The nexus between households’ indebtedness and consumption: the role of gender, geographical area and income groups

Abstract

PurposeThe persistent increase in household indebtedness is an alarming issue that is becoming a major concern for economists and governments in developing nations. Although household consumption is an essential source of economic growth, households’ failure to meet their financial obligations will be one of the causes of economic problems if the increase in consumption is largely financed by household borrowing. Therefore, this study aims to analyse the nexus between households’ indebtedness and consumption and the roles of household characteristics.Design/methodology/approachThis study uses a microdata set of the Household Expenditure and Income Survey in 2019, which contained a simple random sampling of 4,730 households.FindingsUsing a simultaneous equations model, our results show a negative nexus between households’ consumption and their indebtedness. We find that household savings and size have an indirect impact on the debt service ratio, while the assets and total debt repayment instalments indirectly influence household consumption. We also identify differences in the relationship between the gender of the household head, rural and urban locations and income groups in consumption and indebtedness.Research limitations/implicationsThe implication of this study is that governments should adopt several programmes to increase the awareness of household financial and debt management, especially for those in the low-income group.Originality/valueThis study contributes to the empirical literature by establishing a microeconomic perspective of consumption and an indebtedness model focusing on the differences in household characteristics in explaining consumption and indebtedness.