Literature Review on Sources of Loans in Malaysia

According to 2010 CIA World Factbook estimates in 2009, Malaysia has population of 25,715,819. The unemployment rate has increased from 3.325% in year 2008 to 5% in year 2009. Malaysia has successfully eradicated poverty where it is evident from the sharp decline in the percentage of poverty, which decreased from 49.3% in 1970 to 6.1% in 1997 to 6.0% in 2002 and less than 5% in 2007.

2.2 Informal Source of loans

Pawnshop is one of the most popular sources of informal loans. Pawnshops operate by lending money to individuals while accepting their personal property as security or pledge. Pawnshops accept valuable items such as antiques, coins, gold, silver, used merchandise and so on as collateral. Pawnshops purchase these items at a price which is lower than market price so that they can sell at discount and still generate profit.

Another source of informal loans is money lenders who are also known as loans sharks or friends and families. These types of loan are usually small with short maturities. Due to the irregulated nature of this type of loan, interest rates could range from zero up to 100%. Some lenders charge high interest rate because they need risk premium to compensate the default risk. Loan sharks may charge high interests and violently punish customers who fail to repay.

These sources of loans are popular as loans can be obtained in a short period of time. Besides, they involve low transaction costs and less paperwork. However, loans obtained through these sources are small.

2.2 Microfinance in Malaysia

Microfinance in Malaysia had its roots in the Ikhtiar Project pioneered by Universiti Sains Malaysia in year 1985. This pilot project in north-west Selangor has the distinction of being the first Grameen replication in the world, and was conducted with an allocation of only RM2, 000. The success of the pilot project led to the establishment of Amanah Ikhtiar Malaysia (AIM) as an independent trust body in 1987 to promote microcredit throughout the country in order to help eradicate hardcore poverty. A very significant milestone was the decision, within AIM’s first year of operation, to disburse loans only to female borrowers although women made up only a third of the Sahabat when the facility first started. The decision was based not so much on gender considerations as the very pragmatic one of much higher repayment rate on the part of female borrowers – 95 percent as opposed to 78 percent for all borrowers. It had also been found that the men were not able to meet the credit discipline of AIM in terms of being able to form the groups of five which were the basis for organizing the loan activities and also to fulfil the requirement of attending the weekly meetings, in keeping with the Grameen model. (http://www.undp.org.my/uploads/undp_malaysia_nurturingwomenentrepreneurs_publication.pdf

The development of a vibrant and sustainable microfinance industry is part of Bank Negara’s strategic objective of achieving greater financial inclusion, ensuring that all economic sectors, regions and communities have access to full range of financial products and services [18].

According to Cahmhuri and Basri (2001), Microfinance was introduced in Malaysia since 1986 to replicate Grameen Bank’s successful specialized in delivery system, emphasizing targeting, informality of delivery and delivering credit to the ‘doorstep of the poor. Microfinance has been part of the poverty alleviation strategies by reaching the poor who normally would be excluded from the formal credit sector [49].

According to Bank Negara Malaysia (2009), Malaysia is recognized because of the efforts of improving access to financing. Among 183 countries, Malaysia has been ranked by the World Bank as number one in terms of “getting credit”. As end of 2009, there were total of 449, 703 microfinance borrowers in Malaysia. RM2.4 billion was approved through government agencies and formal financial system.

Some of the pioneers like Credit Guarantee Corporation (CGC), Majlis Amanah Rakyat (MARA), and council of trust to the Bumiputera have introduced microfinance services. The rural credit institutions such as Farmers Organization Authority (LPP), Agro based Cooperative Societies, Federal Land Development Authority (FELDA), and Agriculture Bank of Malaysia (BPM) offer agriculture sectors micro credit. Non-government Organizations (NGOs) such as Yayasan Usaha Maju in Sabah, Koperasi Kredit Rakyat in Selangor and Amanah Ikhtiar Malaysia (AIM) have also engaged in microfinance programmes [49].

According to Yab Dato’ Najib (2009), there are several microcredit programmes provided without collateral, including Amanah Ikhtiar Malaysia (AIM), Tabung Ekonomi Kumpulan Usahawan Nasional (TEKUN), Bank Simpanan Nasional (BSN) and AgroBank. Total microcredit funds provided under the various programmes exceed RM1.5 billion and are channelled to small business in urban and rural areas. An additional RM300 million is provided for the microcredit programme under AgroBank to assist farmers and agro-based business in rural areas as well as RM50 million for TEKUN [31].

2.3.1 Microfinance institutional Framework

Prior to 2006, the microfinance industry players comprised largely of government agencies serving the poor and the informal financing system. To enhance support for the growth of microenterprises through improved access to the formal financial system, the National SME Development Council approved a sustainable microfinance framework named Pembiayaan Mikro in 2006. The framework identified three strategies initiatives:

• To define the parameters of an appropriate micro financing product.
• To raise awareness on microfinancing.

Since its launched, the number of participating financial institutions in the Pembiayaan Mikro initiative has increased to nine (CIMB, Public Bank, Alliance Bank, AmBank, UOB, Eon Bank, Agrobank, Bank Simpanan Nasional, Bank Rakyat). The active participations of these institutions have expanded access to micro financing through over 1,800 contact points nationwide.

A number of financial institutions have adopted a mass market model whereby financial institution provides microfinance products through its existing branch network. Others, like Bank Rakyat, have adopted a cooperative model which provides microfinance to its members. Bank Simpanan Nasional has been mandated to provide microfinance while Bank Pertanian would continue to provide microfinance to micro enterprises in the agriculture and agro-based sector. Some have employed the distributor network model, which leverages on the distributive capabilities of strategic business partners. Another is the monoline models with a dedicated microfinance operation, formed with its own distinct branding and processes designed to uniquely appeal to micro enterprises.

In order to promote broader awareness of the availability and benefits of Pembiayaan Mikro, numerous initiatives were implemented including the creation and display of the Pembiayaan Mikro logos at premises that offer Pembiayaan Mikro, the direct distribution of flyers to more than 397,000 micro enterprises, features articles in the newspaper and advertisements on television and radio.

Under Pembiayaan Mikro, outstanding micro financing of the nine participating financial institutions stood at RM616.5 million involving 57