While lower-income households may have televisions, refrigerators and cars, such ownership does not indicate prosperity but debt, as families pay more than the value of these goods through hire purchase plans with high interest rates.
Giving an on-the-ground picture of whether Malaysians are truly benefiting from economic policies, a Khazanah Research Institute report on "The State of Households" released yesterday showed inequality in many areas, including the fact that the rich pay less for the same items because they can afford to pay in cash.
Poorer Malaysians who rely on instalment plans to purchase goods are paying more than their wealthier counterparts for the same items, due to the high interest rates, the report stated.
This “ansuran mudah" scourge has caused Malaysians to spend most of their income, have little savings, and become more susceptible to price increases, the institute noted.
The report said that consumers who opt for instalment payment offers could pay up to 50% in annual percentage rate (APR) for products, such as televisions, washing machines and fridges.
“The wealthiest pay by cash, the better-off choose credit based on interest rates and the least well-off choose the installment payments offer that they can afford,” it said.
“Low-income households, who have low financial literacy and limited access to debt, appear to choose financing based on the affordability of the monthly or weekly installments rather than the true APR.”
The report revealed that a RM24,936 Perodua Viva at an interest rate of 3.38% for nine years may cost only RM271 a month.
However, consumers would be paying RM6,827 in interest, or 27.38% of the total price, at an APR of 6.14%.
“With a nine-year loan, the Perodua Viva seems affordable at RM271 per month. But the reality is that the buyer pays more than a quarter of the purchase price in interest payments,” said the report.
“The problem is more acute with consumer durables, as the rates are almost 50%.”
The report said that households earning less than RM3,000 have a relatively low share of total household debt but their borrowings are proportionately higher than the rest, at seven times their annual income.
“The pressing concern then is how much debt low-income households have taken relative to their ability to pay.
“They spend most of their income and have little savings, making them susceptible to financial stress should interest rates and inflation continue to rise,” said the report.
Other examples of consumer items in the report was how a Samsung television costing RM1,549, paid at an installment of RM15 a week for five years would rack up a total interest of RM2,419, or 156.14% of the original price. The APR would be at 46.05%.
If a consumer purchased a RM1,024 Toshiba Washer based on a weekly installment of RM10 for five years, they would be paying a total interest of RM1,657, or 161.78% of the product’s price. The APR would be at 47.41%.
The interest rate for a Toshiba refrigerator priced at RM1,049 would be RM463, if paid at a weekly installment of RM16 for two years, with an APR of 37.9%.
“A very high proportion of households own cars (78%), motorcycles (66%), refrigerators (96%) and washing machines (91%),” said the report, citing figures from 2012.
“Almost every household owns a television (98%) and a mobile phone (95%), while 57% subscribe for pay TV (Astro). However, only 39% have an internet subscription.
“Most cannot be buying all these with cash, since their incomes are low. They can only be doing so on credit,” the report said.
These higher debts to service resulted in lower savings, as shown from data from Amanah Saham Bumiputera (ASB), the unit trust fund for Bumiputeras.
ASB data showed that the bottom 71.4% of unit holders in 2013 have an average of RM554 in their accounts compared with the average for the top 0.2%, which is RM725,122, said the report.
Wealth and income disparity was also evident from Employees Provident Fund (EPF) data which showed the savings of the top 17,061 members being greater than the total savings of the entire bottom 44% which comprises 2,854,419 members, it said.
“Active EPF members in the 41-55 age group, who are on the brink of retirement and have their careers’ worth of savings, have on average RM147,057 each.
"But this is distorted by the richest 5,446 members who have on average RM1.56 million in savings.
“The bottom 13.5%, meanwhile, have an average savings of RM3,580 and the next 7% an average of RM14,848.
“Low savings and low wealth are a result of low incomes. Low EPF savings of the bottom 20.5% and high wealth inequality are consequences of disparities in income,” said the report.
It added their low levels of savings would mean most families would be in trouble in the event of a shock, such as a reduction in income, unemployment or other emergencies.
The report proposed that the government require all providers of consumer credit to prominently advertise the true APR, in an effort to protect those susceptible to installment payments.
It also mooted a realignment of responsibility, noting that the regulation of credit was distributed between Bank Negara Malaysia, the Ministry of Domestic Trade, Cooperatives and Consumerism, and the Ministry of Urban Wellbeing, Housing and Local Government.
The report also proposed teaching financial literacy in schools.
Meanwhile, the report noted that higher income households have a higher propensity to save and their savings generated returns and further increased their wealth, contributing to the widening wealth gap.
“We have many wealthy people: Malaysians were the top foreign home buyers by transactions in Singapore in 2012; Malaysians were the fourth largest buyers (4%) of newly built London property in 2012; around 7,000 houses costing more than RM1 million are sold in Malaysia each year; Malaysians purchase many luxury cars,” it said.
In 2013, 28,298 luxury cars were sold to Malaysians, including brands such as Volkswagen, BMW, Mercedes Benz, Audi, Lexus, Land Rover, Mini Cooper and Porsche. – November 18, 2014.
- See more at: http://www.themalaysianinsider.com/malaysia/article/instalment-plans-causing-poor-malaysians-to-pay-more-says-khazanah-report#sthash.WnOTAba1.dpuf
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