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PROPOSAL:
THE FACTORS THAT LEAD TO DEFAULT PAYMENT
OF HOUSING LOAN
PREPARED BY:
FAZLINAWATI BT ABDULLAH
2009482982
PREPARED FOR:
PN FADHILAH ISHAK
CHAPTER 1
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INTRODUCTION
Nowadays we know that number of borrowers defaulted in home loan increased significantly
due to my research and literature review that I found. This is due to many factors either
related or not. Availability of many financial institutions that offer variety types of housing
loan lead to the increasing number of borrowers in Malaysia, especially in Kota Bharu
Kelantan.
The research title is The Factors That Lead to Default Payment of Housing Loan Kota
Bharu. In this chapter, its begin with the background of study, followed by problem
statement, objectives, hypothesis, significance of study, definition of terms, limitation of the
study, and scope of study.
1.1 BACKGROUND OF STUDY
This research was conducted at Kota Bharu, Kelantan. Home loan payments are usually due
on the first day of the month, considered late after the 15th day of the month, and reported as
late to the credit bureaus on the 30th day of the month.Although many people find collectorsdifficult and perhaps even unpleasant to deal with, communication with your lender is one of
the important steps to take. Home loan defaults can usually be cured more easily in the early
stages of default, rather than later, both due to the smaller amounts past due and the ability of
many borrowers to be able to successfully complete a workout plan with reasonable
repayment terms. Late stage loan workouts will often require the borrower to make a fairly
large down payment and substantially increased monthly payments to avoid imminent
foreclosure auction.
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Purchasing a house can be a valuable form of investment. However, it requires
considerable thought and careful financial planning before taking on such a big step. If
owning a house is part of your financial goal, then youll need to know whether you can
afford from your income and savings. You can use our housing loan calculator to find out
your monthly instalment, total repayment and total interest for any particular housing loan
packages.
1.2 PROBLEM STATEMENT
When this issue arises, many problems can be related to it. For example in terms of
demographic profile, borrowers attitude, unpredictable crises among borrowers, income of
the borrowers itself, down payment made, increasing rate of interest, price of the house itself,
global recession and so forth.
With the arising of this kind of issue, borrowers are facing problem that can bought
them to bankruptcy. Many factors caused by the borrowers themselves. So, in order to reduce
problem come from defaulting of payment, all parties related to this subject need to take into
their consideration all issues arises.
http://www.bankinginfo.com.my/01_plan_your_finances/0101_managing_your_money/stepbystep.php?intPrefLangID=1&http://www.bankinginfo.com.my/01_plan_your_finances/0101_managing_your_money/stepbystep.php?intPrefLangID=1&http://www.bankinginfo.com.my/01_plan_your_finances/0101_managing_your_money/stepbystep.php?intPrefLangID=1&http://www.bankinginfo.com.my/04_help_and_advice/0401_useful_tools/home_loan_cal.php?intPrefLangID=1&http://www.bankinginfo.com.my/04_help_and_advice/0401_useful_tools/home_loan_cal.php?intPrefLangID=1&http://www.bankinginfo.com.my/01_plan_your_finances/0101_managing_your_money/stepbystep.php?intPrefLangID=1&http://www.bankinginfo.com.my/01_plan_your_finances/0101_managing_your_money/stepbystep.php?intPrefLangID=1& -
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1.3 RESEARCH OBJECTIVES
The purpose of the study is to determine the factors that lead to default payment in
housing loan, focus in Kota Bharu. There are several objectives that have been pointed out in
this study which are:
To investigate the relationship relationship between each of independent variables
with dependent variable.
To analyse the most significant variable that contributed to the default on business
loan repayment.
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1.4 THEORETICAL FRAMEWORK
DEPENDENT INDEPENDENT
VARIABLE VARIABLE
BORROWERS
ATTITUDE
DEFAULT PEYMENT UNPREDICTABLE
CRISES AMONG
BORROWERS
STAFFS OF FINANCIAL
INSTITUTIONS
PERFORMANCE
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1.5 HYPOTHESES
There are three hypotheses developed for this research.
Hypothesis 1
Ho: There is no significant relationship between borrowers attitude and default loan
payment.
H1: There is a significant relationship between borrowers attitude and default loan payment.
Hypothesis 2
Ho: There is no significant relationship between unpredictable crises among borrowers and
default loan payment.
H1: There is a significant relationship between unpredictable crises among borrowers and
default loan payment.
Hypothesis 3
Ho: There is no significant relationship between staffs of financial intuition performance and
default loan payment.
H1: There is a significant relationship between staffs of financial intuition performance and
default loan payment.
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1.6 SIGNIFICANCE OF STUDY
The research is important to:
1.6.1 To the financial institutions
From the analysis, financial institutions able to determine the factors
that cause default payment and take necessary action to overcome it.
This study can be a good reference because the finding will provide
useful information especially in terms financial institutions ability in
implementing their strategies to achieve its target in a specified year.
From the result that they got, they can know their strengths and
weaknesses and thus help them to come up with new strategies which
Next can help them to achieve the target.
1.6.2 To the other researcher
This study can be good references or guidelines to the other researcher
especially regarding loan disburse among Bumiputeras.
1.6.2 To the public
For those who interested to apply for the loan, they can prepare what
they should have.
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1.7 DEFINITION OF TERMS
i. Default
In finance, default occurs when a debtor has not met his or her legal obligations
according to the debt contract, e.g. has not made a scheduled payment, or has violated
a loan covenant (condition) of the debt contract. A default is the failure to pay back a
loan.Default may occur if the debtor is either unwilling or unable to pay theirdebt.
It also can be defined as the inability to repay the loan by either failing to complete
the loan as per the loan agreement or neglect to service the loan.
ii. Default Risk
Default risk refers to a situation where the lenders are unable to recover the loans that
have been extended or the borrowers fail to fulfill their financial obligations at the
stipulated time due to various reasons (Kassim, Salina and Rahman, Md Mahfuzur,
2008).
iii. Borrowers Attitude
Borrowers attitude means behaviour some borrowers of housing loan that lead to
default loan payment. For instance, they do not want to pay their loan for no reason
and use the money for unimportant things. They also do not take into consideration
when warning letter send to them and at last faced difficulty when they have to face
with law and will be announced bankrupt.
http://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Loan_covenanthttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Loan_covenanthttp://en.wikipedia.org/wiki/Finance -
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1.8 LIMITATION OF STUDY
Upon conducting this research, researcher faced few difficulties when facing the respondents.
As the researcher distributes the questionnaire by mail, there were some of them who did not
return it back to the researcher even though researcher already provides them with envelope.
Besides that, there were some respondents who return it back to the researcher, but they
failed to complete the questionnaire. Other limitations have been identified while completing
this research such as:
1.8.1 Time constraint
Respondents have limited time in completing the questionnaire that has been given by
the researcher. This can affect the accuracy of the answer.
1.8.2 Privacy of data
It is not easy for the researcher to get the data from financial institutions as it is
private and only can be seen by certain parties which involve in Financing Unit and
other department that related with it.
1.9 SCOPE OF STUDY
This study focused on default payer of housing loan around Kota Bharu area in
Kelantan. To obtain the data, 50 questionnaires would be distributed to default payers.
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CHAPTER 2
LITERATURE REVIEW
A literature review consists of the collection of the research that had been done related to the
topic of interest in a particular subject area within the certain time period.
2.1 Overview of Default Payment
This definition does not mean that the borrower had entirely stopped paying the loan
and therefore been referred to collection or legal processes; or from an accounting
perspective that the loan had been classified as bad or doubtful, or actually written-off
(Roland Pearson and Mike Greeff, 2006). In simple terms, a loan default is when you have
not made your agreed upon loan payments to the lender.
McMillion (2004), default risk is the risk that a debtor will be unable to pay back its
loans. Default risk goes up if a debtor has large number of liabilities and poor cash flow.
Persons with high default risk stand a greater chance of loan being denied.
With most debt (including corporate debt, mortgages and bank loans) a covenant is
included in the debt contract which states that the total amount owed becomes immediately
payable on the first instance of a default of payment. Generally, if the debtor defaults on any
debt to the lender, a cross default covenant in the debt contract states that that particular debt
is also in default. Lando, David (2004).
Little empirical research has been carried out in the United Kingdom on everyday
experiences of debt. Findings showed that socio demographic factors played a relatively
minor role in debt repayment. (Livingstone & Lunt, 1992). Attitudinal factors that are being
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pro-credit rather than anti-debt were found to be important predictors of debt and debt
repayments. Psychological factors, focusing on economic attributions, locus of control,
coping strategies and consumer pleasure were found to be important. In the same study, the
regression results showed that those who repay more are more concerned with personal
achievement and self-direction. Whenever possible, consumers should do whatever they can
do to avoid default on a loan. A default will normally cause far more problems than the
solution.
2.2 Borrowers Attitudes
Misuses of borrowed money by using the money for other expenses rather than business
purposes such as for marriage and festivities purposes was found to be one of the causes that
co tribute to default payment (Kassim and et al,2008).
Chiang and et al (2002) pointed out that the individual characteristic and attitude of
the borrower, can be applied to observe the default risk for the borrower.
Furthermore, Roberts and et al (1999) also thought that the money attitude may
influence all aspects of individual life, and included the spending behaviour which related to
the loan behaviour.
The consumer loan default behaviour will be positively influenced by individual
attitude toward money; in addition Lin and Lin (2009) once used the actual borrowers
information to understand the influence of money attitude on the default behaviour, and
approved that the default behaviour is able to be influenced by the money attitude. Besides
that, the study also added borrowers money attitude to expectably make more accurate
prediction about the possibility of default.
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John J. Watson and Joseph Barnao (2009), in their journal entitled Debt Repayment:
A Typology found that attitude of the borrowers is one of the factors that cause default in
their loan. They think that debt is common, therefore, the borrowers did not taking serious on
their debt.
Roy L. Williams (2010) in his study found the evidence that consumer behavior give
impact towards default payment.
Saul Schwartz (1999) also has concluded that borrowers attitudes which are negative
attitudes contribute to default in their loan.
2.3 Unpredictable Crises Among Borrowers
Kassim and et al (2008), in their research entitled Handling Default Risks in
Microfinance: The Case of Bangladesh found that, rather than utilizing the loans through the
channel that has been agreed upon, the recipients spent it for more urgent and pressing reason
such as for medication of the family member. There are also cases where the focus of
attention has shifted to taking care of the sick ones, resulting in the business project to be
abandoned. Other than illness, funds are also sometimes being spent for other expenses such
as marriage and festivities.
Dan Norell in his journal entitled How to Reduce Arrears in Microfinance
Institutions, he found that unpredictable crises, such as illness or death in the family can
cause arrears to occur. They are called on to provide for the extended family and are seen as
disloyal to them if they refuse.
Kassim and et al (2008), they also found that multiple borrowings from MFIs
may lead to the difficulty for loan recipients to meet the multiple payment instalments. They
took loan from MFI using his name and took a second loan from another MFI using a
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relatives name. When the business did not well performed, as a result, the recipient faced
difficulties to pay for the two instalments simultaneously. They then started to pay for only
one instalment at a time, but were pressured by the other MFI to pay for the instalment.
Unable to pay the instalment next cause the recipient to have default in their payment.
From the case study done by Rose A.B. Wakuloba entitled Causes of Default in
Government Micro credit Programmes: A Case Study of Uasin Gishu District Trade
Development Joint Loan Board, it was found that one of the causes that contribute to default
payment is due to poor business performance. Besides that, economic condition such as
having many dependents also found to be the causes of default. While for defaulters, poor
business performance was found to be one of the causes of default which contribute highest
percentage. The study also found a strong relationship between major source of income and
cause of default, in which, loaners who depended on their businesses that performed poorly,
defaulted.
Cumhur Erdem (2008), also found that many dependents also contribute to default
payment. The data were obtained from a survey study conducted on May and June of 2006 in
the city of Tokat in Turkay. Farhad Hossain and Tonya Knight (2008) also found that
economic conditions such as very poor individuals are often described as high risk due to
their lack of collateral and unstable sources of income.
However, Roland Pearson and et al (2006), they found that none of the data support
economic factors as a significant contributor to default. The study was done at South Africa.
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2.4 A study done by Dr. Vivek Khare, Asst Professor (Finance and Accounts) Maharishi
Institute of Management Lambakheda, Berasia Road, Bhopal, 2007, entitled Causes of
Default of Loans, and he found that lack of follow up measures lead to default payment.
Follow-up measures taken regularly and systematically keep the borrowing unit under
constant vigil of the financial institution. Many ills can be checked through such follow-up
measures by keeping the borrowing units on their alertness and guiding them to rectify their
mistakes in the first opportunities or extending them a helping hand in tiding over their tight
times. Normally, such close follow-up programs are conspicuous by their absence. In the
result, the borrowing units not only ignore payment of their dues to financial institutions but
also often tread on wrong tracks, much to the detriment of their own financial health and that
of the financial institutions. Performance of the borrowing units, if carefully and
systematically monitored through regular inspections by scrutiny of returns, annual balance
sheet and inspection of site, can be significantly improved. Naturally, such inspections
prevent the borrowers from deviating from the terms and conditions of the loan or from
diverting any fund for purpose other than those earmarked in the sanction letter and keep
the financial health of the units in good order.
Lowly educated and lack of experience among field workers were found to be one of
the causes of default (Kassim, Salina and Rahman, Md mahfuzur , 2008). They did not have
enough qualifications and were too young. As a result, they fail to deliver effectively the
objectives of the MFIs to the recipients, what more to give motivations to the recipients.
Rose A.B. Wakuloba in his journal entitled Causes of Default in Government Micro
credit Programmes: A Case Study of Uasin Gishu District Trade Development Joint Loan
Board, has determined causes of default and one of the findings is due to lacks capacity of
staff to handle core functions.
Farhad Hossain and Tonya Knight (2008) in their journal entitled Financing the Poor:
Can Microcredit Make a Difference? Empirical Observations From Bangladesh, they found
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that organizational factors such as staff inefficiency and skill as well as clear communication
of repayment expectations are the causes that lead to default payment. Besides that, other
factors such as geographical factors also contribute to default payment. Other findings that
found by them is that, financial, group dynamics, and environmental degradation also has
significant impact towards default payment. The study was based on field studies they have
carried out in a village in central Bangladesh by applying participatory methodological
techniques in two different phases; the most recent one in December 2007 and earlier in
July 2005.
Vasanthi Peter (2006) however found that location variable had the expected sign but
it is not significant. If more detailed location information is available in the future, it may be
simpler to focus on the effect of location on default risk.
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CHAPTER 3
RESEARCH METHODOLOGY
This chapter consists of the research methodology used in order to complete the study. It
discusses on the procedures and step that fulfil the objective of the study. Besides that, it also
explains in detail the sources of data.
3.1 RESEARCH DESIGN
Research design is framework or blueprint for conducting the research project. It
details the procedures necessary for obtaining the information needed to structure or solve the
research problem (Naresh K. Malhotra, 2004).
According to this research, researcher used exploratory research. According to (Uma
Sekaran, 2003) exploratory research is undertaken when not much is known about the
situation at hand, or no information is available on how similar problem or research issues
have been solved in the past. As for this research, extensive preliminary work needs to be
done to gain familiarity with the phenomena in the situation, and understand what is
occurring, before researcher develop a model and set up a rigorous design for comprehensive
investigation. In essence, exploratory research are undertaken to better comprehend the
nature of the problem. Extensive interviews with many people might have to be undertaken to
get a handle on the situation and understand the phenomena.
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3.2 TYPES OF DATA
Data can be obtained from primary or secondary sources. As for this research,
researcher used primary types of data. Primary data refer to information obtained first hand
by the researcher on the variables of interest for the specific purpose of the study (Uma
Sekaran, 2003).
3.2.1 Primary Data Sources
Primary data are specifically collected for the purpose of the research project. Data
originated by the researcher specifically to address the research problem. The researcher used
two methods in collecting data; it involves the distribution of questionnaire and conducting
the interview with the relevant parties.
3.3 DATA COLLECTION METHODS
Data collection methods are an integral part of research design. There are several data
collection methods, each with its advantages and disadvantages. Problems researched with
the use of appropriate methods greatly enhance the value of the research. Three main data
collection methods in survey research are interviews that are face-to-face interviews and
telephone interviews; questionnaires that are either personally administered, or sent through
mail; and observing people and phenomena. For this research, researcher used questionnaires
and interviews as methods in collecting the data.
3.3.1 Questionnaires
A questionnaire is a reformulated written set of questions to which respondents record
their answers, usually within rather closely defined alternatives. Questionnaires are an
efficient data collection mechanism when the researcher knows exactly what is required and
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how to measure the variables of interest. Questionnaires can be administered personally,
mailed to the respondents, or electronically distributed (Uma Sekaran, 2003).
The structured questionnaire is used in gathering data for completion of this study.
The questionnaires were designed properly in order to get the maximum accuracy
information and the results are easy to understand by the respondents.
3.3.2 Interview
Interviews with the relevant parties were conducted by the researcher in order to get
the information and to have better understanding. For the purpose of this study, interviews
were conducted with officer of several financial institutions in Kota Bharu. Besides that,
researcher also conduct interview with the staff that face and deals with the borrowers
regularly.
The researcher also uses the telephone interview in order to get the information from
the respondents
3.4 SAMPLING TECHNIQUE AND TARGET POPULATION
Sampling is important in determining and representing the whole large population.
The researcher uses the non-probability sampling techniques that are convenience sampling
and judgmental sampling. Convenience sampling attempts to obtain a simple of convenience
elements (Malhotra, 2007). For judgmental sampling, it is non-probability sampling in
convenience form in which the population elements are purposely selected based on the
judgment of the researcher. In this, the researcher used a list of customers to decide the right
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customers to distribute the questionnaires. The researcher ensures that the right customers
answered the questionnaires. This is to ensure the data collected are accurate as possible.
Therefore, the researcher has decided that, there are only 70 sample of the whole
population will be taken. It is reasonable for the researcher because this is not for the purpose
of monetary profits as well as the number of the population itself is not that big. Besides,
according to Uma Sekaran (2003), too large a sample size, however (over 500) could also
become a problem. Sample sizes larger than 30 and less than 500 are appropriate for most
research (Uma Sekaran, 2003).
3.6DATA ANALYSIS
3.6.1 Statistical Procedure of Social System (SPSS)
The analysis will be done to get the finding to the study after all the data is collected.
All the data is treated and interpreted by using relevant information from analysis
method. An analysis of the data can be made by using the Statistical Procedure of
Social System (SPSS), then interpret the result findings.
3.6.1.1 Frequency Distribution
Frequency distribution is used to report the respondents feedback. It will be
practical in order to report the number of respondents that each question
received and is the simplest way of determining empirical distribution of
variable. From it, the researcher can label it with frequencies or percentages.
3.6.1.2Cross Tabulation Analysis
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The cross tabulation is the most appropriate technique for studying the
relationship between two or more variables. It indicates the necessary study of
the importance of those variables. This is a statistical technique that described
two or more variables simultaneously and results will indicate the join
distribution of the variables chosen. This technique gives more accuracy in
researcher finding and conclusion (Malhotra,2007).
3.6.1.3Reliability Analysis
Reliability test used to test reliable or relevant of the questions asked in
questionnaires according to the variables. For this study, there are three
independent variables and one dependent variable. Due to that, researcher test
reliability for our variables to find out whether each question for each variable
are reliable or not to determine factors that lead to default payment. According
to Zikmund and Babin (2007), scales with Croanbachs alpha 0.80 to 0.95 are
considered to have very good reliability. Scales with Croanbachs alpha 0.70
and 0.80 are considered to have good reliability and Croanbachs alpha 0.60
and 0.70 indicates fair reliability. When the Croanbachs alpha below 0.60, the
scale has poor reliability.
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3.6.1.3.1 Chi-Square
The test of chi-square statistic had been used in this study to test the
hypotheses. The calculated value from Pearson Chi-Square will be compared
with the critical value from the table of Chi-Square Distribution based on the
degree of freedom (df) that obtained from the calculated value. Null
hypotheses (Ho) were rejected when the calculated value greater than critical
value and vice versa.
3.6.1.3.2 T-test
An alternative but complementary approach to the confidence-interval method
of testing statistical hypotheses is the test-of-significance approach developed
along independent lines by R. A. Fisher and jointly by Neyman and Pearson.
Broadly speaking, a test of significance is a procedure by which sample results
are used to verify the truth or falsity of a null hypotheses. The key idea behind
test of significance is that of a test statistic (estimator) and the sampling
distribution of such a statistic under the null hypothesis.
3.6.1.3.3 F-test
Proceeding t-test post-mortem examination because we try to find out whether
the linear restriction is satisfied after estimating the unrestricted regression.
A direct approach would be incorporated the restriction into the estimating
procedure at the outset.
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3.6.1.3.4 R2
An important property of R2 is that it is a no decreasing function of the
number of explanatory variables or regressors present in the model, unless the
added variable is perfectly collinear with the other regressors; as the number
of regressors increases, R2 almost invariably increases and never decreases.