The Effects of Macroeconomics Determinants and Secured Financing of Islamic Banks on Personal Insolvency: An Empirical Investigation on Malaysia

Authors

  • Zuraina Alias Universiti Utara Malaysia
  • Ruzita Azmi University Utara Malaysia
  • Rosylin Mohd Yusof University Utara Malaysia

DOI:

https://doi.org/10.31436/ijema.v26i2.617

Keywords:

Personal insolvency, Macroeconomics, Secured financing, Islamic banking, ARDL

Abstract

Recent statistics from the Malaysian Department of Insolvency (MDI), and reports from the Malaysian Credit Management Counseling Agency (CMCA) highlight the increasing number of bankrupt borrowers and borrowers registered under the Debt Management Programme (DMP) organized by AKPK. Rising indebtedness can unfavorably influence economic monetary development as it successfully evacuates people from participating or contributing to the economy. Hence, this research is to investigate the issues of personal insolvency in Malaysia and to analyze several macroeconomic determinants, banking variables and Islamic secured financing that affects personal insolvency. The study attempts to inaugurate a long-run cointegration relationship between personal insolvency and independent variables by employing the Auto-Regressive Distributed Lag (ARDL) bounds testing approach and the Vector Autoregression (VAR) model. Based on quarterly data covering the period 2007Q1 to 2016Q4, this study documents evidence of a long-run dynamics with strong bidirectional causality between the house price index and personal insolvency in Malaysia. Accordingly, policies leading to a more efficient housing market while reducing the demand and supply gap affecting house prices will reduce insolvency in Malaysia.

References

Abid, L., and S. Zouari-Ghorbel. (2012). “Household Indebtedness in Tunisia.†no. 3(10) (2012): 341–50.

Agarwal, S., B.W. Ambrose, and S. Chomsisengphet. “Determinants of Automobile Loan Default and Prepayment.†Economic Perspectives, (2008): 17–28.

Aikman, D., A. Lehnert, N. Liang, and M. Modugno. “Financial Vulnerabilities, Macroeconomic Dynamics, and Monetary Policy,†Finance and Economics Discussion Series 2016-055. Washington: Board of Governors of the Federal Reserve System (2016).

Allen, J., and E. Damar. "Household Insolvency in Canada." Bank of Canada Review Winter 2011–2012 (2012): 43–54.

Baek, E., and G.S Hong. “Effects of Family Life-Cycle Stages on Consumer Debts.†Journal of Family and Economic Issues 25, no. 3 (2004): 359-85.

Bank Negara Malaysia, Financial Stability and Payment Systems Report (2017). http://www.bnm.gov.my/

Baqutaya, S., A.S. Ariffin, and F. Raji. "Affordable Housing Policy: Issues and Challenges among Middle-Income Groups." International Journal of Social Science and Humanity 6, no. 6 (2016): 433–6.

Bartiloro, L., V. Michelangeli, and C. Rampazz. "The Vulnerability of Indebted Households During the Crisis: Some Evidence from The Euro Area." Banca d’Italia. mimeo, (2015).

Bianco, K.M. The Subprime Lending Crisis: Causes and Effects of the Mortga ge Meltdown. New York: CCH, Wolters Kluwer Law & Business, 2008.

Bishop, P. "The Spatial Distribution of Personal Insolvencies in England and Wales, 2000–2007." Regional Studies 47, no. 3 (2013): 419–32.

Bishop, P., and P. Gripaios. "Personal Insolvency in England and Wales: A Spatial Analysis." Urban Studies 47, no. 8 (2010): 1687–702.

Blasio, G. De. "Questioni di Economia e Finanza." Occasional Papers (2010).

Boeri, T., G. Pietro, and R.M. Espen. "The Labor Market Consequences of Adverse Financial Shocks." IZA Discussion Papers, No. 6826, Institute for the Study of Labor (IZA), Bonn. (2012).

Browning, M., and F.C. Thomas. "Shocks, Stocks, And Socks: Smoothing Consumption Over a Temporary Income Loss." Journal of the European Economic Association 7, no. 6 (2009): 1169-92.

Buera, F.J., R.N.F Jaef, and Y. Shin. "Anatomy of a credit crunch: from capital to labor markets." Review of Economic Dynamics 18, no. 1 (2015): 101-17.

Campbell, J.Y., and F.C. Joao. "How Do House Prices Affect Consumption? Evidence from Micro Data." Journal of Monetary Economics 54, no. 3 (2007): 591-621.

Case, B., O.P. Henry, and M.W. Susan. “On choosing Among House Price Index Methodologies.†Real Estate Economics 19, no. 3 (1991): 286-307.

Chambers, M. S., C. Garriga, and D. Schlagenhauf. "Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice." Review of Economic Dynamics 12, no. 3 (2009): 444-68.

Credit Management Counseling Agency. Fact Sheet. (2017).

Crisis, U. S. H. L., and A. Mian. "House Prices, Home Equity-Based Borrowing." (2009): 2132-56.

Crotty. J., “Structural Causes of the Global Financial Crisis: A Critical Assessment of The ‘New Financial Architecture.†Cambridge Journal of Economics, no. 33 (2009): 563-80.

Da Costa, P.N., "Janet Yellen Decries Widening Income Inequality." Wall Street Journal (2014).

Davis D., and J.M. Frank. “Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses.†The Center for Responsible Lending. (2011). http://www.responsible lending.org/other-consumer-loans /auto-financing/research-an alysis/Under-the-Hood-Auto-Dealer-Rate-Markups.pdf

Debelle, G. "Household Debt and the Macroeconomy." BIS Quarterly Review, part 5, March (2004): 51–64.

Dinh, M. T. H., A.W Mullineux, and P. Muriu "Macroeconomic Factors Influencing UK Household Loan Losses." Journal of Financial Regulation and Compliance 20, no. 4 (2012): 385–401.

Dynan, K.E., and D.L. Kohn. "The Rise in U.S. Household Indebtedness: Causes and Consequences Karen." Finance and Economics Discussion Series (2007): 1–45.

Engle, R.F., and C. Granger. “Co-integration and error correction: Representation, estimation, and testing.†Econometrica, no. 55 (1987): 251-76.

Finocchiaro, D., C. Nilsson, D. Nyberg, and A. Soultanaeva. "Household Indebtedness, House Prices and the Macroeconomy: A Review of the Literature." Sveriges Riksbank Economic Review 1 (2011): 6–28.

Fitzpatrick, T., and K. McQuinn. “House Prices and Mortgage Credit: Empirical Evidence for Ireland.†The Manchester School, 75 no. 1 (2007): 82-103.

Friedman, M. A Theory of the Consumption Function. Princeton: Princeton University Press, 1957.

Gathergood, J., "Debt and Depression: Causal Links and Social Norm Effects." The Economic Journal 122, no. 563 (2012): 1094-114.

Gujarati, D.N. Econometrics. 3rd Edition, McGraw-Hill, Inc., New York, 1995.

Hall, R. “Stochastic Implications of the Life Cycle Permanent Income Hypothesis: Theory and Evidence.†Journal of Political Economy 86, no. 6 (1978): 971-87.

Heitfield, E., and T. Sabarwal. What Drives Default and Prepayment On Subprime Auto Loans?†Journal of Real Estate Finance and Economics 29, no. 4, (2003): 457–77.

Hussainat, M. M., Q.M Ghnimat, and M.A. Al-dlaeen. “The Impact of Unemployment On Young People in The Jordanian Community: A case study from unemployed perspective.†Asian Social Science 9, no. 1 (2012): 155–64.

Jappelli, T., M. Pagano, and M. Maggio. "Households’ Indebtedness and Financial Fragility." Journal of Financial Management Markets and Institutions 1, no. 1 (2013): 23–46.

JureviÄienÄ—, D., and V. SukaÄevskytÄ—. "Factors Affecting Personal Insolvency." KSI Transactions on Knowledge Society 7, no. 3 (2014): 5–11.

Jureviciene, D., K. Taujanskaite, and V. Sukacevskyte. "Indirect Factors Affecting Personal Solvency: Empirical Analysis of Lithuanian Consumer Credit Market." European Scientific Journal 12, no. 1, (2016): 157–74.

Koning, N. “ Personal Insolvency Dynamics in Germany and the UK – A SUR-TAR Approach.†DEP (Socioeconomics) Discussion Papers Macroeconomics and Finance Series. (2016): 1-45.

Lai, F., S.N. Chan, W.Y. Shum, and N. Zhou. "Household Debt and Housing Price: An Empirical Study Across 36 Countries." International Journal of Business and Management 12, no. 11 (2017): 227–41.

Ma’in, M., N.A. Ismaru Tajuddin, and S.B. Saiful Nathan. "Household Debt and Macroeconomic Variables in Malaysia." 3rd International Conference on Business and Economics, 3 (eISSN: 2357-1330) (2016): 21–3.

Mainal, S.A., N.A. Mohd Kassim, C.S.F. Ho, and J. Mohd Yusof. "Preliminary Investigation on the Determinants of Household Debt Burden." 2014 AAGBS International Conference on Business Management (AiCoMB 2014) (2016): 47–67.

McKibbin W.J., and A. Stoeckel. “The Global Financial Crisis: Causes and Consequences.†Asian Economic Papers, 9 no. 1 (2010): 54-86.

Meng, X., N.T. Hoang, and M. Siriwardana. “The Determinants of Australian Household Debt: A Macro Level Study.†Journal of Asian Economics. 29 (2013): 80–90.

Mian, A., and A. Sufi. "Who Bears the Cost of Recessions? The Role of House Prices and Household Debt." In Handbook of Macroeconomics 2 (2016): 255-96.

______, S. Amir and V. Emil. "Household Debt and Business Cycles Worldwide." The Quarterly Journal of Economics 4 (2017) 1755-817.

Meniago, C., J.M. Petersen, M.A Petersen, and I.P. Mongale. “What Causes Household Debt to Increase in South Africa?†Economic Modelling 33 (2013): 482-92.

Nakornthab, D. "Household Indebtedness and Its Implications for Financial Stability." Research Studies (2016): 67-88.

Narayan, P.K., “The Saving and Investment Nexus for China: Evidence from Cointegration Tests.†Applied Economics 37 no. 17, (2005): 1979-90.

Nizar, N. Proceeding - Kuala Lumpur International Business, Economics and Law Conference 6, no. 1. April 18 – 19, 2015. Hotel Putra, Kuala Lumpur, Malaysia 1 (2015): 97–107.

Othman, K., and S. Sipon, "The Relationship of Financial Stress and Religious Coping from Islamic Perspective." International Review of Management and Business Research 3, no. 1 (2014): 133–38.

Pesaran, M.H., and Y. Shin. “Generalized Impulse Response Analysis in Linear Multivariate Models.†Economics Letters 58, no. 1 (1998): 17–29.

______, Y. Shin, and R.J. Smith. “Bounds Testing Approaches to the Analysis of Long Run Relationships.†Journal of Applied Econometrics 16, no. 3 (1999): 289–326.

______, Y. Shin, and R.J. Smith. “Bounds Testing Approaches to The Analysis of Level Relationships.†Journal of Applied Econometrics 6 no. 3 (2001): 289-326.

Philbrick, P., and P. Gustafsson. Australian Household Debt: An Empirical Investigation into the Determinants of the Rise in the Debt-to-Income Ratio. (Masters Thesis) Lund University Australia, Australia, 2010.

Rahman, S., and M. Masih. "Increasing Household Debts and Its Relation to GDP, Interest Rate and House Price: Malaysia’s Perspective." Munich Personal RePEc Archive (MPRA) no. 62365 (2014). https://mpra.ub.uni-muen chen.de/62365/1/MP RA_paper_62365.pdf

Ramsay, I., and C. Sim, “Personal insolvency in Australia: An Increasingly Middle Class Phenomenon.†Federal Law Review, 38 (2010): 283–310.

Sinai, T., and S.S. Nicholas "Owner-Occupied Housing as A Hedge Against Rent Risk." The Quarterly Journal of Economics 120, no. 2 (2005): 763-89.

Sullivan, J.X. “Borrowing During Unemployment: Unsecured Debt as a Safety Net.†Journal of Human Resources 43, no. 2 (2008): 383-412.

Sutherland, D., and P. Hoeller. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics." OECD Economics Department Working Papers, 1006 (2012).

Tudela, M., and G. Young. “The Determinants of Household Debt and Balance Sheets in United Kingdom.†Bank of England Working Paper, 66 (2005): 1-33.

Toda, H.Y., and T. Yamamoto. "Statistical Inference in Vector Autoregressions with Possibly Integrated Processes." Journal of Econometrics 66, no. 1-2 (1995): 225-50.

Wong, J., L. Fung, and A. Sze. “Residential Mortgage Default Risk and The Loan-To-Value Ratio.†Hong Kong Monetary Authority Quarterly Bulletin 4 (2004): 35-45.

Yerex, R. P. "The Consumer-Driven Economy at a Crossroads." Business Economics, 46 (April) (2011): 32–42.

Yusof, R. M., and F.H. Usman. “Islamic Home Financing and The Real Sectors in Malaysia: An ARDL Bound Testing Approach to Cointegration.†International Journal of Economics, Management and Accounting 23, no. 1 (2015): 79-107.

Downloads

Published

2018-12-28

How to Cite

Alias, Z., Azmi, R., & Mohd Yusof, R. (2018). The Effects of Macroeconomics Determinants and Secured Financing of Islamic Banks on Personal Insolvency: An Empirical Investigation on Malaysia. International Journal of Economics, Management and Accounting, 26(2), 475–497. https://doi.org/10.31436/ijema.v26i2.617

Issue

Section

Articles