Issues in Educational Loan Repayment in Malaysia

Issues in Educational Loan Repayment in Malaysia Dr. Norhasni Zainal Abiddin, Universiti Putra Malaysia, Malaysia ABSTRACT The objectives of this research were to understand the practices that being used in recovering the educational loan, the cause of the problems, the background of the problematic borrowers and steps taken to overcome the problems in collecting the repayment provided by one of the major government agencies in Malaysia that providing such facilities to the students in higher learning institutions. This research was conducted by way of qualitative research method and the data were obtained through in-depth interview and reference on related documents. Informants for this research were selected from the management of the government agency of educational loan provider which represented by five of its personnel. Also represented in this research were five borrowers who are having problems with their loan repayment and five borrowers who managed to pay their loan consistently. The research had found that: (1) the approach practiced by the government agency of educational loan provider was too lenient and the collection of the loans were made by taking into account the problem faced by the borrowers; (2) in the process of recovering the loans, publishing the name of the borrowers in local newspapers was found to be the most effective way; (3) the borrowers who performed badly in their study and studying abroad were the most problem loan paymaster; and (4) attitudes, influenced by friends, economic recession and family commitment were to be among the main factors for the borrowers to delay their repayment of the educational loan. INTRODUCTION In view to the increasing number of students being offered for places in higher learning institutions, the government had taken an initiative to provide study loans for most of the students. The main body that providing such facilities to the student in Malaysia is the government agencies. They are the major resources for the students to obtain study loans for their flexibility in applying and repaying it as well as low interest rate or interest free. While banks and other loan providers incurred higher interest rates and had very tight conditions for obtaining them. This government agency of educational loan provider had required for the students to report themselves to the agency soon after they completed their study and re-pay the loan at fixed amount one year after they graduated. Base on the latest information of student s study status, the agency will prepare the Repayment Schedule which among other things consists of loan amount, loan period and the monthly repayment which need to be made by the students. As for students who graduated from overseas universities, the monthly repayment is much higher as compared to local university students due to larger loan size provided to those students. Normally, the repayment amount is computer generated figures however the agency would take into account the level and type of employment of the borrowers and the size of their salary. Notwithstanding, there are some cases where the borrower given less attention to the letter or warning sent to them that demanding them to pay back the loan. On some occasions, the letter sent to them will be returned to the agency for undelivered mails due to recipient not exist at that address. In other cases, some of the borrowers had started paying back the loans but stop doing it half way or inconsistence in their repayment even though reminders had to be sent to them and to the extent to issue them with Notice of Demand from lawyer. The Notice of Demand requested the borrowers to act within 14 days and failing to do so will be bound for further legal suit such as being summoned to the court. If the borrowers still failed to settle the loan, the guarantors will also be responsible to pay back the loan. This is because before the loan been disbursed to the borrower, the borrower and the guarantors had to sign an agreement with the agency. All parties understand their responsibilities and a copy of the agreement were sent to the respective parties. Generally, this research was done in order to understand the problems of loan repayment at one of the major government agency which providing the educational loan. The main objectives in this research are: (1) what are the

approaches and actions applied by the agency in recovering the loan; (2) what are the problems that caused the borrowers unable to pay or delay their repayment; and (3) what are the backgrounds of the problem borrowers. LITERATURE REVIEW There are various factors that making the reason for the business or educational loan repayment problem. In considering for giving out loans, there are few criterions that need to be taken into account such as the borrower s profile, the ability to pay back, the reason for borrowing, the amount of the loan, loan tenure and security of the loan. The borrower s profile is important before approving for loan application in order to evaluate the integrity and selfattitude of the borrower. An honest and good integrity borrower would have the awareness to fulfill their responsibility (Rosli, 1998). As for the educational loans, Wilms, Moore and Bolus (1987) had mentioned that the study performance of the borrower has relationship with the loan repayment problem. This is to the fact that the borrower who could complete their study successfully and timely will tend to obtain a good job and received good income and therefore be able to re-pay the loan as required unlike the least successful borrower. Other reason for this problem is the difficulty to locate the whereabouts of the borrower after they completed their study. If they have moved from their original address, they will not bother to inform the agency for changing of their address. As for those who have poor family, they will be influenced to spend their monthly salary to support their family than paying for other things such as loan repayment (Shouxin and Bray, 1992). According to Rosli (1998), those borrowers who had applied for bigger loan amount and longer repayment period could have the tendency to have problem in their repayment unlike those who getting small amount and shorter repayment period. However, Woodhall (1992) mentioned that the loan recovering system should also be improved in order to encourage the borrower to pay back their loan. Failure to pay back loan is devided into two different issues namely not paying back the loan at all and delayed repayment. The reason for this problem lies on the burden of paying the interest of the loan. Insufficient amount of salary received, was also been identified for failing to pay back the loan (Albrecht and Ziderman, 1992). Another reason for this failure was the need of the family s expenditures. Due to increase of the number of people in the family could contribute to increase of the family expenditures such as the size of the house, equipments and other related matters. Normally, the increased of the family needs exceeding the amount of monies earned and therefore forcing a lot of money to be spent. This could cause the indebted family not to pay their loans effectively (Rosli, 1998). In general, the loan would be doubtful when the terms and conditions for the loan failed to be honoured and this could caused the loan will turn into unpaid debt which contained in the note, security or loan agreement. The problem would also occurred when the terms and conditions of the original loan terms and conditions been amended according to the bank s needs such as increasing the loan tenure, improving or loan restructuring (Clarke and Johnston, 1995). Groves (1992) had outlined some of the reasons of the loan problem. Firstly, loan amount that is so big could exceed the affordability of the borrower. Secondly, a loan that beyond the collateral and was failure to provide a sufficient collateral. Thirdly, a loan that been secured against assets that cannot be repossessed such as musical instruments, aeroplane and so on. Fourthly is ineffective credit checking on the borrowers- for some banks which is normally profit oriented, they are not interested to check the credit rating of the borrower since this job is time and money consuming. Fifthly, the weaknesses in following-up the security document such as land title or insurants. This would caused the collateral documents could not be very helpful to overcome the problem. Lastly, the competition from other banks that could provide better and more liberalized loan with better interest rates. Behrens (1992) had identified four reasons that contribute to the problems of the loans and its repayment that are mismanagement, economic recession, fraudulent and other unavoidable problems such as death, illness, natural disaster and accidents. A study made by Robert Morris Associations in 1993 had shown that the mismanagement is referring to the inability of the management to organize things properly and accordingly. A systematic and well managed of the loan provider agency could increase the loan repayment performance. The economic recession is related to the drop in economic market value and the change in economic cycle. While fraudulent was referred to as a problem caused by the borrower such as providing false financial documents, fraud in getting loan and false statement about the repayment

ability. Attitude was found to be the most important factors in the loan repayment problem even if the borrower has the ability to re-pay the loan but without the sense of responsible, it could create disaster to the loan (Behrens, 1992). Kajubi (1992) mentioned that it is a moral responsibility to pay back whatever one had borrowed. The same was found by Christopher (1981) which shows that the unsatisfactorily loan repayment pattern is highly caused by the attitude of the borrower than the borrower s economic position. Loan recovering is not an easy task and should not be taken lightly. It needs a very proper effort from drafting the rules and laws up to exercise it (Tilak, 1992). As for the banks, all legal resources were deployed strictly. Behrens (1992) had mentioned that when a loan is in default, it is important for the bank to communicate with the borrower and to compile as much as possible information related to the matter. Clarke and Johnston (1995) added that by visiting and following-up the borrower could be very helpful to identify the ability of the borrower and the problem faced by the borrower earlier and this could reduce the unpaid loan problem. If needed, restructuring of the loan could be suggested in order to reduce the number of potential bad debts. This could also avoid the increase of the loan cost such as interest and legal cost. Albrecht and Ziderman (1992) suggested that two main strategies to improve the ability of the loan repayment program. The first strategy was to design a staggered loan repayment program and this is for the needed students. Secondly, hidden subsidy should be reduced with charging a positively interest rates but it could be together with reasonable repayment. Thirdly, a strong strategy should be designed in order to face with the repayment problem and the inefficient credit collection company should be terminated if they cannot do their job effectively. METHODOLOGY This research was conducted at one of the largest government agency who provide educational loan. There were five management staff from the loan providing agency, five from borrowers who having problem to pay their loans and another five informants were the borrowers who managed to pay their loan consistently. This research was conducted using qualitative methodology. Semi-structured questionnaires were used to collect data from the informants. The interviews were recorded using tape-recorder guided by prepared semi-structured questions. The interviews then were analyzed manually in order to get the emerged themes. All the informants were interviewed at the agency s office during their visit to the office to settle their disputes. THE RESULTS The discussion of this research was based on the following category: (1) less systematical action; (2) the assisting approach; (3) the internal factor of problem borrowers; (4) the external problem factor of problem borrowers; (5) the management method in solving the problem; and (6) the background of problem borrowers. Less Systematical Action High monthly repayment arrears reflecting the declining rate of the repayment performance. According to the Educational Scholarship and Loan Program Status Report which was made in 1999, there were 18,297 arrears loans for 12 months and above and 2,795 loans were in arrears within 10 to 12 months. The action taken by the agency to overcome this problem was to send First Reminder to the affected borrowers and their guarantors and followed by Summon Notice if they fail to act accordingly after the stipulated period of time. The study also found that the agency s office which located at every state and district were not functioning well. Those borrowers who live in rural areas are required to go to the Head Office of the agency for any transaction such as reporting their status, appealing for reducing the repayment amount or applying for Repayment Schedule. Therefore, those who received the reminder letter would not act immediately due to time constraint with their job. Hence, by delaying to act, the borrowers were in default and repayments were in arrears for up to two to three years. The research had found that from the issuance of the Reminder to issuance of 14 Days Notice had taken too much gap and delayed for quite sometimes even though it should takes only a few months to produce it after the borrowers received their Repayment Schedule. This action had affected the increasing number of defaulted borrowers and the

arrears were increased for many months. Ineffectiveness and inefficiency of the agency had also contributed to increasing number of defaulted loans and arrears. However, the borrowers have the chance to delay their repayment formally by informing the agency on their status or problem such as change of address, have not get any jobs or could not afford to pay according to the Repayment Schedule. By doing this, the agency will not issue and Reminder to the borrowers. The Assisting Approach Overall, the objective of the government in providing this loan is to provide assistance to reduce the burden of the students for their study expenses. For that reason, the agency that providing this loan been compromising with the student in most of the matters. Even though the approach taken by the agency has not burden the student but those students had taken advantage of their leniency. However, the leniency approach taken by the agency management was seen too much such as the borrowers were not bother to contact the agency or acting promptly towards the Reminder Notice given out by the agency. The research had found out that even though the names of the borrowers had been listed as defaulted debtors but the agency still assists them by providing a new and affordable Repayment Schedule. This action could cause prolonged repayment period and the collection target for certain period could not be achieved. The Internal Factor of Problem Borrowers The selfish attitude is the best word to describe the borrowers who do not pay back the educational loan provided by the government agency. Among the bad attitudes by the borrowers are: (1) the practice of friends that influence the borrowers for not paying the loan; (2) subsidy mentality; and (3) dishonest and irresponsible. The attitude practiced by the seniors also influenced them. They become braver to turn into irresponsible borrowers by following the footstep of their friends. Even though they have planned to pay back the loan but they are not serious about it since they knew that the loan that they are borrowing does not charge any interest. Moreover, they thought that the duty of the agency is more towards charityship rather than burdening them. The subsidy mentality should also be shredded out of their mind instead, they should thank to the government agency for providing such facility to them until they could get a good job with better income. Some of them put higher priority to other loans such as car, housing or computer loans than their study loans obtained from the government agency. The External Factor of Problem Borrowers There are two main factors that contribute to the problem of the borrower to pay back their loan namely: (1) the too lenient approach of the agency management; and (2) economic recession and borrower s family commitment. This research found out that the approach used by the agency to recover the loan was too lenient and it was taken for granted by the borrower to delay their repayment. Even the borrower themselves agreed that lack of agency s strictness in collecting the repayment had contributed to the problem. Economic recession was also found to be among the factors and should not be taken lightly in discussing the reason for the borrowers not paying back their loans. Some of the borrowers have not getting any jobs soon after completing their study and this had made them almost impossible to pay the loan back. The Management Method in Solving the Problem This research had found that displaying the names of the borrowers in local newspaper who do not pay back their loans is the most effective way to solve this problem. When their names appeared in the major newpapers, they surrendered themselves to avoid further embarassment. However, this most effective way is not really cost effective. It costs the agency big sum of money to do this. For instance, when they stop flashing the names in the newspapers, only 282 borrowers turn-up to pay back their loan as compared to flashing their names in the newspapers where 1330 of 2200 borrowers paying back the loan. However, the guarantors could used as middleman to detect the borrower. The Background of Problem Borrowers The poor performing borrowers such as low CGPA (Cummulative Grade Points Average) or extending their studies due to failure for some subjects has the tendency to turn into problem borrower when come to paying back the loan. This is because such borrower could be having difficulities in getting job or good income and would be unable to pay

back the loan. Like the bank borrower, those who borrowed bigger amount would face difficulties to pay back the loan. This normally involved those who study abroad when they return to Malaysia and were asked to pay back the loan, the amount will be huge and the repayment period would be longer As for the agency, they too will face the problem of recovering the loan since the amount is big and the repayment period is longer and therefore, they have no other ways except extending the repayment period and this could risk in arrears. Borrowers who facing with this kind of problem are mostly married and already have their own family and therefore, all income that they received will firstly channelled for family survival. However, if we turn back the clock, the repayment should already be done before they got married and this should not happen if they have the sense of responsibility to the country. Figure 1:Issuses in Educational Loan Repayment in Malaysia CONCLUSION AND RECOMMENDATION A systematic and strict management could lead to higher loan repayment collection. Compromising in collecting loan has the positive side since it could make the repayment progressing well even though need to take so much time to collect it and this is actually the objective of the agency to provide assistance to the needed students. Meanwhile, the downside is the borrower will be given too much leniency and this could cause them to just ignore the reminder sent to them. The awareness to their responsibility should be developed by the parents, school and universities from the very beginning of their study up to highest level. Their involvement in community projects could also be the way to measure their awareness and responsibilities to the community. The agency should also tighten up their conditions of those who being nominated to become guarantor should be from only government officers. This is to make the job of tracking the guarantor is much easier if the borrowers keep quiet and to make the application to get the loan become a little bit

difficult and challenging. The agency offices at states and districts should also play more active role in recovering the loan. The approach of tightening the conditions to get study loan for students studying abroad is the most effective way that been taken by the agency at this moment. This could contribute to reduce the problem of recovering the loan. The agency should have online information with the university of the graduated student s movement to make the job of tracking them after they graduated become much easier. The respective university should also withhold the student s certificate until they inform their whereabouts to the loan provider. REFERENCES Albrecht, D. and Ziderman, A. (1992). Student Loans and Their Alternatives: Improving the Performance of Deferred Payment Programs. Journal of Higher Education. 23: 357-374 Behrens, R. H. (1992). Commercial Loan Officer s Handbook. Japan: Bankers Publishing Company, Toppan Company, Limited. Christopher, J. (1981). Self-Selection and the Pricing of Bank Services: An Analysis of the market for Loan Commitments and the Role of Compensating balance Requirements. Journal of Financial and Quantitative Analysis. 15(5), 725-746 Clarke, P. S. and Johnston, D. H. (1995). The Problem Loan-Problem Solver-Step-by-Step Strategies for Resolving Bankruptcy, Lender Liability and Other Problem Loan Situations. United States of America: A BankLine Publication, Probus Publishing. Groves, M. (1992). Managing Problem Loans. Illinois: Bank Administration Institute, Toppan Co, Limited. Kajubi, W. S. (1992). Financing of Higher Education in Uganda. Journal of Higher Education. 23:433-441. Rosli Mahmood (1998). Perbankan dan Pemberian Pinjaman. Kuala Lumpur: Utusan Publications & Distributors Sdn. Bhd. Shouxin, L. and Bray, M. (1992). Attempting a Capitalist Form of Financing in A Socialist System: Student Loans in the People s Republic of China. Journal of Higher Education. 23: 375-367. Tilak, J. B. G. (1992). Students Loans in Financing Higher Education in India. Journal of Higher Education. 23: 389-404. Wilms, W. W., Moore, R. and Bolus, R. E. (1987). Whose Fault is Default? A Study of the Impact Student Characteristics and Institutional Practices on Guaranteed Student Loan Default Rates in California. Educational Evaluation and Policy Analysis Journal. 9(1): 41-54. Woodhall, M. (1992). Student Loans in Developing Countries: Feasibly, Experience and Prospects for Reform. Journal of Higher Education. 23: 347-356.