Low-income households in Malaysia face significant challenges due to the recent surge in higher cost of living. Low-income households in Malaysia are particularly vulnerable to rising prices because they typically spend a higher percentage of their income on necessities like food, housing, and healthcare.
When prices for these essentials rise, these households may have to forgo other important expenses such as education or health insurance.
BusinessToday spent some time with Direct Lending Founder Yik Hui Seong recently, who said these families often have less financial cushioning and limited access to credit, making it difficult to absorb the increased cost of living. Rising prices mean that their already stretched incomes have to cover more, often forcing them to make tough choices between basic necessities.
The rise in cost of living in Malaysia is driven by a combination of factors including increased global commodity prices and supply chain disruptions. In addition, currency depreciation has made imports more expensive, contributing further to inflation.
These factors disproportionately impact different segments of society, with low-income households feeling the most strain as they spend a larger portion of their income on essentials, which are subject to the most significant price increases, Yik said.
Asked on how does rising costs affect borrowing behaviour and creditworthiness among Malaysians, Yik said lending institutions can mitigate these risks by adjusting their credit assessment models to factor in the economic impact of inflation on borrower’s net disposable income and by offering more tailored financial products to meet changing consumer needs.
For example, Direct Lending (www.directlending.com.my) offers auto service financing to help car owners to pay for unexpected car repair and service bills by paying affordably through up to 12-month instalments.
Rising inflation rates influence borrowing behaviour as more individuals and SME businesses find themselves needing short-term credit to manage escalating costs and cope with unexpected emergency expenses.
These financial pressures can arise because incomes do not always rise proportionally with inflation. In fact, some individuals and SMEs might experience a decrease in real income due to the inflationary impact on the costs of goods and services essential to their operations.
Higher costs can also erode creditworthiness
As living and operational costs climb, both individuals and businesses may see their net disposable income decrease, making it increasingly challenging to service existing debts. Furthermore, as inflation rises, central banks often respond by increasing interest rates to control economic overheating.
This adjustment can lead to higher monthly repayments for loans tied to variable interest rates, further straining borrowers’ financial capacity.
To mitigate these risks, lending institutions can adopt several strategies:
a. Adjusting Credit Assessment Models: Lenders should consider revising their credit evaluation frameworks to account for the economic impact of inflation on an applicant’s financial stability. This involves analyzing trends in income stability, cost of living adjustments, and sector-specific impacts that might affect borrowers’ repayment ability.
b. Offering Tailored Financial Products: Financial institutions can develop products that reflect the current economic reality. For example, Direct Lending offers auto service financing, which allows car owners to manage the costs of necessary vehicle repairs and maintenance through affordable monthly instalments spread over up to 12 months. This type of product is particularly helpful in times of inflation, as it provides a manageable financial solution without the need for large, immediate outlays of cash.
c. Flexible Repayment Options: Providing options for loan deferment, interest-only payments for a period, or restructuring loans can help borrowers manage through periods of high inflation. Such flexibility can be crucial in preventing defaults by providing relief during financial stress.
d. Enhancing Financial Education: Educating customers about the implications of inflation on their finances and the importance of maintaining good credit practices during economic downturns can also be beneficial. This approach not only helps in managing current loans but also prepares them for better financial management in the long term.
By implementing these strategies, lending institutions including Direct lending can support their clients through challenging economic times, helping maintain financial stability and fostering long-term customer loyalty, Yik explained.
Adjusting spending patterns
Malaysians are increasingly adjusting their spending patterns in response to inflationary pressures by prioritizing essential over discretionary spending, seeking cost-effective alternatives, and cutting back on non-essential services.
This rise in loan demand is often exacerbated by higher interest rates, which can increase the cost of financing, compounding the financial strain on borrowers whose salaries or business incomes have not increased proportionately.
However, repayment behaviour may deteriorate under these conditions. With higher living and operating costs, along with increased loan expenses due to rising interest rates, borrowers may find themselves with significantly reduced disposable income. If not properly managed, this scenario can potentially lead to higher default rates as borrowers struggle to meet their repayment obligations.
Financial support to individuals and businesses during times of economic uncertainty
Lending institutions like Direct Lending can play a role in providing financial assistance during times of economic uncertainty. By offering quick, accessible loans with transparent terms, Direct Lending helps individuals and businesses manage cash flow challenges.
For example, Direct Lending’s auto service financing is available in over 1,500 car workshops that enable car owners to apply and obtain the financing to pay for their car repair/ service bills as fast as 15 minutes. Car owners can fully settle the financing at any time with rebates offered.
Furthermore, our efforts in financial education and responsible lending practices help ensure that borrowers understand their commitments and are less likely to overextend financially.
Proactive Measures
Yik said Malaysians can safeguard their financial well-being against inflation by adopting several key strategies:
a. Prioritising Budgeting and Expense Tracking: It’s crucial to distinguish between essential needs and non-essential wants. Regularly review and adjust your budget to reflect current economic realities. Utilise budgeting apps or spreadsheets to monitor your spending patterns. Seek cost-effective alternatives for everyday expenses, such as opting for generic brands, utilizing discounts, and conserving utilities.
b. Diversifying and Adding Income Sources: In times of economic uncertainty, having multiple streams of income can provide additional financial security. Consider part-time jobs, freelance opportunities, or turning hobbies into income-generating activities. Explore passive income streams such as dividend-paying stocks, real estate investments, or digital products that can generate earnings without continuous active involvement.
c. Building an Emergency Fund: Aim to set aside a portion of your income in a dedicated emergency fund. A general rule of thumb is to have at least three to six months’ worth of living expenses saved. This fund should be easily accessible and held in a secure, low-risk account to support you in case of sudden financial needs without resorting to high-interest borrowing.
d. Investing in Financial Literacy: Understanding how to effectively manage and grow your money is more crucial than ever. Educate yourself on the basics of personal finance, including budgeting, investing, and the responsible use of credit. Attend workshops, read books, or take online courses to enhance your financial knowledge. Being well-informed enables you to make smarter financial decisions and better utilize financial products to your advantage.
Implementing these measures requires consistent effort and discipline but can significantly enhance your financial resilience against inflation. By carefully managing expenditures, expanding income sources, preparing for emergencies, and investing in financial education, Malaysians can navigate through inflationary periods more effectively and maintain financial stability.
The digital lending industry is actively developing products and solutions tailored to more effectively meet the evolving financial needs of Malaysians. This innovation includes streamlining the digital application process to make it simpler and faster by leveraging advancements in data analytics and technology.
One key area of focus is the utilization of machine learning and the exploration of alternative data sources—such as utility bill payments, rental payment histories —to broaden the inclusivity of our credit assessments. This approach aims to provide more accessible and affordable financing options for the credit underserved communities, helping them address their financial needs without the traditional barriers posed by conventional credit scoring systems.
At Direct Lending, we are taking these innovations further by:
a. Enhancing User Experience: We aim to simplify the application process not just by making it faster, but also by ensuring it is intuitive and user-friendly.
b. Inclusive Financing Models: We are committed to developing financing models that consider the unique challenges faced by those with limited credit histories. By integrating non-traditional data into our assessment processes, we aim to offer financing to individuals who would otherwise be excluded from the financial system.
c. Strategic Partnerships: We are continuously exploring and establishing partnerships with various ecosystem players — including fintech firms and non-financial corporations—to embed our financing solutions within a broader network. This strategic integration ensures that our financial products are available at the point of need, whether it’s at the point of sale or through other consumer touchpoints, enhancing convenience and accessibility for our customers.
d. Feedback-Driven Improvements: We actively solicit feedback from our users to continuously refine our offerings. This feedback loop helps us to not only improve existing products but also innovate new solutions that address unmet needs within the community.
By adopting these approaches, Direct Lending aims to not only contribute to a more inclusive and responsible financial landscape but also ensures that we stay at the forefront of technological advancements and customer-centric service in the digital lending space.
