that wealth and luxury material helps them to improve their social power (Arabzadeh & Aghaeian, 2015). People prefer to purchase the product without intention and the only aim is to improve their social status. Selvanathan et al. (2016) claimed that uncontrollable spending without proper management of their money will lead to bankruptcy.
One of the factors that influenced high personal bankruptcy are causing by the overspending and also acquiring luxury items (Hilmy et al., 2013).
Credit Card Usage
Individual especially youngsters nowadays can obtain credit card from the financial institution without difficulty. Some of them can obtain the credit card regardless of their income and occupation (Noordin et al., 2012). Therefore, the number of the credit card holders are increasing dramatically in recent years. Credit card usage are directly influenced by the holder’s spending behaviour. People who have higher outstanding amount on their credit balance were influenced by their specific attitude. They are unable to control their expenses which caused them to have higher credit debt and having more credit cards (Zamzamir et al., 2015). Credit card holders tend to have overspending behavior which caused by impulsive purchase (Juen et al., 2013). As a result, credit card usage plays a role in directly related to the consumer’s debt which ultimately lead to personal bankruptcy.
Financial Commitment
Having higher financial commitment compared to income is the starting point of debt accumulation. The debt accumulated faster than the income they actually earn. Certain people are unable to estimate their expenses accurately. As a result, it led to higher pay back difficulties and finance insolvency during the credit cycle (Zaminor et al., 2016). Diana and Zariyawati (2013) found that working individual are likely to go bankrupt rather than those who are unemployed. The authors claimed that working individual are highly involved in borrowing which resulted the increasing of monthly financial commitment. Selvanathan et al.
(2016) claimed that loan was the major issue that increase personal bankruptcy in the society.
Nizar (2015) highlighted that financial commitment can be one of the threats toward the country economy. It will be a huge threat to the economy system when it exceeded certain level.
Financial Literacy
Financial literacy involves budget planning, which can be defined as skills that helps individual to assess and evaluate all financial decision and provide better decision making.
Individual who has limited financial literacy definitely has limited ability to make positive decision (Othman et al., 2015). Individual who has limited financial knowledge will cause financial difficulties thus ultimately lead to bankrupts. Idris et al. (2013) conducted a research related to the relationship between the level of financial distress and financial literacy and
found out that the respondents who have low level of financial literacy, they will normally experience high financial distress level.
3. Research Methodology
This is a quantitative study using probability sampling method and 209 respondents from the Klang Valley have given their feedbacks via online form. Questionnaires was developed to delve their response using Likert Scale of 5. From the review of literature, the theoretical framework was developed as per Figure 1 below.
Independent Variables Dependent Variable
Spending Behaviour H1
Credit Card Usage H2
H3
Figure 1: Research Framework
The hypotheses (H) for this study are as below:
H1: There is significant relationship between spending behaviour and bankruptcy risk.
H2: There is significant relationship between credit card usage and bankruptcy risk.
H3: There is significant relationship between financial commitment and bankruptcy risk.
Demographic Profile
Table 2: Summary of Demographic Characteristics
Demographic Characteristics Frequency Percentage Gender
Male 95 45
Female 114 55
Age
24-29 53 25
30-39 156 75
No of Credit Card
1 85 41
2 101 48
3 13 6
More than 4 10 5
Financial Commitment
Bankruptcy Risk
Majority of the respondents are from age 24-29 years’ old which consists of 75% (156 out of 209 respondents). There are 48% respondents who owned two credit cards at the same time (101 out of 209 respondents) while 66% of the respondents (132 respondents) used their credit card regularly from one to ten times per month. Another 25% (51 respondents) used their credit card from eleven to twenty times per month. There are 43% of the respondents who earn between RM3,000 to RM6,000 per month (90 respondents) meanwhile the second highest respondents with the income level is below RM3,000 per month is 32%. Table 2 shows 39% and 56% of respondents have monthly financial commitment from the range of RM2,001 to RM5,000 and below RM2,000 respectively.
Credit Limit
RM2000 or less 75 36
RM2001- RM5000 69 33
RM5001- RM10000 42 20
RM10001- RM15000 14 7
More than RM15000 9 4
Credit Card Usage per month
No usage 0 0
1-10 times 132 63
11-20 times 51 25
More than 20 times 26 12
Financial Commitment
RM2000 or less 117 56
RM2001- RM5000 81 39
RM5001- RM8000 7 3
More than RM8000 4 2
Education
SPM 17 8
Diploma 67 32
Degree 110 53
Master /PhD 15 7
Income Level Less than RM3000 67 32
RM3000- RM6000 90 43
RM6001- RM9000 39 19
RM9001- RM11000 9 4
More than RM11000 4 2
Hypotheses Testing
Hypothesis testing is used to examine the relationship between spending behaviour, credit card usage and financial commitment with bankruptcy risk. Pearson Correlation is examining one relationship between each of variables and used to evaluate the degree of relationship.
The higher the value of Pearson correlation, the stronger the relationship between the variables. In contrast, the lower the Pearson correlation value, the weaker the relationship between the variables (Hair et al., 2007). Table 3 below shows the Pearson Correlation between spending behaviour, credit card usage, financial commitment and bankruptcy risk.
Table 3: Pearson Correlation
Spending Behaviour Credit Card
Usage
Financial Commitment Pearson
Correlation
0.433 0.493 0.512
N 209 209 209
**. Correlation is significant at the 0.01 level (2-tailed).
From Table 3, the researchers found the outcome of hypotheses as below.
H1: There is significant positive relationship between spending behaviour and bankruptcy risk.
Table 3 shows that there is significant positive relationship between spending behaviour and bankruptcy risk. The positive Pearson Correlation value indicated that there is positive relationship between spending behaviour and bankruptcy risk. The Pearson correlation in this study stated 0.433 which indicates that there is positive relationship between bankruptcy risk and spending behaviour among Generation Y. Diana and Zariyawati (2013) claimed that Generation Y nowadays unable to control their spending attitude, which may lead to bankruptcy. Youth generation spent most on branded products which caused them to spent more than their income.
H2: There is significant positive relationship between credit card usage and bankruptcy risk.
The result indicates that there is significant positive relationship between bankruptcy risk and credit card usage. The Pearson Correlation value is 0.493 indicated positive relationship between bankruptcy risk and credit card usage. The higher the number of credit cards usage will lead to higher possibility for Generation Y in facing bankruptcy. Juen et al. (2013) found that early bankruptcy caused by uncontrollable spending behaviour of the credit card young users. Credit card holders tend to spent more compared to the non-credit card holders.
Henceforth, it was claimed that credit card usage plays an important role in influencing people’s debt level which will lead to the increasing of bankruptcy risk.
H3: There is significant positive relationship between financial commitment and bankruptcy risk.
There is significant positive relationship between financial commitment and bankruptcy risk.
The Pearson Correlation value is 0.512 which indicates positive relationship between financial commitment and bankruptcy risk. Selvanathan et al. (2016) claimed that high borrowing is one of the factor that lead to personal bankruptcy. Unemployment, high interest
financial difficulties. Zhu (2015) emphasised that the person’s low ability to repay the debt will lead to bigger debts.
Multiple Linear Regression
Next, researchers used multiple linear regression to investigate the relationship between variables. This function is to examine the relationship between bankruptcy risk with spending behavior, credit card usage and financial commitment. In another word, multiple linear regression is uses regularly to examine group relationship.
Table 4: Multiple Linear Regression
Model R R Square
1 0.582 0.339
Table 4 illustrates that the R value equal to 0.582 which means the spending behaviour, credit card usage and financial commitment contribute up to 58.20% to the bankruptcy risk. R Square value of 0.339 is telling the actual contribution of the independent variables. It indicates that 33.90% of the bankruptcy risk explained by spending behaviour, credit card usage and financial commitment.
Table 5: Anova Table
Model
Sum of
Squares Df Mean Square F Sig.
1 Regression 37.691 3 12.564 33.482 .000b
Residual 73.546 196 .375
Total 111.237 199
Dependent Variable: Bankruptcy Risk
Predictors:(Constant), Spending Behaviour, Credit Card Usage, Financial Commitment
Subsequently, Anova is used to examine the relationship between variables. The result indicates that the model is significant and fit. From the table, the significant value is 0.000 which is less than 0.05. Therefore, it can be concluded that there is relationship between bankruptcy risk with spending behavior, credit card usage and financial commitment.
4. Implications of Study
There are a few organizations and agencies that may provide assistance to society in handling their financial matters. Agensi Kaunseling dan Pengurusan Kredit (AKPK) will be able to grab useful information pertaining the generation Y bankruptcy and they may assist other younger generation effectively by awareness campaign, seminar and other mediums on savings and spending. Bank Negara Malaysia may formulate new policy on credit cards in term of new limit, numbers of cards, new minimum income and other areas to curbs lesser bankruptcy cases. Malaysian government may develop a new plan by allowing the taxpayer to experience tax deductible on their certain limit of savings in any financial institution. This initiative may increase savings among citizens.
Limitation
Respondents may unaware on their behaviour and they may feel the questionnaires are related to their private financial life, hence they may provide vague answer to a few questionnaires. Furthermore, this paper is limited to certain demographic and by selected geographic areas which is focusing on Generation Y based at Klang Valley.
Suggestion for future study
Future studies could concentrate on other variables rather than human perspective. For instances, future researchers may conduct studies on how other factors like macroeconomic might influence bankruptcy risk. Besides that, future researchers may investigate on other areas other than Klang Valley.
5. Conclusion
The rising of the standard cost of living, low saving rate and moderate increment of salary of generation Y would make the situation become worsen. The study reveals that sufficient financial literacy is very important to Gen Y so that they have knowledge and skills to manage their financial matters. Lack of financial literacy may lead to the overspending of money, irresponsible of credit cards usage, increasing financial commitment that lead to the bankruptcy risk. Government and financial institutions shall regulate new rules on loan especially credit card to curb the issue of increasing bankruptcy among young generations.
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