MALAYSIA has recorded an impressive progress in making its financial system an inclusive one.
As reported by a World Bank Group study in 2017 entitled "Financial Inclusion in Malaysia: Distilling Lessons for Other Countries," more than 92 per cent of the population have access to financial services.
Theoretically, inclusive finance paves the way for the greater segment of society, especially the B40 and M40 groups to participate in financial activities, such as obtaining loans for their SME business or making investment in unit trusts.
Nevertheless, there are still challenges. One is the sustainability of its financial inclusion efforts, which may be jeopardised by the high level of household debt.
The report highlighted that Malaysia's household debt-to-GDP ratio in 2016 was at 82 per cent.
This ratio is certain to rise further following the Covid-19 pandemic whose adverse effects on the economy have underscored the need to support and protect lower income groups.
Bank Negara Malaysia (BNM) in its 2020 Annual Report indicated that the household debt-to-GDP ratio rose sharply to a whopping 93.3 per cent in December 2020 from 87.9 per cent in June 2020.
It's the result of many households losing jobs and sources of income due to the pandemic.
As reported by Department of Statistics Malaysia (DOSM) in December 2020 Key Statistics of Labour Force in Malaysia, the unemployment rate spiked to 5.1 per cent in the second quarter of 2020 reaching 5.3 per cent in May 2020.
BNM in its 2020 annual report further stated that, of total household debt at the end of December 2020, almost 40 per cent was owned by borrowers with monthly earnings below RM5,000.
In its other report "Financial Stability Review-First Half 2021", BNM stated that at end-July last year, 30 per cent of the outstanding household loans are under repayment assistance plan, a drastic increase from 16 per cent at the end of June last year.
The households earning below RM5,000 per month are from the B40 group, whose income range is up to RM4,850, and maybe among the lower M40 group whose income range is between RM4,850-RM10,970.
Furthermore, in 2020 the median household income reported by DOSM is RM5,209. So, if the population is divided into two halves, half of the population is essentially earning an income from the lowest possible range until RM5,209.
There are several observations that can be drawn from the above information.
Firstly, the room of participation in financial activities for B40 and M40 groups (such as making investments to improve household incomes) could be severely dented with the high-level debt as well as lower income.
Secondly, considering half of our population is earning an income of slightly above RM5,000 a month, this group accounts for almost 40 per cent of the household debt.
It can be construed that these income groups (B40 and the lower part of the M40) are undeniably the most vulnerable to any adverse economic situations, just like during the Covid-19 pandemic.
Thirdly, the World Bank report on Malaysia's significant success in raising the level of financial inclusion is apparently at the aggregate level.
It is more interesting to know the breakdown of financial inclusion indicators, especially the degree of participation in financial activities, according to states in Malaysia.
Finally, the level of financial inclusion among all population must also be mapped out according to the income groups at the state level.
The Household Income and Basic Survey Amenities Report 2019 by DOSM showed nine states where poverty was prevalent (Kelantan, Perlis, Kedah, Perak, Sarawak, Pahang, Sabah, Terengganu and Negri Sembilan), with a median income from RM3,010 to RM4,478, lower than the national median income of RM5,209.
This continued disparity between them and the other seven richer states could throw a wrench in the government efforts to achieve shared prosperity via SPV2030.
I am of the opinion that appropriate strategies to support B40 and M40 to be more resilient in weathering the pandemic and high household debt could be devised if financial inclusion level is delineated according to different states and income groups of the state's population.
In other words, better insights on the role of inclusive finance in improving the financial situation of the B40 and M40 groups could be gained when an in-depth, state-level and income-based analysis of financial inclusion is done.
The writer is an Associate Professor and Associate Fellow at Accounting Research Institute (ARI), Universiti Teknologi MARA (UiTM)