PROPOSAL:

THE FACTORS THAT LEAD TO DEFAULT PAYMENT OF HOUSING LOAN

PREPARED BY: FAZLINAWATI BT ABDULLAH 2009482982

PREPARED FOR: PN FADHILAH ISHAK

CHAPTER 1

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 collectors difficult 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.

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.

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.

1.4 THEORETICAL FRAMEWORK

BORROWERS ATTITUDE

DEFAULT PEYMENT

UNPREDICTABLE CRISES AMONG BORROWERS

STAFFS OF FINANCIAL INSTITUTIONS PERFORMANCE

DEPENDENT VARIABLE

INDEPENDENT VARIABLE

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.

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.

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 their debt. 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.

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.

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

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.

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

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.

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

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.

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.

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

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

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).

3.6 DATA 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. 3.6.1.2 Cross Tabulation Analysis

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). 3.6.1.3 Reliability 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.

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.

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.