Funding development infrastructure without leverage: A risk‐sharing alternative using innovative sukuk structures

Muslim countries of the developing world suffer indebtedness resulting mostly from funding development infrastructure. Faced with a dire need for development infrastructure but with inadequate resources to fund them domestically, these governments often resort to foreign borrowing. As neither foreign banks nor international debt markets would allow for the debt to be in home currency, the funding is invariably denominated in foreign currency. For the borrowing country, in addition to currency exposure such borrowing increases the country's leverage and economic vulnerability. As these countries typically have a narrow economic base with heavy reliance on commodity exports, they are susceptible to the vagaries of commodity price fluctuation. Leverage increases the amplitude of the economy's fluctuation, resulting if not in outright crisis, then, at least in financial distress and depreciating home currency. As a result, when the foreign currency funded project comes on stream, it is burdened with huge accumulated debt which in many cases makes the project unmanageable without further government help through subsidy of operating costs. This further stresses already stretched government budgets and perpetuates indebtedness. This cycle of borrowing, leverage and vulnerability can be broken by innovative use of sukuk. The problem with debt financing is that the servicing requirements are independent of the underlying project's risk or cash flows. This paper presents two sukuk structures based on the risk sharing principles of Islamic finance. Sukuk that have returns linked to the nation's gross domestic product growth if the funded project is non‐revenue generating and linked to earnings of the project if it is revenue generating can avoid the problems above. The pay‐off profile, estimated cost of funds and returns to investors of these sukuk are discussed. When designed in small denomination, such sukuk can enhance financial inclusion, help build domestic capital markets and enable the financing of development without stressing government budgets.     

Changes over Time in College Student Credit Card Attitudes and Debt: Evidence from One Campus

Over the past 10 years, both public awareness of, and research about, college student credit card debt have increased. This study examined changes in college students' debt and possession of credit cards, as well as attitudes toward debt and credit cards over that time at one American college campus. Results indicate that the number of credit cards held and the amount of credit card debt both decreased in the time following the 2009 Credit CARD Act. Attitudes toward debt gradually became more negative over the past 10 years, whereas perceived personal financial well‐being increased. Although debt is decreasing, some students continue to report high levels of debt and correlates of higher levels of debt continue to include year in school, decreased ability to delay gratification, and lower levels of perceived financial well‐being. Overall, it appears that students' relationship with credit cards is changing, but many still have difficulty managing credit.     

Debt as a source of financial stress in Australian households

This paper examines the role of demographic, socio‐economic and debt portfolio characteristics as contributors to financial stress in Australian households. The data are drawn from the most recent Household Expenditure Survey and relate to 3268 probability‐weighted households. Financial stress is defined, among other things, in terms of financial reasons for being unable to have a holiday, to have meals with family and friends, to engage in hobbies and other leisure activities, and general money management. Characteristics examined include family structure and composition, source and level of household income, age, gender and marital status, ethnic background, housing value, debt repayment of various types and credit card usage. Binary logit models are used to identify the source and magnitude of factors associated with financial stress. The evidence provided suggests that financial stress is higher in families with more children and those from ethnic minorities, especially when reliant on government pensions and benefits, and lower in families with higher disposable incomes and housing values. There is weak evidence that Australia's historically high levels of household debt cause financial stress.     

Impact of wage rigidity on sovereign credit rating

Sovereign credit rating is a condensed assessment of a country's ability to repay its public debt in a timely fashion. Downward wage rigidity has been considered as a critical determinant of various macroeconomic and financial phenomena. This study examines the effect of a country's wage rigidity on its sovereign credit rating after measuring downward wage rigidities based on a regime-switching model. The results indicate that greater wage rigidity induces lower sovereign credit rating. We find that wage rigidity amplifies cash flow fluctuations and magnified cash flow volatility negatively affects sovereign credit rating.     

Dynamics of Households' Income,Debt, and Attitudes Toward Credit, 1983–1989

Using the panel data from the 1983–1989 Survey of Consumer Finances, this research examines the shifts in households' income and debt quintiles and changes in respondents' attitudes toward credit. Households exhibited considerable income mobility during the 1980s, almost as much as during the more volatile decade of the 1970s previously reported by Duncan (1986). Except for a committed group of “no debt” households, there was even more mobility in households' debt status, that is, a majority of households were in a different debt quintile in 1989 than in 1983. Respondents' attitudes toward debt also changed considerably with more respondents' becoming more negative toward credit than more positive. Trend analyses of American households' debt underestimate the extent and variability of such changes.     

The management of exchange‐rate risk: A case from the manufacturing industry

This article looks into the management of exchange rate risk at a U.K.‐listed company. The focus is particularly on the firm's operating exchange risk, for which it uses a synthesis of three different risk management approaches. These include the use of long‐term financial hedging instruments, operational adjustments based on real options theory, and the currency denomination of debt. Practice at the case company is unique, in that the former approach has been considered inappropriate by the theoretical literature and the latter is seldom used to manage firms' real cash flow exposures. In general, it has important implications for multinationals, especially with reference to the use of operational adjustments and the currency denomination of debt. © 2004 Wiley Periodicals, Inc.     

Debt problems,home‐leaving,and boomeranging: A register‐based perspective on economic consequences of moving away from parental home

This article analyses the development of financial problems after leaving one's parental home, and considers how financial problems are associated with likelihood of boomeranging (i.e., adult children returning to parental home). The 9‐year follow‐up study focused on a nationally representative sample of Finnish young people between the ages of 15 and 25 who moved out from their parental home between 2006 and 2009 (n = 9,196). The measure of debt problems was based on monthly data on debt enforcement, a legal matter which may bring serious consequences for the debtors. The primary within‐individual, longitudinal analyses showed that debt problems increased directly after leaving parental home. Education and family background were significant predictors of debt problems in the four years after leaving parental home. Early leavers had significantly more debt problems than later leavers. Debt problems were associated with a higher likelihood of moving back to parental home. The results imply that it is important to support economic decision‐making during early adulthood.     

Small‐Dollar Credit Lending: The Effect of Financial Burden on Personal Asset Misvaluation

Small‐dollar credit lenders offer consumers quick access to cash in the form of products, such as pawn loans. The consumers who tend to use these small‐dollar credit products are more likely to face financial burden and potential for default—particularly when loan‐to‐value ratios are high. However, the cognitive effects of financial burden can impair financial decision making. If financial literacy educators are to empower consumers, more consumer‐centric evidence is necessary to determine how small‐dollar credit consumers make decisions when purchasing loans. One critical decision consumers make is accepting how lenders value their assets in exchange for credit. Three lab studies assess how consumers facing financial burden value their own assets. We find that, due to cognitive constraints of financial burden, consumers can undervalue functional assets and overvalue symbolic assets. Importantly for financial literacy efforts, however, we show that framing a symbolic asset in terms of other‐benefit construal helps attenuate asset overvaluation.     

A SUPPLY CHAIN‐ORIENTED APPROACH OF WORKING CAPITAL MANAGEMENT

This article analyzes and illustrates the role of payment terms for working capital improvements in supply chains. So far, research has shown how individual industries and powerful companies were able to enhance their cash‐to‐cash cycles at both their supplier's and customer's expense. From a “network perspective,” the exploitation of individual advantages by a single powerful company lowers the overall financial wealth of the supply chain. Therefore, a collaborative working capital management approach is proposed, by which the cash‐to‐cash cycles of companies with the lowest weighted average cost of capital (WACC) should be extended, while companies with higher financing costs are relieved by a shortened cash‐to‐cash cycle. An unequal distribution of power, however, between supply chain members can be the main hindrance for developing a collaborative working capital management solution.     

A DYNAMIC ANALYSIS OF DEBT‐LED AND DEBT‐BURDENED GROWTH REGIMES WITH MINSKIAN FINANCIAL STRUCTURE

In this paper, we formally derive a version of the Minskian taxonomy of the firms' financial structure (hedge, speculative and Ponzi types), under the economic growth context in the long run. As for the economic growth, we formalize the mechanism of debt‐led (debt‐burdened) growth where the economy expands as the debt variables increase (decrease). By explicitly introducing the relationship between the finance growth regime and Minskian taxonomy in a dynamic model, the model in this paper enables us to evaluate whether or not the economic growth regime is sounded in terms of the firms' financial positions.     

Mindfulness,Money Attitudes,and Credit

Consumer credit is a central feature of modern living, having been an important topic of research for some time. In contrast, mindfulness has only recently gained research prominence. Our study develops a model that links individuals' mindfulness with their credit intentions/use, and that further proposes money attitudes as a mediator variable. Broad support for the model is provided by a sample of students from a Portuguese University and a second sample composed of adult US residents. The results suggest that mindfulness might play a significant role in shaping consumers' money attitudes and credit intentions/use. Additionally, the study suggests that the relationships of mindfulness and money attitudes with credit are only significant when credit is directed toward the purchase of nonbasic products. These results yield a number of considerations for future research and for institutions promoting financial education, which could lead to improved debt management and greater financial well‐being.     

Consumer and Corporate Debt: A Neo‐Kaleckian Synthesis

We present a neo‐Kaleckian growth model with both consumer and corporate debt. The model's macrodynamic and stability characteristics differ from singleߚdebt models, yet some steadyߚstate results persist. For example, a surge in ‘animal spirits’ is good for steadyߚstate growth, and consumer borrowing can help to sustain aggregate demand. Stable steady states are characterized by a kind of ‘euthanasia of the rentier’. Consumer credit conditions influence effective demand, the profit rate and economic growth. Looser consumer credit conditions have a steadyߚstate growth effect and can enhance system stability. In this restricted sense, looser consumer credit conditions are good for macroeconomic stability.     

Parental financial support: A safety net for young adults with debt problems

Parental financial support benefits young adults in societies with decreasing welfare‐state support and a pattern of early home‐leaving. This article focuses on the association between young adults’ debt problems and parental financial support: the extent to which indebted young adults receive financial help from their parents. We also investigate the extent to which specific benefits are associated with debt problems or parental financial support. The data were gathered in an online survey conducted among 18‐to‐35‐year‐old Finns (n = 1,019). The results revealed, first, that many parents safeguard their indebted adult children’s lives by means of financial support and second, that heavy cash‐welfare‐benefit users are particularly likely to receive parental financial support. Our analysis also revealed that the prevalence of debt problems as well as of parental financial support were especially high among those who had received social assistance, sickness benefit or labour‐market subsidy within the previous 12 months. In a society open to new social risks as well as to debt problems, young people who lack financial support from their parents have a rockier transition to adulthood than those who receive support.     

Effects of a Tax‐Time Savings Intervention on Use of Alternative Financial Services among Lower‐Income Households

Alternative financial services (AFS) such as check cashing and payday loans may help unbanked households meet transaction and credit needs, yet often at a very high price. Saving tax refunds can help low‐ and moderate‐income (LMI) households build emergency savings as a way to reduce dependence on AFS and cope effectively with irregular cash flows and financial shocks. This study examined the impact on AFS use of message‐based interventions encouraging LMI households to save their refunds when they electronically filed their federal income tax returns. We found that 3 out of 18 interventions resulted in statistically significant reductions in credit‐related AFS use with small effect sizes. None of the interventions resulted in reduced transaction‐related AFS use. Other factors—especially prior AFS use and financial shocks—were strong predictors of AFS. Financially vulnerable households may need additional opportunities and protections to reduce dependence on AFS.     

Credit Card Indebtedness and Psychological Well‐Being Over Time: Empirical Evidence from a Household Survey

While a number of studies have investigated the relationship between debt and psychological well‐being, none so far has explored if and how this relationship evolves over time. We seek to fill this gap in the literature by empirically analyzing the impact of household credit card debt on debt stress. Using cross‐sectional data collected by The Ohio State University's Consumer Finance Monthly survey between August 2008 and December 2010, we construct a debt stress index and categorize households into three groups based on the length of credit card indebtedness. Our empirical results provide statistical evidence of time‐varying impacts of credit card debt on stress levels. Specifically, we find that debt stress for short‐run debtors is more than twice that of long‐run debtors. The results are robust across a range of econometric specifications.     

Health Shocks,Out‐of‐Pocket Medical Expenses and Consumer Debt Among Middle‐Aged and Older Americans

We examine two important issues related to health and financial burden in middle‐aged and older Americans: (1) whether or not new health events affect a consumer's unsecured debt, and (2) to what extent the associated out‐of‐pocket medical expenses (OOP) contribute to unsecured debt. We use six biennial waves (1998, 2000, 2002, 2004, 2006 and 2008) from the Health and Retirement Study (HRS). We estimated fixed effects models and conducted mediation analyses. We find that new health events affect the accumulation of unsecured debt. Our estimates suggest that new health events increase unsecured debt by 6.3% ($230) to 9.3 % ($339); approximately 20% of the increase in unsecured consumer debt comes from OOP when experiencing new health events. New severe health events increase debt for the 50–64 age group, but do not increase it for the 65+ group.     

Educating and empowering consumers to avoid bankruptcy

The US has the highest consumer bankruptcy rate in the world and Utah is the state with the highest rate. Bankruptcy filings are rising rapidly due to uninsured medical expenses, job loss, family break‐up and rising consumer and mortgage debt burdens. Lending standards are extremely lax among mainstream creditors while predatory and sub‐prime lending are growing. Utah State University Extension is addressing this problem by creating a new Extension educator position to focus on financial education and by training county Extension educators to mount an extensive consumer education campaign. The ‘Take Charge of Your Money’ programme, developed by the Extension specialist, is being taught throughout the state by satellite distance education. Each educator is being trained to use the Power Pay debt reduction software developed by two Utah Extension educators. As part of the emphasis on empowerment, consumers are being taught to make their own decisions on debt load rather than accepting credit because it is available. Heavy dependence of lenders on credit scores mean consumers are taking on debt that they do not have the cash flow to repay. Grant money available from the state was used to provide training for an Extension bankruptcy prevention team and to provide funding for laptop computers for Power Pay so educators can take the programme to the citizens at county fairs and other public events. While it is too soon to measure the results of the programme, Utah State University's Cooperative Extension project is an example of an aggressive response to the highest bankruptcy rate in the nation. The bankruptcy prevention team is an example of the power of the Extension Service to extend the resources of the university to improve the quality of life for the citizens of the state.     

The Influence of Financial Well‐Being on Pawnshop Use

This research examined the influence of financial well‐being on pawnshop use. Data from the 2015 National Financial Capability Study were used to construct a measure of financial well‐being, based on the Consumer Financial Protection Bureau's definition. A higher financial well‐being reduced the odds of pawnshop use by 17%, even after controlling for having a bank account, having a credit card, being financially overconfident, proximity to local pawnshops, and selected demographic characteristics. The authors make recommendations for future research based on changes in the pawnshop industry and its users.     

Credit Cards: Transactional Convenience or Debt‐Trap?

We survey individuals on their credit card usage. Contrary to popular press, most credit card holders use credit cards in a responsible manner. They tend to use credit cards for transaction convenience and pay little interest. Only a minor subset of people uses credit cards to access expensive credit, with only 7% of credit card holders in our sample never paying the balance in full. Credit card debt is more common among older, less financially literate, and less trusting respondents. Even individuals with credit card debt are well aware about its costs and are likely to make informed financial choices.     

Borrowing Capacity and Financial Decisions of Low‐to‐Moderate Income First‐Time Homebuyers

This study documents the extent to which first‐time homebuyers seeking a mortgage accurately estimate their borrowing capacity and how this is associated with their decisions regarding mortgage debt and the take‐up of a free offer of financial coaching. We find that consumers who underestimate their nonmortgage debt (31.5% of the sample) also take out larger mortgages relative to income. Consumers who underestimate or overestimate their total debt as well as their monthly debt payments are more likely to accept the offer of financial coaching. Moreover, overconfidence in financial matters reduces the take‐up of financial coaching. These biases in perceived financial status appear to be systematically related to behavior among a group of relatively inexperienced consumers. These findings suggest that efforts to extend homeownership may need to include debiasing mechanisms to help less informed consumers accurately assess their current debt levels and ability to make ongoing mortgage payments.