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RBF
11,2
188
Received 16 May 2017
Revised 16 November 2017
26 December 2017
5 April 2018
Accepted 24 April 2018
Review of Behavioral Finance
Vol. 11 No. 2, 2019
pp. 188-200
© Emerald Publishing Limited
1940-5979
DOI 10.1108/RBF-05-2017-0046
Propensity toward indebtedness:
evidence from Malaysia
Nurul Azma
Department of Accounting and Finance,
Management and Science University, Shah Alam, Malaysia
Mahfuzur Rahman
Department of Finance and Banking,
University of Malaya, Kuala Lumpur, Malaysia
Adewale Abideen Adeyemi
Department of Management Program,
International Islamic University Malaysia, Kuala Lumpur, Malaysia, and
Muhammad Khalilur Rahman
Department of Operation and Management Information Systems,
University of Malaya, Kuala Lumpur, Malaysia
Abstract
Purpose – The purpose of this paper is to develop a model for studying the propensity towards indebtedness
in Malaysia using behavioural factors.
Design/methodology/approach – A self-administered questionnaire was distributed among Malaysians
who work in Klang Valley, Kuala Lumpur. The questionnaire contained several demographic variables and
four behavioural factors: financial literacy, risk perception, materialism and emotions. A total of 201 completed
questionnaires were received and the data were tested using structural equation modelling with partial
least squares.
Findings – This study found that emotion and materialism are statistically significant for a propensity
towards indebtedness, while financial literacy and risk perceptions are insignificant for a propensity towards
indebtedness.
Originality/value – The results of this study would be useful in helping design better models for credit
offerings and addressing credit problems in the long run.
Keywords Indebtedness, Behavioural factor, Financial literacy, Materialism, Emotion
Paper type Research paper
1. Introduction
Over the past few decades, many economies around the world have been experiencing
considerable growth in credit supply and an increase in payment periods (Ahmed et al.,
2010; Ghani, 2010). In their drive for financial inclusion, financial institutions are encouraged
to provide credit to social classes that previously had been excluded. Simultaneously, many
people report financial difficulties and feel embarrassed by their debt repayments (Endut
and Hua, 2009; Ghani, 2010; Mann et al., 2013). Flores and Vieira (2014) and Keese (2012)
pointed out that debt repayments have raised public concern and many borrowers are
unable to handle their debt repayments.
In Malaysia, since Southeast Asia financial crises of the 1990s, credit has been apparently
easily available (Hilmy et al., 2013). However, the rising household and individual debt has led
to unprecedented numbers of people filing for bankruptcy, which undermines the intended
benefits of such credit availability. Malaysian household debt profiles indicate that the number
of bankruptcy cases in Malaysia is increasing dramatically. Hilmy et al. (2013) identified that
the number of bankruptcy cases is higher for the economically active age group of 35 to
JEL Classification — G32, G110, M300
44-year-old male Malays. The economic activity of this group causes unexpected increases in Propensity
family debt, default on debt repayments and bankruptcy. The Malaysian Department of toward
Insolvency recorded a total of 253,635 bankruptcy cases between 2007 and 2013. The indebtedness
Department also reported that the number of bankruptcy cases is increasing from year to year.
Bankruptcy cases increased from 13,238 in 2007 to 13,855 in 2008 and from 16,228 in 2009 to
18,119 in 2010. Even though the number decreased to 16,167 in 2011, it rose again to 19,525 in
2012 and to 21,987 in 2013 (Meiken, 2014; Selvanathan et al., 2016). Thus, studying behavioural 189
factors may improve the current situation by providing a comprehensive understanding of the
causes of individual indebtedness.
The economic environment, including rising interest rates and a higher cost of living,
turned against households. According to the World Bank report and the Star Online
(22 November 2014), many households in Asian countries find themselves in a vulnerable
position due to their high level of indebtedness. In 2013, Malaysia’s household debt was
valued at 87 per cent of the country’s GDP, which is a substantial increase from 60.4 per cent
of GDP in 2008. The Star Online (22 November 2014) reported that the ratio of household
debt to GDP in Malaysia is the highest among the Asian countries. Many Malaysian
households have limited savings and relatively low incomes. In the Malaysian context, ease
of getting credit, increases in payment periods and use of credit cards instead of cash have
all been linked to increasing consumption and indebtedness in Malaysia (Endut and Hua,
2009). According to Zainol et al. (2016), household debt in Malaysia has increased from
RM465.2bn in 2008 to RM1,010.8bn in 2015.
Keese (2012) stated that income helps to explain the behavioural factors which have the
strongest influence on young people. The foregoing argument motivates this study, that is,
it is probable that credit problems are not only produced by economic factors but also are
influenced by psychological and behavioural factors (Vitt, 2004). Indeed, credit should help
people to improve their financial condition by enabling them to acquire assets, cover
essential expenses and become economically solvent in long run. But in reality, credit supply
often seems to make people more indebted. The number of borrowers struggling with
indebtedness has raised public concern. It is questionable that indebtedness is determined
solely by financial factors, and it is likely it may also be influenced by non-financial factors,
such as behaviour. The above discussions signify the relevance of this study, as it seeks to
investigate the behavioural determinants of people struggling with indebtedness.

2. Theoretical basis
Indebtedness is a concern in today’s society as people may need to sacrifice a significant
portion of their income to tackle their debt (Gathergood, 2012). Livingstone and Lunt (1992)
found a strong positive correlation between attitudes to debt and the level of debt that
people carry. The finding is also supported by Davies and Lea (1995) who revealed a
significant positive correlation between debt and attitude. According to Katona (1975), there
are three reasons that people spend more than they earn, which may cause indebtedness:
low income; high income along with strong desire to spend; and reluctance to save,
regardless of income. These general factors seem to hold true across almost all countries in
the world, including Malaysia, when financial institutions supply credit to social classes that
previously had been excluded from it.
According to Azman et al. (2017), in Malaysia, total household debt had increased to
RM70.4bn; this increase has been driven by the outstanding debts of credit cardholders which
stood at RM32,841.40m by 2015. Pineda (2017) examined estimates of the optimal debt ratio
for ASEAN economies (Malaysia, Indonesia, Thailand and The Philippines) and found that
increased capital inflows and lower borrowing costs following financial liberalisation spurred
excessive borrowing. These findings consider Stein’s theory that increases in excess
indebtedness signal an impending financial crisis. Malaysian people are often highly indebted
RBF as they seek to maintain their lifestyle by buying homes, cars, businesses and investment
11,2 shares. The country has easily accessible customer banking products (i.e. personal loans,
credit cards, etc.) which may lead to increased bankruptcy cases among the people.
Emotions that are relevant to people’s propensity to indebtedness include anger, fear,
jealousy, embarrassment, pride, shame, nervousness, etc. Individuals may express positive
or negative emotions. Hu et al. (2014) asserted that people who have positive emotions are
190 more risk-prone than those with negative emotions. Emotion influences people’s behaviours
such as their consumption behaviour, risk-taking behaviour and decision-making behaviour
(Flores and Vieira, 2014). Ottaviani and Vandone (2010) stated that emotional responses are
considered major factors in making financial decisions. The existing studies have shown
that highly emotional people tend to have a high-risk perception (Flores and Vieira, 2014)
and a low level of materialism (Disney and Gathergood, 2011). Persson (2010) and Doosti
and Karampour (2017) postulated that emotion impacts on indebtedness. Flores and Vieira
(2014) showed that indebtedness can be attributed to emotion. Thus, this study’s first
hypothesis is as follows:
H1. Emotions have a significant relationship with a propensity for indebtedness.
Materialism is defined as “the importance given to the possession and acquisition of
material goods in achieving life goals or desired states” (Richins and Dawson, 1992, p. 32).
Materialism also can be defined as one who seeks to acquire possessions to bolster social
status and increase pleasure. Materialism is viewed positively when it becomes a source of
motivation for acquiring values that are more collectively oriented; however, it is viewed
negatively when the motivation is creating envy and gaining status (Flores and Vieira,
2014). Many studies linked materialism with consumption-related behaviours (e.g. Ponchio,
2006; Flores and Vieira, 2014). Pham et al. (2012) found that people who have a high level of
materialism also have compulsive buying problems due to poor financial management
practices. Watson (2003) suggested that people with high levels of materialism are
characterised as spenders, while people with low levels of materialism are savers; this is
because people who have less interest in material possessions are more likely to invest in
stocks, bonds and mutual funds. Meanwhile, materialistic people lack the self-control
necessary for saving and investing. Hoch and Loewenstein (1991) suggested that cognitive
exercises may help to increase individuals’ self-control and reduce their time-inconsistent
choices. Macedo et al. (2011) and Doosti and Karampour (2017) pointed out that materialism
is negatively related to risk perception and emotion while positively linked with
consumption. Based on these arguments, it has been postulated that:
H2. Materialism has a significant relationship with a propensity for indebtedness.
Risk perception indicates how individuals view risk during decision making (Caetano et al.,
2011). For example, two persons who have an equal risk when buying similar goods may
perceive the risk differently. Thus, they will make different decisions related to the goods
(Barros and Botelho, 2012). Prior studies have linked risk perception with financial decision
making (e.g. investment, borrowing, lending) (Garling et al., 2009; Keese, 2012; Doosti and
Karampour, 2017). Caetano et al. (2011) found that people with high-risk perception tend to
have a low level of debt, while Flores and Vieira (2014) demonstrated that risk perception is
positively linked to emotion and negatively linked with materialism. Following these
arguments, it has been postulated that:
H3. Risk perception has a significant relationship with a propensity to indebtedness.
Kamleitner et al. (2011) stated that individuals need to learn to establish cost-benefit
associations to get out of debt in response to financial pressures; in other words, they need to
improve their financial literacy. Financial literacy refers to the set of information that helps
people to manage their income, expenses, monetary loans, savings and investments for both Propensity
the short term and the long term (Van Rooij et al., 2011). Researchers raise concerns about toward
individuals’ ability to secure their financial well-being (Mitchell, 2011; Reed and Cochrane, indebtedness
2012). Many individuals save too little to invest wisely, and often become indebted. Financial
literacy is important to understanding personal financial management because there are so
many financial products in the market, and people are often inundated with financial
information that they are ill-equipped to process because of their lack of financial education. 191
Lührmann et al. (2014) indicated that lacking financial knowledge causes individuals to make
inadequate financial decisions. Financial literacy is particularly important to people who are at
an early stage of their careers (Lusardi et al., 2017). Lusardi et al. (2010) concluded that
programmes to improve financial literacy will not be successful if governments are not
involved in them as the cost for participating in private programmes may be too high for some
individuals. Indeed, financial literacy helps people to be prepared to manage their personal
finance (Sevim et al., 2012; French and McKillop, 2016). For example, individuals who are
financially literate may set financial goals, spend within their budget and pay for credit on
time to avoid late payment charges. From these arguments, this study postulates that:
H4. Financial literacy has a significant relationship with a propensity for indebtedness.

3. Methodology
This study is quantitative in nature. Quantitative research examines the relationship
between variables to test objective theories (Creswell, 2009). A baseline structural model is
developed to explore the influence of behavioural factors in a propensity towards
indebtedness. To evaluate behavioural factors and indebtedness, four hypotheses were
developed for testing, as demonstrated in Table I. The study measures the independent
variables using adapted instruments from several papers in the literature: 14 measures for
examining financial literacy and emotion were adopted from Mitchell (2011), Disney and
Gathergood (2011), Quelch and Jocz (2007) and Persson (2010); 9 measures for establishing
levels of materialism were adapted from Macedo et al. (2011) and Ponchio (2006); and
5 measures for risk perception were adapted from Caetano et al. (2011) and Flores and Vieira
(2014). Meanwhile, the dependent variable of propensity towards indebtedness was
established using 7 measures adapted from Flores and Vieira (2014).
The constructs used in this study are measures from the literature which were adapted to
the context of this study. Thus, regarding the baseline structural model, the first hypothesis
established a relationship between emotion and a propensity towards indebtedness. This
finding is based on Persson (2010), who indicated that emotion has a direct effect on a
person’s propensity towards indebtedness. Källmén (2000) demonstrated that the anxiety
has a significant relationship with emotion. He also indicated that people with lower levels of
anxiety and emotion are more effective than those with higher levels. In relation to this,
Zuckerman and Kuhlman (2000) postulated that high-risk behaviours might be caused by

Hypotheses References

H1: emotions negatively impact propensity towards Quelch and Jocz (2007), Doosti and Karampour
indebtedness (2017)
H2: materialism positively impacts propensity towards Macedo et al. (2011), Ponchio (2006)
indebtedness
H3: risk perception negatively impacts propensity towards Caetano et al. (2011), Flores and Vieira (2014)
indebtedness Table I.
H4: financial literacy negatively impacts propensity towards Mitchell (2011), Disney and Gathergood (2011) Hypotheses relations
indebtedness with sources
RBF the need to express emotions. Regarding measures of materialism for the second hypothesis,
11,2 Flores and Vieira (2014) found a relationship between materialism and a propensity towards
indebtedness. They also indicated that emotion has a significant relationship with
indebtedness and with risk perception. In addition, Flores and Vieira (2014) identified
that indebtedness influences emotion. Ponchio (2006) showed that more materialistic
individuals are exposed to higher levels of indebtedness and are involved in credit for
192 consumption purposes. The third hypothesis measures risk perception, and it relied on the
findings of Caetano et al. (2011); they indicated that the higher the perceived risk is the lower
the level of debt the individual incurs. Finally, the fourth hypothesis examines the
relationship between financial literacy and indebtedness; this claim depended on the work of
Disney and Gathergood (2011), who attempted to determine whether financial literacy
inversely impacts the propensity towards indebtedness.
From these hypotheses and based on the synthesis of the extant literature on the
propensity towards indebtedness as explained by behavioural factors, a baseline structural
model is set forth in Figure 1. The model is developed to reflect each of the hypotheses to be
tested in this study. The model identifies four factors incorporating emotion, materialism,
risk reception and financial literacy.
This research was conducted via a structured questionnaire designed to explore the
baseline structural model and the hypotheses development. The sampling unit for this study
consisted of individuals who are Malaysian citizens who worked in both the public and
private sectors in the Klang Valley area. The Klang Valley has the highest population
density in Malaysia, and it contributed to the rapid development of the country (Bunnell
et al., 2002). Probability sampling method was used in this study as samples are gathered in
a process that gives all the individuals in the Malaysian population equal chances of being
selected. The potential respondents were politely approached by the researcher who
designed the study; he then asked for their permission to include them as participants.
The researchers highlighted to participants that any data collected could be used
for academic purposes only and their involvement was anonymous and voluntary. The
participants completed the questionnaires and handed them to the researcher. A total of
250 questionnaires were distributed between February and April 2015, with 212 being
returned; this represents a return rate of 84.8 per cent. Of them, 11 returned questionnaires
were partially completed, and were thus unusable. Therefore, the usable response rate was
about 80.4 per cent. In this study, G*Power software (version 3.1.9.2) was used to measure the
valid sample size of 201 using a total of five indicators. Using G*Power with a statistical
significance of 0.05 yielded a power of 0.99, which was above the minimum useable value of
0.80 (Chin, 2001). According to the G*Power test, the results reveal that the minimum effective
sample size for this study would be 184, which indicates that the proposed sample size of 201
is large enough for this study (Faul et al., 2009).
The survey instrument was a structured questionnaire with close-ended questions,
divided into two sections. The first section considered the respondents’ profile, whereas the
second section explored behavioural related factors to the baseline structural model. As
explained above, the factors used in this paper were measured using tools adapted from the
existing literature. After conducting the confirmatory factor analysis (CFA), four items
remained for measuring how emotion affects the propensity towards indebtedness; these

Emotion H1 H3 Risk Perception

Propensity to
Figure 1.
Indebtedness
Theoretical model and
associated hypotheses Materialism H2 H4 Financial Literacy
measures were adapted from Persson (2010), Källmén (2010) and Flores and Vieira (2014). Propensity
Three measures adapted from Flores and Vieira (2014) were found to be useful for toward
evaluating levels of materialism. Three measures of risk perception were adapted from indebtedness
Caetano et al. (2011). Measures developed by Disney and Gathergood (2011) were adapted to
measure financial literacy. Finally, propensity towards indebtedness was also measured
using three tools adapted from Flores and Vieira (2014). In response to each measure, the
participants were asked to indicate their level of agreement on a five-point Likert scale 193
ranging from 1 (strongly disagree) to 5 (strongly agree). Each of the measurement constructs
in the survey was made up of three to four items.
For model estimation and validation we employed partial least squares (PLS). In the PLS
model, many multivariate equations have been used to predict and explain exogenous
constructs. To this end, the principal equation in modelling is represented by the following
equation (Muller et al., 2005, p. 850):

Y i ¼ b0 þb1 X 1i þb2 X 2i þb3 X 3i þb4 X 4i þmi ; (1)

where X1i, X2i, X3i and X4i are the independent variables, Y is the dependent variable, β0–β3
are the coefficients and ui is the disturbance term.
Therefore, in this paper we are testing the following model:

DBi ¼ b0 þ b1 M A1i þb2 EM 2i þb3 RP 3i þb4 FL4i þmi ; (2)

where DB is the propensity towards indebtedness, MA is materialism, EM is emotion, RP is

risk perception, FL is financial literacy, β0–β3 are coefficients and ui is the disturbance term.
The convergent validity of each construct is assessed by observing factor loadings,
average variance extracted (AVE) and composite reliability (CR). Acceptable values for
factor loadings, AVE and CR are greater than 0.65, 0.50 and 0.60, respectively (Fornell and
Larcker, 1981).

4. Results and discussion

The demographic analysis was based on the 201 responses collected. The result indicated that
the majority of the respondents are female (146, 72.6 per cent) and married (126, 62.7 per cent).
In terms of age, most of the respondents are between 21 and 30 years old (113, 56.2 per cent).
With respect to education, the result identified that most respondents hold at least a bachelor’s
degree (89, 44.3 per cent), while others have a master’s degree (65, 32.3 per cent), a diploma
(23, 11.4 per cent), a PhD (19, 9.5 per cent) or a secondary school certificate (5, 2.5 per cent).
Regarding occupation, almost half of the respondents are private-sector employees
(95, 47.3 per cent), while the others work in the public sector (83, 41.3 per cent) or are
self-employed (23, 11.4 per cent). In terms of religion, the majority of the respondents are Muslim
(90.5 per cent), followed by Buddhists (4.5 per cent), Christians (3 per cent), Hindus (1.0 per cent)
and other religions (1.0 per cent). Most of the respondents indicate their race to be Malay
(87.6 per cent), followed by Chinese (6.5 per cent), Indian (5.0 per cent) and others (0.9 per cent).
Income plays a vital role in determining the indebtedness propensity of individuals and
households. Therefore, respondents were asked about their monthly income. More than a
quarter of the respondents (26.9 per cent) have a monthly income of between RM2,001 and
3,000. This is followed closely with 25.4 per cent reporting an income of RM2,000 and below.
Almost 21 per cent have an income between RM3,001 and 4,000, while 14.9 per cent report
income of RM5,001 and above, and finally 11.9 per cent earn between RM4,001 and 5,000.
When asked about credit, more than half of the respondents (59.2 per cent) said they do not
have a credit card. However, the majority of them, or approximately 72 per cent, have taken
a loan such as a personal loan, car loan or housing loan.
RBF After outlining the respondents’ profiles, we measured mean scores for each statement
11,2 and conducted CFA. Table II presents all constructs used in each mean score with the
averages of the responses. It is significant that the scales used in this paper are five-point
Likert scales. CFA was conducted to determine whether a particular set of variables
influenced the responses in a predicted way. This paper used structural equation modelling
technique with SmartPLS version 2.0. SmartPLS statistical analysis was used to estimate
194 the path of coefficients and to maximise the explained variance (Hair et al., 2014). The
bootstrapping technique was applied to test the coefficients for the significance of the path
modelling. The bootstrapping result identifies the paths corresponding to each hypothesis.
The t-value was assumed to be 1.645 for each path that indicates a significant difference at
5 per cent, and 2.326 assumes significant differences at 1 per cent.
Accordingly, the convergence validity was illustrated by factor loadings greater than
0.65, and convergence validity for factors measuring less than 0.65 were deleted in order to
develop the path coefficient for the measurement model. For example, three items (EM1,
EM2 and EM5) were deleted from the variable emotion, and six items (M1, M2, M3, M4, M5
and M8) were deleted from materialism. For the variable of risk perception, two items (RP2
and RP5) were deleted, while four items were deleted from indebtedness and financial
literacy (DB1, DB2, DB3 and DB6; and FL1, FL2, FL3 and FL4, respectively). Hair et al.
(2014) suggested that the AVE should be above 0.50 and CR should be greater than
0.60. The discriminant validity is measured by the square root of the AVE and is greater
than any of the inter-construct correlations (Fornell and Larcker, 1981). Hair et al. (2014)
postulated that the discriminant validity refers to the degree to which a specific construct is

Characteristics Mean Factor loadings AVE CR CA

Emotion 0.612 0.806 0.701

[EM3] My sleep would be affected if I am indebted 3.37 0.667
[EM4] I would feel depressed if I am indebted 3.63 0.822
[EM6] My family relation would suffer if I am indebted 3.11 0.646
[EM7] My relations with friends would be harmed if I am indebted 3.09 0.715
Materialism 0.739 0.895 0.824
[M6] I like to possess things to impress other people 3.12 0.841
[M7] I like to have a lot of luxury in my life 2.84 0.855
[M9] Spending a lot of money is among the most important
things in my life 2.97 0.881
Risk perception 0.719 0.763 0.835
[RP1] Spends a great amount of money on the lottery 3.36 0.692
[RP3] Spends money carelessly, without thinking of the 3.87 0.781
consequences
[RP4] Invests in businesses that have great chances of not
working well 3.04 0.684
Financial literacy 0.728 0.888 0.823
[FL5] Analyses personal finances in depth before making any 4.24 0.916
major purchase
[FL6] Takes notes and controls all personal expenses 4.02 0.912
[FL7] I am satisfied with my own system to control finances 3.67 0.716
Propensity towards Indebtedness 0.687 0.739 0.790
[DB4] I think it is normal for people to go into debt to pay their bills 3.01 0.649
Table II. [DB5] I would rather buy in instalments than to wait to gather
Mean scales,
money to buy in cash 3.77 0.722
summary results of
[DB7] I would rather pay in instalments even if the total is more
the measurement
model and expensive 2.93 0.719
convergent validity Notes: AVE, average variance extracted; CR, construct reliability; CA, Cronbach’s α
different to other constructs. Additionally, CR is generally interpreted in a comparable way, Propensity
as Cronbach’s α (CA) value should be greater than 0.70. Hair et al. (2014) suggested that toward
higher values denote higher levels of reliability. indebtedness
Moreover, Table II summarises the results of the measurement model (Figure 2). The CR
and AVE support the convergent validity of the CFA results. The CR result shows a value
range between 0.739 and 0.895, which exceeds the threshold point of 0.60. Similarly, the AVE
ranges from 0.612 to 0.739, which is above 0.50 and validates the use of the construct. Overall, 195
these results suggest that the measurement model has good convergent validity. To scrutinise
the discriminant validity, the paper followed the Fornell–Larcker criterion. The square (x2)
root of the AVE for each variable was measured whether they are higher than the correlation
coefficients of the corresponding inter-variables. Table III demonstrates the correlation matrix,
indicating the correlations between the variables and the square root of the AVE (in italics),
signifying that discriminant validity is achieved. Furthermore, all the CA values were
examined and found to be greater than the threshold value of 0.70 (Hair et al. 2014), showing
the good reliability of all measures. The highest CA value was risk perception (0.835), which
designates a good internal consistency of the items in this variable. However, the lowest CA
value was emotion (0.701), which signifies low inter-item correlations (Table II).
Nonparametric bootstrapping was applied (Wetzels et al., 2009) with 5,000 replications to
test the measurement model. The significance of direct impacts indicated by the research

RP3
EM6 0.781
0.000
0.646 0.692
0.715 0.000 0.684 RP1
EM7
0.667
–0.074 RP RP4
EM3 0.822
0.241
EM
DB5
EM4 0.722
0.447
0.719
0.649 DB7

0.568 DB DB4
0.063

FL5
M6 0.916
0.841
0.000 0.000
0.858 0.912
FL6
M7 0.881 0.716
Figure 2.
MA FL FL7
M9 Structural model

Variable DB EM FL MA RP

Indebtedness 0.8286
Emotion 0.6255 0.7823
Financial literacy −0.5410 −0.5804 0.8531
Materialism 0.5393 0.4967 −0.5741 0.8600 Table III.
Risk perception 0.4452 0.4906 −0.2572 0.7358 0.8479 Discriminant validity
RBF model was tested. Table IV shows all the hypothesised direct relationships in this paper.
11,2 The results indicate that the impact of emotion (β ¼ 0.241, p o0.05) and materialism
(β ¼ 0.567, p o0.01) on a propensity towards indebtedness was significant and positive.
In contrast, the impact of risk perception (β ¼ −0.074, p W0.05) and financial literacy
(β ¼ 0.063, p W0.05) was insignificant. As such H1 and H2 were supported whilst H3 and
H4 were not supported.
196 The measurement model tested provides evidence that a propensity towards
indebtedness is dependent on emotion. This finding is supported by the earlier study by
Flores and Vieira (2014). In the context of the inhabitants of Brazil, Flores and Vieira
(2014) found that there is a significant, negative relationship between emotion and a
propensity towards indebtedness. However, in the context of Malaysia, the findings reveal
that emotion is positively significant with a propensity towards indebtedness. Positive
emotion may reduce perceived risk if compared to negative emotions. According to the
findings, emotion plays an important role in a propensity towards indebtedness.
The result of this study also indicates that materialism positively influences indebtedness,
which strongly supported the previous empirical study by Flores and Vieira (2014). By
verifying this relationship, Flores and Vieira (2014) suggested that people who have
higher levels of materialism have a greater propensity towards indebtedness.
Furthermore, Macedo et al. (2011) and Flores and Vieira (2014) indicated that high
consumption levels do not always provide benefits; on the contrary, such levels of
consumption may adversely affect individual welfare. The positive relationship between
materialism and indebtedness is noteworthy; it is observed that people who highly value
the possession of goods tend towards a higher propensity for being in debt because they
are prone to spending without proper planning. The finding of this study regarding
materialism is in line with the finding of Flores and Vieira (2014).
In addition, the estimation phase of the measurement model reveals that risk perception
has a negative impact on the propensity towards indebtedness. Although this finding is not
significant, its negative impact is consistent with the previous study by Flores and Vieira
(2014). However, these authors found that there is a significant, negative relationship
between risk perception and indebtedness. People with high-risk perception tend to have a
low level of debt. This study also found a positive relationship between financial literacy
and indebtedness. With respect to the sign of the coefficient of financial literacy, the
hypothesis related to this issue is not confirmed. Interestingly, this study found that
financial literacy was neither practically, nor statistically significant to indebtedness.
In the context of Malaysia, this study suggests that those who are financially literate are
more prone to indebtedness. This may be because they have confidence in their ability to
manage their debt. They probably understand better the function of loans or credit cards,
the implications of interest rates, the duration of repayment, etc. Conversely, those who are
financially illiterate have lower confidence in taking on debt, possibly because they have
insufficient knowledge about the functions and implications of debt. A study conducted by
Flores and Vieira (2014) also found a statistically insignificant relationship between
financial literacy and indebtedness.

Hypothesis Relationship Path coefficients SE t-statistics

H1 Emotion→Indebtedness 0.241 0.109 2.200*

H2 Materialism→Indebtedness 0.567 0.113 5.017**
H3 Risk perception→Indebtedness −0.074 0.123 0.602
Table IV. H4 Financial literacy→Indebtedness 0.063 0.111 0.566
Hypothesis testing Notes: *po 0.05; **p o0.01
5. Conclusion Propensity
The propensity towards indebtedness is a vital issue in Malaysia. Many people have apparently toward
not realised this situation, but it is of great concern to the government, decision makers and indebtedness
researchers. Therefore, initiatives for overcoming this issue should be taken seriously. The
present study contributes empirically to filling a gap in the literature regarding the behavioural
factors that predict a propensity towards indebtedness. Self-control is important to avoiding
indebtedness, especially against the backdrop that materialism is a statistically significant 197
factor explaining propensity to indebtedness in this study’s hypothesised model. This
contribution could be a useful source of information for the higher authorities seeking to guide
people to improve their financial planning through programmes and mass media.
The essential reason that behavioural factors have an influence on the propensity
towards indebtedness is the assumption that people are not always rational. This study
helps to broaden the understanding of behavioural factors which may lead to the
development of actions to prevent indebtedness and assist defaulters. The researcher also
hopes that financial institutions can benefit from the results of this study by building
stronger models for credit offerings. The findings also suggest that financial institutions
may have to improve their model in addressing the credit problem in the long run. As
materialism is a significant factor in explaining the propensity for indebtedness, the higher
authorities should consider this behavioural factor and take necessary steps to guide people
to engage in better financial planning and disseminate it widely through programmes and
mass media. In addition, financial institutions should measure people’s level of materialism
before approving loan applications as it has a direct link with indebtedness. For example,
care should be taken in considering the loan applications of highly materialistic people.
In efforts to reduce the indebtedness among Malaysians, there is an urgent need for financial
institutions to impose reasonable down payments for house and car loans; also, they should
check thoroughly their sources of funds to pay the instalments. As suggested by Kamleitner
et al. (2011), individuals need to improve their financial literacy by establishing cost-benefit
associations to get out of debt in response to financial pressures.
Furthermore, post-disbursement monitoring systems for business loans should include
close supervision on the status or progress of the business undertaken and some technical
assistance in achieving a viable business project. This includes advice to be given during the
initial stage, ensuring consistent progress and evaluation, as well as advice for marketing
and ensuring the continuity of the business. Even though borrowing makes it possible for
individuals to improve their lifestyle and consumption, some individuals may reach
unsustainable levels of indebtedness, or over-indebtedness (Vandone, 2009). However, prior
studies note that people who are over-indebted are prone to suffer from poor psychological
health (Brown et al., 2005), physical health problems (Balmer et al., 2006), weakened social
networks, such as divorces, and problems at their workplace; therefore, governments should
take this issue seriously and conduct programmes that will enhance people’s understanding
of both the beneficial and harmful sides of debt.
The contributions of this study are subject to several limitations. First, the model limits
the choice of constructs and relationships. Second, the scope of this study was confined to
the Klang Valley area. The working individuals in this area may differ from those in the
other states in terms of experiences and characteristics. Future study may carry out
comparative studies between people in the private and public sectors, or those who work in
different states in Malaysia. The third limitation is that this study has an insufficient
number of respondents which makes it unable to generalise to the whole population of
working people in Klang Valley area. Therefore, future work requires more samples so there
will be an increase in the total numbers of items. This study might help to explore the
underlying reasons, the real truth of why people become indebted based on the experiences
of financial advisors and bankrupt people.
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Further reading
Muzammil, B. (2014), “Debts among us: young Malaysians are going bankrupt”, available at: www.
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Malaysia: Dewan Besar IKIM, Kuala Lumpur.

Corresponding author
Mahfuzur Rahman can be contacted at: mahfuzur@um.edu.my

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