Credit has become an integral part of modern economies, so much so that it can be the primary catalyst for economic booms and busts. The expansive role of finance has made it challenging for policymakers and regulators to find the balance between ensuring credit flows into productive sectors that increase income and improve welfare, and preventing the build-up of financial imbalances. Empirical studies on the positive effect of finance on economic growth have mostly been premised upon the use of aggregate stock measures of credit, providing the impression that all types of credit have the same economic implication.

Recently, a greater focus has been given towards making more granular assessments as different types of credit would have different impacts on the economy[2]. One comparable study by Garcia-Escribano and Han (2015) uses data from 31 emerging markets and finds evidence that housing and consumption credit had different impacts on economic growth and private consumption. Their findings also suggest that housing credit affects future income growth mainly through the housing wealth channel. A meaningful assessment of the relationship between household credit and income growth would necessitate differentiating between the different types of credit. This is the focus of this study.

Using a combination of macro- and micro-level analysis to investigate the case for Malaysia, this study finds that housing credit is associated with higher future GDP per capita growth. More importantly, the positive results of housing credit are premised on ensuring access to eligible borrowers[3], accompanied by prudent lending standards and sustainability of prices in the property market. Consumption credit, on the other hand, was found to have no significant impact on future GDP per capita growth in Malaysia.

 Significant shift in the composition of household debt towards housing credit from consumption credit

In Malaysia, there has been a gradual and consistent shift away from consumption credit towards housing credit, to the extent that housing credit is now the largest component of total outstanding household loans from the banking system. The share of housing credit has increased from 36% in 1997 to [52%] in 2016, with the net disbursement[4] of housing credit being higher than the net disbursement of consumption credit since 1998.

Figure 1: Composition of Household Credit in Malaysia

Source: Bank Negara Malaysia

Building upon the significant shifts in the composition of household credit over the years, the macro-level analysis in this study uses economic and banking sector data for the sample period between 1997 and 2015. An aggregate growth function for Malaysia is estimated[5] with determinants that include housing credit, consumption credit, savings ratio, dependency ratio, openness to trade and initial level of GDP. The micro-level analysis leverages on the Household Income and Expenditure Survey (HIES) datasets in 2009 and 2014[6]. A household-level income growth function is estimated[7], and the determinants include housing credit, consumption credit, state, education level, age group, and initial level of income for the sample period between 2009 and 2014. It is worth highlighting that for the sample period covered in the study, the extension of credit to eligible borrowers in Malaysia was accompanied by prudent lending standards, without  deterioration in credit quality. This is an important qualification to the study.

The types of credit extended to households matter for economic growth

The findings of the macro-level analysis show that higher household credit is associated with higher growth of future GDP per capita, with housing credit accounting for most of the positive effects[8]. The positive association of housing credit with future income growth is driven by the accumulation of housing wealth, in which households could liquidate the capital gains from housing assets in the future as realised income. The micro-level analysis suggests that having a higher proportion of eligible households with housing loans is associated with a larger increase in future disposable income. However, consumption credit has no significant impact on future income growth at both the macro- and micro-level analysis. Table 1 shows the estimation results. This finding highlights the importance of recognising the different types of household credit and their varying impacts on future income growth. For Malaysia, housing credit seems to play a more significant role in the economy compared to consumption credit[9].

Table 1: Estimation Results for Macro- and Micro-Level Analysis


Note: Both the macro- and micro-level analyses are estimated using the methods and control variables mentioned above. Credit at the macro-level refers to net disbursements (% of GDP), whereas at the micro-level it refers to proportion of households with credit. * indicates significance at 5% level.                                               Source: Soh et al, 2016

Ensuring prudent lending standards and sustainable growth in house prices are crucial to ensure the positive impact of housing credit on future income growth

Nevertheless, there are two important caveats to the findings of this study. First, while housing credit contributes positively to future income growth empirically, this should not be taken to imply that greater housing credit is always and everywhere a positive development to economic growth. More importantly, in the period studied, the extension of housing credit in Malaysia was accompanied by prudent lending standards, in which credit was extended only to eligible households, without deterioration in credit quality. A key qualification to the findings of this study is the average debt-service ratio (DSR) for households who had a housing loan in 2009 (see Figure 2). The DSR of these households were relatively low across all income groups, with debt repayment constituting for at most only 30% of the household disposable income[10]. In fact, between 2009 and 2014, the impairment ratio for housing credit in Malaysia improved from 6.99% to 2.07%. As the experiences in the developed economies during the recent crisis have shown, rapid appreciation in house prices had masked the deterioration in the subprime mortgage market and the lending standards, and therefore the true riskiness of subprime mortgage loans. The risk became apparent only when the increase in house prices moderated. This accumulation of excessive housing credit accompanied by the deterioration in lending standards thus led to a build-up of financial imbalances, with significant negative consequences on macroeconomic and financial stability[11].

Figure 2: Average DSR for Households with Housing Loans

 image004                  Source: HIES 2009

Second, given that the positive association of housing credit with future income growth is driven mainly by the access to housing wealth[12], it is important to note that this is conditioned upon the appreciation of house prices between the period of 2009 and 2014[13]. With the appreciation of house prices, households who purchased residential properties in 2009 using housing credit would be able to extract the capital gains as realised income by selling their housing assets. However, the positive relationship between housing credit and future income growth may not hold should houses become unaffordable going forward and have limited room for appreciation. This highlights the importance of containing the build up of a house price bubble such that the gains to future income growth could be sustained.


The discussions on credit and growth have often focused on the aggregate stock of credit, with the implicit assumption that all types of household credit have similar economic implications. This study explores deeper to emphasise the importance of recognising the roles of different types of household credit in the economy in relation to future income growth. For Malaysia, housing credit appears to play a role in contributing towards future income growth through the accumulation of housing wealth, but this is not the case for consumption credit.

Most importantly, the conclusion on the relationship between housing credit and future income growth is premised upon the caveats of prudent lending standards and sustainable growth in house prices. The results reaffirm the role of policies to prevent the build-up of financial imbalances that could affect macroeconomic and financial stability. In particular, the Bank has been closely monitoring developments in household debt and has taken a series of measures since 2010 to pre-emptively address potential weaknesses that could increase the risks to macro-financial stability. Measures such as the implementation of maximum loan tenure for personal financing and Guidelines on Responsible Financing were put in place to mitigate unsustainable expansion of consumption credit. On housing credit, a series of macro-prudential measures were also implemented in stages to discourage speculative activity and rein in excesses in the property market. These measures were targeted and implemented with an incremental approach, with careful considerations to ensure that macroeconomic and financial stability are not undermined.


Demyanyk, Y. and O, Van Hermert. (2009). Understanding the Subprime Mortgage Crisis. The Review of Financial Studies.

Drehmann, M. and Juselius, M. (2012). Do debt service costs affect macroeconomic and financial stability? BIS Quarterly Review, September 2012.

Endut, N. and G, Toh. (2009). Household Debt in Malaysia. BIS Working Paper No.46.

Garcia-Escribano, M. and F, Han. (2015). Credit Expansion in Emerging Markets: Propeller of Growth? IMF Working Paper WP/15/212.

Soh, J., A, Chong., and K, Chuah. (2016). Household Credit, Growth, and Inequality in Malaysia: Does the Type of Credit Matter? Forthcoming in the Conference Volume of the BNM-BIS Conference on “Financial System and the Real Economy”, October 2016.

King, R. and R, Levine. (1993). Finance and Growth: Schumpeter might be right. The Quarterly Journal of Economics.

Levine, R., N, Loayza., and T, Beck. (2000). Financial Intermediation and Growth: Causality and Causes. Journal of Monetary Economics.

Muellbauer, J. (2008). Housing, Credit, and Consumer Expectations. CEPR Discussion Paper.

Murugasu, D., W, Chang., and B, Tng. (2015). Implications of Evolving Household Balance Sheets for Private Consumption in Malaysia. Bank Negara Malaysia Working Papers WP7/2015.

Tsatsaronis, K. and Z, Haibin. (2004). What Drives Housing Price Dynamics: Cross-country Evidence. BIS Quarterly Review, March 2004.

Turk, R. (2015). Housing Price and Household Debt Interactions in Sweden. IMF Working Paper WP/15/276I.

[1] This box article outlines the findings from the study “Household Credit, Growth, and Inequality in Malaysia: Does the Type of Credit Matter?” by Jiaming Soh, Amanda Chong, and Kue-Peng Chuah (2016). The study can be downloaded at Bank Negara Malaysia’s official website [link to be provided], as well as in the Conference Volume of the BNM-BIS Conference on “Financial System and the Real Economy, October 2016”.

[2] Mian and Sufi, 2016; Muellbauer, 2008.

[3] Eligible borrowers refer to households who satisfied the debt-service ratio (DSR) and credit quality requirements as assessed by the banks.

[4] Net disbursement is defined as the difference between the total loans disbursed and the total loans repaid.

[5] At the macro-level analysis, a standard growth regression model is estimated, and household credit refers to net disbursements as a share of GDP. The proxy for future income growth is the 4-quarters ahead GDP per capita growth to reduce the potential reverse causality from growth to credit.

[6] The HIES 2009 and 2014 datasets are built from surveys carried out using a personal interview approach on a representative sample of households in Malaysia. The two HIES datasets are merged based on three common characteristics available in both surveys: state, education level and age group for the head of household. The 2009 survey contains 21,641 households, and the 2014 survey contains 49,862 households.

[7] At the micro-level analysis, a clustered ordinary-least square regression is estimated; household credit refers to the proportion of households with loan; and income growth refers to the change in household disposable income between 2009 and 2014.

[8] Of note, the positive relationship between housing credit and income growth, however, diminishes when the level of housing credit is too high.

[9] This finding also suggests that the type of credit distribution across households could matter for income inequality, particularly when asset accumulation in the economy is highly skewed. Soh et al (2016) provides further investigation and discussion on the relationship between household credit and income inequality in Malaysia.

[10] This qualification is further supported by the box article titled “Rich Debt, Poor Debt” in the 2016 Financial Stability and Payment Systems Report (2016 FSPSR), which finds that the delinquency and impairment ratios are higher for individual borrowers with DSR of 60% and above. Given on average of about two working adults per household, the household DSR in Figure 2 of about 30% would roughly be equivalent to 60% under the individual-level DSR. Of note, the individual-level DSR for all income groups in Figure 2 are below 60%, indicating that this study is based on a sample of eligible borrowers. A more comprehensive analysis on individual-level DSR can be found in the box article “Rich Debt, Poor Debt (2016 FSPSR).

[11] Demyanyk and Van Hermert , 2009; Drehmann and Juselius, 2015.

[12]  See Soh et al (2016) for the estimation results of this channel.

[13]  Between 2009 and 2014, the average house price in Malaysia rose by 7.9% on a compounded annual basis. Source: NAPIC.

About the author(s)                                                                                                               

Soh Jiaming and Amanda Chong are economists at the Monetary Policy Department, Bank Negara Malaysia.

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