Talking About Belanjawanku

I was on BFM yesterday, talking about UM's new Belanjawanku reference budget:




One thing I should have mentioned/emphasised more is the splendid work done by Prof Datuk Dr Norma Mansor and her team at the Social Wellbeing Research Centre in coming up with it. You can also hear her talking about it here:

Belanjawanku

So I was at the launch yesterday, moderating the panel session after all the speeches. So far, the reception to the guide has been…interesting, to say the least. But since the media gave little attention to the panel discussion, I though I’d set out what topics were discussed. Not that we had any definitive answers, but then part of the motivation for publishing this thing in the first place was to raise awareness. So these were the 3 main themes that I gave to the panel:

My Dreams Have Come True

Financial literacy is finally making it into the official school curriculum (excerpt):

Financial education to be introduced in school soon

KUALA LUMPUR: Financial education will be incorporated into the school curriculum in stages from next year.

Bank Negara assistant governor Abu Hassan Alshari Yahaya said the central bank, in a collaboration with the Education Ministry, would introduce it to Year 3 students next year and secondary school students from 2017.

“Part of the financial education elements have been introduced this year in Bahasa Malaysia and Maths subjects, ahead of the targeted date,” he said during the launch of the Financial Literacy Month yesterday.

Abu Hassan said financial education needed to be inculcated continuously from a young age to adulthood to help instill discipline and increase their financial management skills.

He said the curriculum would cover money management, planning, savings and investments, credit and debt management and insurance.

Abu Hassan said that parents should not rely only on the school curriculum for their children to be prudent with their finances as they should share the responsibility...

I have hardly anything to add to what he said, save to note that adult financial literacy skills are on average pretty abysmal the world over. I don’t know of any other country that has made this move (sound off in the comments if you know any), so Malaysia might actually be one of the first.

Breaking The Poverty Trap: Financial Services Edition

The Governor is on Project Syndicate, talking about financial inclusion (excerpt):

Financial Inclusion Now

KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.

Bankruptcy Malaysian Style

As a rule, I don’t allow guest posts or posts on behalf of other sites, but in this case I’m making an exception because I think financial literacy is a terribly important life skill that too many Malaysians aren’t equipped with.

iMoney.my requested if I could feature their infographic on bankruptcies in Malaysia here, so without further ado:

Bankruptcy in Malaysia – A Reality Check (Infographic)

To most folks in Malaysia, “bankruptcy” is a term synonymous with “having no money” – used commonly to describe a situation where a person has exhausted his monetary resources and has next to nothing to survive on.

In reality, however, bankruptcy is something that is far more serious than simply having no money to survive the month. It is a status declared by a court order, which effectively eliminates certain rights that we take for granted everyday. And despite common perception, you do not need to owe millions to be bankrupt; you can be one with just a debt of RM30,001.

In this infographic, iMoney shows you what bankruptcy is, how it affects a person, and what the true scenario is when it comes to bankruptcies in Malaysia.

Hit the link for the infographic, and you might want to check out the rest of the iMoney.my site while you're at it.

The Financial Literacy Test

How many of you can get all three of these following questions right (answers at the bottom of the post):

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow:
   1. …more than $102?
   2. …exactly $102?
   3. …less than $102?
   4. Do not know.
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:
   1. …more than today?
   2. …exactly the same as today?
   3. …less than today?
   4. Do not know
3. Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’
   1. True
   2. False
   3. Do not know

If you got all three correct, congratulations – you’re in a global minority. In a US survey, less than half could answer the first two questions correctly, less than a third were able to answer all three. And this was for people aged 50 and over, who are generally more financially literate than the average population. The same questions have been used in international surveys, and the results are pretty depressing: across the globe, financial literacy is low, and especially low among the young. It doesn’t appear to matter whether you’re in a developed

The questions come from an NBER working paper released about a month back (abstract):

The Economic Importance of Financial Literacy: Theory and Evidence
Annamaria Lusardi, Olivia S. Mitchell

In this paper, we undertake an assessment of the rapidly growing body of research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still growing, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.

The paper is really a survey of the current state of research into financial literacy and its wider economic implications. Study after study finds that financial illiteracy is common, and in fact the norm.

Yet literacy in financial matters – especially in an increasingly complex and noisy financial system – and is what I would class as a life skill. I suspect that one reason why wealth inequality is so persistent, is through the uneven distribution of financial literacy.

Generally speaking, higher income (and wealthier) individuals possess greater degrees of financial literacy. There remains the question of causality (does literacy come first, or does greater wealth create the desire for greater literacy?), but there’s hardly anything controversial about investing in knowledge.

If there’s one thing that’s definitely missing from our education system – and from virtually everyone else’s – it’s mandatory financial literacy courses. This should be part of at least the secondary/high school curriculum. As it stands, financial literacy is almost entirely up to the parents, who might not be all that literate either.

[Answers: 1,3,2]

Technical Notes

Lusardi, Annamaria, and Olivia S. Mitchell, "The Economic Importance of Financial Literacy: Theory and Evidence", NBER Working Paper No. 18952, April 2013

Reforming Bankruptcy Laws

I’ve always felt that the legal provisions for bankruptcy in Malaysia are too punitive. Seems like I have some company (excerpt):

...If the borrower or the guarantor (who is equally liable) has a debt of RM30,000 or more and has not been repaying that loan, the financial institution or creditor can institute bankruptcy proceedings to get their money back.

And it is tough being a bankrupt. When a person is declared a bankrupt, their existing bank accounts will be deactivated. This means they cannot withdraw money, open a new account or use their existing account unless they get permission from the Director-General of Insolvency (DGI). Their assets will be frozen and sold off to pay the debtors; they are unable to get new loans or travel overseas (unless they get written permission from the DGI) and can only use a credit of up to RM1,000 on an existing credit card. Their standing in society is damaged and they can forget about any political ambitions as they would not be allowed to stand for elections.

According to Rembau MP and Umno Youth chief Khairy Jamaluddin, who has been pushing for a review of the Bankruptcy Law to give people a second chance, Malaysia has one of the most stringent bankruptcy laws in the world...

When Is A Return Not A Return?

When investing in an international commodity, it really, really matters what currency you’re investing in. Exhibit one (excerpt):

Gold outshines equity, other asset class

NEW DELHI: Gold has witnessed a golden era in terms of returns to investors amid its skyrocketing prices as compared with the share market, which has given negative returns on investments in the last three years, a study revealed.

Credit Card Woes?

Beginning next year, those earning less than RM3000 a month will have their access to easy credit card debt cut (excerpt):

Bank Negara to enforce limit on credit cards starting Jan 1

KUALA LUMPUR: Bank Negara has issued a new ruling to control and manage the debt of credit cardholders earning RM36,000 and below per annum.

The maximum credit limit extended to a principal cardholder in that category cannot exceed twice the holder's monthly income (RM3,000 x 2) per credit card issuer.

To further restrict their spending, they will only be allowed to be a principal cardholder from a maximum of two credit card issuers.

Lessons In Financial Literacy

I’ve been a convert to the idea of promoting financial literacy at the earliest level of education. It’s such a critical life skill yet very few have any knowledge of it, particularly in light of the consumerist society the modern world is turning into.

Now, Prof Frances Wooley explains why financial literacy alone isn’t enough (excerpt):

Don't eat the marshmallow

Canadians are increasingly indebted. 31% of us struggle to make our bills and payments. We're pretty clueless when it comes to retirement - just 40% have a good idea how money we need to save in order to maintain our standard of living in retirement...

...I regard the the whole financial literacy exercise with some cynicism. As Canada has reasonably adequate government-funded income support programs for seniors, governments have a strong interest in ensuring that Canadians have enough savings that they do not need to rely upon those supports.

Moreover, financial literacy campaigns frame excessive debt or insufficient savings as a financial problem - expenditures exceed income. Yet, as the the familiar circular flow diagram shows, financial flows are simply a reflection of real flows…

…Framed in real terms, excessive debt and insufficient savings becomes either a problem of "too much stuff" or inadequate incomes: the value of goods and services coming into the household exceeds the value of that household's labour and capital.

Housing and Credit Cards: Cross Purposes

Probably long overdue:

New Measures on Credit Cards to Promote Prudent Financial Management and Responsible Business Practices

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.

BNM Announces 70% LTV For 3rd Mortgages

I’ve been travelling this morning, so posts will be running late today.

As rumoured last week, BNM has announced curbs on property lending, but only for people carrying more than two mortgages:

Measures in Promoting a Stable and Sustainable Property Market and Sound Financial and Debt Management of Households

Bank Negara Malaysia wishes to announce with immediate effect the implementation of a maximum loan-to-value (LTV) ratio of 70%, which will be applicable to the third house financing facility taken out by a borrower. Financing facilities for purchase of the first and second homes are not affected and borrowers will continue to be able to obtain financing for these purchases at the present prevailing LTV level applied by individual banks based on their internal credit policies…

Wealth, Income and Education

I’m swamped with work today, so this will be a filler post to tide you guys over until I can get into meatier things.

I’ve been advocating more attention be paid to the early years of education, rather than focusing primarily on tertiary education, as I believe its a more effective way to create a more productive Malaysian workforce.

Here’s some supporting evidence (abstract):

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR
Raj Chetty, John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, Danny Yagan