Probably long overdue:
Bank Negara Malaysia wishes to announce new measures on credit cards in continuous efforts to inculcate sound financial and debt management among credit card users. These measures are also aimed to promote fair and responsible business practices by credit card issuers with further enhancements in the cards security infrastructure.
But I do wonder whether this might be shutting the stable door after the horse has bolted. Or maybe I’m getting my metaphors mixed. In any case, what’s clear to me is that you’re not going to teach adults how to manage their financial affairs by just putting in rules and regulations on credit. What I think is really needed is putting financial literacy on par with language, math and science skills right at the point where it would be most effective – when budding citizens are in school.
And then there’s the behavioural impulses inherent in the human condition, as this paper makes clear (abstract):
How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors
Justine S. Hastings, Olivia S. MitchellTwo competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement wellbeing would do well to consider the importance of these factors.
The literature on the impact of financial literacy on household wealth is pretty big, and uniformly positive in favour of early intervention – financial literacy is in my opinion a life skill as necessary as math or writing.
Yet almost no government in the world puts financial literacy as an integral part of primary or secondary school curriculums. By the time kids get into college, quite frankly it’s almost too late. And putting the onus on parents – who aren’t likely to be financially literate themselves – isn’t the optimal solution. Nor is relying on self-help books. We’re allowing the haves to continue to have, and the have-nots mired in hand-to-mouth existence.
And so we arrive at the My First Home scheme that the government’s planning to introduce. It’s bad enough saddling low income households with debts that they might not be able to handle. Now someone thinks the socially (or should I say politically) correct move is to load them with even more (extract):
Raise ceiling price of ‘first homes’, govt urged
KOTA KINABALU: The government has been urged to raise the ceiling price of houses under the My First Home scheme as the present cap allows housebuyers to purchase only an apartment or a single-storey terraced house outside city limits.
Sabah Housing and Real Estate Developers Association (Shareda) wants the government to raise the ceiling price to at least RM300,000 instead of the current RM100,000 to RM220,000.
The house price set is too low, said Shareda president Datuk Susan Wong. “I don’t think it is the preferred choice for first-time buyers,” she told reporters after retaining her seat at the association’s AGM here...
So instead of a single storey terrace house or apartment which a household earning less than RM36,000 annually wouldn’t have been able to afford in the first place, you want them to buy RM300,000 houses? Really? Wasn’t this kind of political push part of the brew that caused the US Sub-Prime market to start bubbling a decade ago?
Technical Notes:
Hastings, Justine S. & Olivia S. Mitchell, "How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors", NBER Working Paper No. 16740, January 2011
Posts
I always berate my mother that she has too many credit cards.
ReplyDeleteShe will reply 'This is how I raise you' which is a very very bad answer.
I will not be like her I promise and never will I raise my kids with credit cards.
Credit cards would be a hallmark of shame.
Till now I have managed to avoid a single credit cards and depend on saving bit by bit old style although in the future I might take one for travelling or perhaps a debit card/charge card.
I also avoided those ASB scheme where you take loans in ASB and earn the interest which is a strange concept where you take a loan as a form of savings? ANy comment on this Mr.Hishamh?So many young people especially my friend take up to RM100k in these ASB scheme,is it a good form of investment?
Good for you - though I tend to keep a credit card handy for claims and such (hard to carry that much cash around when travelling).
ReplyDeleteAs to ASB loans, you should only consider them if you don't feel you have the discipline to force yourself to save. Otherwise, consider:
ASB loans costs BLR++ (about 7%+ now), but PNB pays out around 8%-9%. You do gain and the bonus payout is slightly higher, but the advantage is minimal and doesn't cover inflation.
On the other hand, if you save the same as the loan installments and don't withdraw any of it, you benefit from reinvestment of dividends - the magic of compounding. In the end, this will turn out to be way more.
As a matter of policy, PNB doesn't encourage taking out loans for ASB investment.
Anon 9:38pm - congrats for having the discipline to manage your expenses. With this strong trait, I don't think you will encounter any problems in the future if you so decide to use credit cards.
ReplyDeletePersonally to me, credit card is one the best modern creations. It gives us the option to not carry a lot of cash, allow us to buy first pay later or pay installment with 0% interest, offer us discounts & rebates for selected purchases and also give us shopping vouchers/gifts in exchange for points. I've been using it for the past 15 years and have always pay in full & on time.
My point is: let not your mom's bad experience with credit cards made you denounce them coz it is quite a shame that people with strong financial discipline like you do not get to enjoy the benefits of credit cards.
An important topic.
ReplyDeleteJust before reaching the LDP toll before Sri Damansara, you will see a cluster of lowcost highrises, much like those elsewhere throughout the country. They look more like pigeonholes. With a cutting sun beating on them in the afternoon, there is absolutely zero comfort and aesthetics outside and one can imagine how cubicularized and dehumnizing the apartments must be inside.
And there is only one access road to them. It is two-laned either way and tree-lined. But when you get to the cluster, cars and bikes clutter its one narrow winding and steep road. The dwellers density must be tremendous and the poorly-maintained place is like one of those bazaar alleys. There's no park or garden, not a single tree anywhere, no fire hydrand in sight, and the proportion of free to occupied space must have been as twisted as the architect's arm.
One's first thought was to ask how a fire engine could possibly get up there should there be a fire. Cityhall and the fire department should quickly take a look and maybe do an exercise. Furthermore they should ask themselves honestly throughout the country why it needs to take someone to point this out and hopefully not too late.
If we say the root of the matter of this topic is all about urban land, then maybe planners should relook their land delineation escapades. Intelligent dynamics to maximize healthy urban living seems missing. Add to that missing puzzle indifferent public awareness about keeping the places clean and tidy and we have a first world potentiate telescoping back into third world only held together tenuously by money spent disproportionate to final result. One can forget those plastic coconut trees.
It's not just about pricing properties built on increasingly scarce land but also the politics of property development, urban transportation to make urban density diffusion workable and the productivity:education aspects which will rationalize how much people should be paid which they haven't todate so that not only they can afford to pay regular installments to own their own homes but they can also be able to pay regularly for maintenance fees which for highrises should in the first place be capped by legislation because the basic maintenance for utilities and refuse collection are already being collected at the annual assessment stage, and if we are less than generous today, one can throw in the quit rent as well, whatever that one is for.
Property developers also have problems with legislation. Some have been held to ransom by approving authorities. One hears horror stories that many years ago the going rate to approve a minor extension to the frontage of a link house was something like a non-negotiable six hundred ringgit, delivered below the furniture. Millions must have changed hands for what would have been a basic right distorted by a convenient legislation unsustainable for any reason one can cook up.
So owning one's own home is an increasing challenge and an increasingly distant prospect for many because income cannot catch up with expenditures. Yet living in one's own home defrays rental costs over the long-run and appreciates an asset that can be liquefied should a need arise one day.
2/2
ReplyDeleteGoing off at a tangent today, the government should insist that economists be used when planning land delineations and property pricings. And the building materials industry should be incentized further to sell their products to construction companies at the lowest possible rates consonant with the lowest final pricings of the property to low-income buyers. And insurance companies should make suicides allowable for claimage of life insurance even when the befrienders clubs will have their ears full. If one chooses to go so as to leave behind some financial relief for one's charges, who has the right to say no? How else can the charges get a small stepping stone to make progress?
This how much one makes leads to how wisely one should spend which leads to how much one can leave behind. In most cases, all this comes back to how one can personally survive on retirement when income earned is zero. When compared with the majority of those in the private sector, the civil service has the best package. Governments should appreciate that if the private sector people don't make enough when they can still stand, they won't be able to afford even a wheelchair when they can't. There's no social net for the private sector. At present rising costs, provident and other funds will be increasingly puny reserves.
This is an important point too for people on realizing it will start to proliferate larger families. With its attendant depressant effect on means distribution. Less money for more and more family members means less and less money for their upgrading...food, shelter, clothing, education and so on. The cycle of poverty and helplessness then repeats but as costs increase, it repeats downwards until a paradox is achieved ...more numbers but certain extinction.
The whole dynamic of affordability hits right at the solar plexus of socio-economic engineering at the individual level.
So..in the above setting we can revisit the topic about housing and credit cards. True, financial education is a must. It should be a living skill subject. In fact, schools should run competitions to see which class or group can make the most money and save the most money made from doing special projects as part of their co-cu exercises. If you listen in on the way the young have been organizing their events, come 2020 there will be no suitable candidate for MoF. Or central banker, securities commissioner, etc.
Should one next talk about the power of less or small is beautiful or ...? Someone once said what we don't have we can't miss. That's indeed witty for how can one miss anything which one doesn't have. But perhaps it was more a wry joke looking at how the poor still live.
Perhaps another way is to tackle boredom at the society level. How to keep people from being bored. When boredom sets, one tends to go out and spend. While good for economies, it cannot be sustained for long if income streams peter.
The situation is like that conversation between two poor undergrads. One saw the other eating little and asked why. The other replied so that more food is available for others. The first then replied no one should eat more to have more strength to plant more padi.
And cards companies charge fees to sellers who charge costs to consumers.
1/2
ReplyDeleteAn important topic.
Just before reaching the LDP toll before Sri Damansara, you will see a cluster of lowcost highrises, much like those elsewhere throughout the country. They look more like pigeonholes. With a cutting sun beating on them in the afternoon, there is absolutely zero comfort and aesthetics outside and one can imagine how cubicularized and dehumnizing the apartments must be inside.
And there is only one access road to them. It is two-laned either way and tree-lined. But when you get to the cluster, cars and bikes clutter its one narrow winding and steep road. The dwellers density must be tremendous and the poorly-maintained place is like one of those bazaar alleys. There's no park or garden, not a single tree anywhere, no fire hydrand in sight, and the proportion of free to occupied space must have been as twisted as the architect's arm.
One's first thought was to ask how a fire engine could possibly get up there should there be a fire. Cityhall and the fire department should quickly take a look and maybe do an exercise. Furthermore they should ask themselves honestly throughout the country why it needs to take someone to point this out and hopefully not too late.
If we say the root of the matter of this topic is all about urban land, then maybe planners should relook their land delineation escapades. Intelligent dynamics to maximize healthy urban living seems missing. Add to that missing puzzle indifferent public awareness about keeping the places clean and tidy and we have a first world potentiate telescoping back into third world only held together tenuously by money spent disproportionate to final result. One can forget those plastic coconut trees.
It's not just about pricing properties built on increasingly scarce land but also the politics of property development, urban transportation to make urban density diffusion workable and the productivity:education aspects which will rationalize how much people should be paid which they haven't todate so that not only they can afford to pay regular installments to own their own homes but they can also be able to pay regularly for maintenance fees which for highrises should in the first place be capped by legislation because the basic maintenance for utilities and refuse collection are already being collected at the annual assessment stage, and if we are less than generous today, one can throw in the quit rent as well, whatever that one is for.
Property developers also have problems with legislation. Some have been held to ransom by approving authorities. One hears horror stories that many years ago the going rate to approve a minor extension to the frontage of a link house was something like a non-negotiable six hundred ringgit, delivered below the furniture. Millions must have changed hands for what would have been a basic right distorted by a convenient legislation unsustainable for any reason one can cook up.
So owning one's own home is an increasing challenge and an increasingly distant prospect for many because income cannot catch up with expenditures. Yet living in one's own home defrays rental costs over the long-run and appreciates an asset that can be liquefied should a need arise one day.
As always, Walla, a great contribution.
ReplyDeleteHi Hisham H,
ReplyDeleteAs usual if its about debt, I'll love to chip in. Great article and some cool sound bites. Perhaps you should do a half hour radio slot on economic matters?
But back to the crux of the matter - debt. Its really becoming the bugbear of everybody and even the mother of all debt, good ol USA is showing signs of increased worry on this aspect.
Is it me, or is there something wierd out there? Because on one hand we are well known for a high savings rate and on the other hand, I read it somewhere, that on a per capita basis we are one of the most indebted country in Asia.
My theory - divergence of the commons. If we think of income following a pyramid distribution, could it be that the indebtness % starts of small rises up when it reaches the middle class and then tapers off again?
However, the big question is why the sudden move by BNM? You mentioned the hike in the reserve ratio, now the credit card limit, is BNM seing something our politicians don't see? (cos they are too busy queuing for a movie pass to Datuk T's premiere?)
My bias, so I'll admit this is not a factual reasoning is that there is some specter of inflation, not at the CPI level but at the household economic level that is causing people to go more into debt. I mean, I'll take schooling for example. Today we hear of $100 bills here and now when we never heard of such things before. A
Hi Wenger,you raise some good points. Sheer speculation, but I'd tend to agree with your hypothesis regarding the uneven distribution of debt - you might want to think of it as age related as well. Since the bulk of the population is under 30, most aren't in their prime earning years, so a higher debt load shouldn't be too surprising. And you're probably right with your last point as well.
ReplyDeleteIn fact that's my primary viewpoint regarding the household experience with inflation - it's not that inflation is high, it's incomes which haven't kept pace. Something like this.
Regarding national savings - its a residual calculation. I probably need to dig up the data eventually, but I think most of the "saving" is actually corporate saving (excess cash), not household.