Islamic Microfinance in Malaysia


Poverty is a global challenge and in particular, Muslim societies fare far worse in comparison to the rest of the world with regard to addressing problems stemming from poverty. Both, urban and rural areas of several Muslim countries experience rising poverty levels, which are frequently associated with low productivity and greater inequality. One mechanism of poverty alleviation is referred to as microfinance, which is the extension of small loans by Microfinance Institutions (MFIs) to impoverished individuals in low-income groups. These loans can be used to develop businesses, providing a stable and consistent income for the beneficiary, in addition to emergency needs and major life-cycle events like birth or death, that require funding.

Operations relating to Islamic Microfinance must comply with the same principles governing Islamic Finance, which are primarily derived from the Shariah law. The various instruments utilised, take into consideration the prohibition of Riba (usury/interest), Gharar (uncertainty) etc and provide access to funds whilst simultaneously striving to cover the overhead costs of MFIs, share risks and be sustainable. The Islamic approach is more inclusive than the conventional one and favours equity and cooperation-based models as opposed to instruments that create debt.

The Islamic Microfinance Industry: Malaysia

Due to the high number of Islamic Finance educational institutions, notable scholars, product development potential and certification programs, Kuala Lumpur is considered Asia’s Islamic Finance capital. Malaysia, as a whole, takes the lead in the global Sukuk market, standing at US$ 14 billion in 2014 and Malaysia’s Islamic Finance institutions are experiencing dynamic growth each year.

Microfinance institutions in Malaysia are highly supported by the government. Theyare subsidised and offer restricted products, and often deal with lending contracts that are standardised rather than those compared to the Grameen Bank and BPR which have flexible lending contracts and a variety of products. Since the aforementioned banks (Grameen and BPR) are unsubsidised, they are required to provide a diverse range of microfinance products and services in order to generate revenue, which in turn is used to cover operations and loanable funds. Malaysian microfinance institutions therefore, do not have incentives to diversify due to the immense support from the government. Malaysian microfinance institutions need to consider offering microinsurance and pension funds, similar to those provided by Malaysian microfinance Grameen and BPR, as well as implement flexible repayment structures, in order to spread the outreach and garner demands.

Out of the total number of institutions in Malaysia, about 80% is comprised of microfinance establishments that are far less attractive than their counterparts. As per studies, SMEs contributed 32% in 2010, which is expected to surge to 41% in 2020. Around 59% of the total labour force was employed by SMEs in 2010.

According to statistics, microfinance clients have an impressive repayment track record and a capability to develop their microbusinesses. In Malaysia, clients of Amanah Ikhtiar Malaysia (AIM) have shown a repayment rate of 95% with relatively higher revenues courtesy of their business activities.

A handful of policies and programs have been created since 1970; the New Economic Policy (NEP), National Vision Plan, Amanah Ikhtiar Malaysia, TEKUN, to name but a few. The main aims of these programs are to alleviate poverty, restructure communities and establishing a sustainable economy, and they have shown progress in achieving in their overall goal of reducing overall poverty rates in certain areas. Including urban and rural areas in Malaysia, the poverty reduction rate (PRR) lies in the range of 61% to 77%. This was made possible as a result of the poverty-oriented programs implemented and policies enforced by the government and a few NGOs. AIM, which emulated the Grameen Bank model has witnessed success throughout the last three decades. It has managed to span 6700 villages, covering 123 branches with a recovery rate of 99%.

Although poverty alleviation in Malaysia has been in operation for many years, challenges and related issues often crop up:

  • Poverty-oriented institutions offering microfinance products fall short in terms of reaching a sizeable number of the poor. For instance, AIM only managed to cater to about 4% of the total number of poverty-stricken individuals. It was also found that a favourable impact of lending microcredit loans would mostly occur on borrowers with better financial incomes and it leads to the assumption as to whether microfinance borrowers are actually under the ‘poor’ category.
  • Majority of the potential borrowers seem to lack business education and the technical know-how when it comes to managing their business operations. Several have proceeded to allocate a large portion of the revenue for personal use, ignoring the need to separate the two. This results in minimal success and stagnancy, despite continually receiving financial aid.
  • Following the major problems of financial illiteracy, Malaysia’s microfinance institutions have set out to provide business and finance educational courses for the benefit of the borrowers. Although it is a positive step, many borrowers complained of the selection criteria applied, seasonal training schedules that are not fixed and the inconvenience of locations chosen. The institutions do not practice a standardised method of training to handle borrowers of different backgrounds and so it was highly recommended that the government and responsible authorities redesign its programs to ensure effectiveness and efficiency.
  • There exists a lack of correlation between Islamic microfinance and digital tools that could aid the promotion, marketing and innovation of products. Digitisation could propel a wider outreach, ease administrative burdens and lower costs of business operations.

Areas to Improve Upon