THE CHALLENGES OF MICRO ENTERPRISES IN MALAYSIA AND THE PROSPECT FOR INTEGRATED CASH WAQF MICRO ENTERPRISE INVESTMENT (ICWME-I) MODEL
THE CHALLENGES OF MICRO ENTERPRISES IN MALAYSIA AND
THE PROSPECT FOR INTEGRATED CASH WAQF MICRO ENTERPRISE INVESTMENT
(ICWME-I) MODEL
CHALLENGES FACING SMES IN MALAYSIA
The existing literatures have highlighted several problems confronting SMEs in Malaysia.
Most of the literatures have discussed similar problems facing SMEs, namely financing,
human resources, information technology, managerial inefficiency, bureaucracy, market
accessibility and competition, among others.
For example, Hashim (1999) found that SMEs in Malaysia lack of capital and credit facilities,
short of skilled workers and raw materials, posses inadequate infrastructure, lack managerial
and technical expertise, faced market and knowledge constraints, and have limited
application of new technology, which affected their growth and contribution to the economy.
His findings are consistent with the general observation by Ting (2004) who identified five
key challenges facing Malaysian SMEs. The challenges were lack of access to finance,
human resource constraints, limited or inability to adopt technology, lack of information on
potential markets and customers and global competition. He also argued that there was a high
risk that SMEs would be wiped out if they did not increase their competitiveness in the new
rapidly changing world of globalization.
Similarly, Saleh and Ndubisi (2006) identified high levels of bureaucracy in government
agencies, difficulty in obtaining funds from financial institutions as well as from the
government, lack of skilled workers, high competition from large companies and also limited
access to technology and ICT as the major factors hindering efficient development of SMEs
in Malaysia. Soon (2011) found that SMEs in Malaysia are exposed to external and internal
challenges that hindered their growth and development. These internal and external
environmental factors include lack of capabilities and resources, poor management, low
technology, competition, economics and, technological, socio-cultural and international factors.
These challenges affected the profitability, growth and success of SMEs in Malaysia.
Meanwhile, in the Malaysian SMI Development Plan 2001-2005, it is stated that SMEs in
Malaysia were facing many challenges domestically as well as globally. These challenges
directly influenced the growth of SMEs in Malaysia. The challenges include high global
competition, limited capability to meet the market environment, limited capacity for
technology management and knowledge acquisition, low productivity and quality output, lack
of skilled human resources, and limited access to finance and capital.
The challenges facing the Malaysian SMEs are apparently shared by SMEs in other countries.
For example, in India, The Trade India Newsletter (2007) reported that the SMEs contributed
less to their GDP, roughly about 10 percent only although they represented more than 80
percent of the business establishments. This report stated that among the challenges that
SMEs in India faced were technological backwardness, poor financial conditions, low levels
of R&D, poor adaptability to changing trade trends, non-availability of technically trained
human resources, lack of management skills, lack of access to technological information and
lack of consultancy services.
Similarly, SMEs in Sub Saharan Africa (SSA) also face the same problems. A study by
Tadesse (2009) found that lack of access to finance was the prominent factor that hindered
the growth of SMEs in SSA. These are in addition to other problems such as lack of
workplace, lack of technological capability, lack of knowledge of market environment and
lack of skilled human resources. Furthermore, Bhutanese SMEs have the same story to tell.
Moktan (2007) empirically surveyed 168 firms to examine the problems they faced. Based on
his findings, the major constraints facing these SMEs were improper regulations, limited
access to credit and poor infrastructure. Other less significant constraints included licensing
procedure, lack of government support, lack of capital, lack of skilled labor, lack of market
access, competition, unskilled labor, low technology and low FDI inflow.
Although most of these studies have discussed almost similar problems that have hindered
the contribution of SMEs to their respective economies, they have only examined SMEs as a
single unit of analysis. Such an approach cannot pinpoint and provide detail on the SMEs
component that is mostly affected. There are few studies that have investigated these
components of SMEs individually. Evidences in these studies show that most of the funding
from the private sector and the government goes to two components of SMEs, namely the
small and medium enterprises. While the third component, the micro enterprises hardly
receive considerable funding from private and public institutions (Selamat et.al, 2011; Hassan
et.al, 2010). Ironically, it is this component that should have received greater attention. This
may explain why efforts towards SMEs by the government in Malaysia have not yielded the
desired results.
THE CHALLENGES OF MICRO ENTERPRISES IN MALAYSIA
Micro enterprises in Malaysia is defined as an establishment with less than 5 employees or
less than RM 250,000 of the sales turnover for all sectors, namely agriculture, mining &
quarrying, construction, services and manufacturing. The enterprises are largely dominated
by the Bumiputra ethnic group in Malaysia (ETP Annual Report, 2011). The importance of
these enterprises lies in its ability to bring social change, employment and income generating
opportunities, exploring the talents of entrepreneurs, empowering the marginalised segments
of the population, improving communities’ standard of living, creating condition for
sustainable livelihood and eliminating conditions of extreme poverty (Ladzani & Van
Vuuren, 2002; Mogale, 2005; Tustin, 2001; ADB, 1997).
Micro enterprises constitute 77 percent of the total SMEs in Malaysia compared to the small
and medium enterprises which constitute 20 percent and 3 percent, respectively (Economic
Census: Profile of SMEs, 2011). Micro enterprises have also dominated almost all the sectors
in Malaysia. For example, the bulk of SMEs in the services sector are micro establishments,
representing over 79.0 per cent of the total SMEs in this sector. The manufacturing and
agriculture sectors also show the same pattern where micro businesses are predominant,
accounting for more than half, with 57.1 per cent and 56.3 per cent, respectively. This is
followed by the construction sector, where the micro enterprises form about 45 percent
(Economic Census: Profile of SMEs, 2011).
As micro enterprises comprise more than three quarter of the total SMEs and they have the
largest shares in almost all the sectors, it is obvious that they are supposed to get the lion
share of the schemes and programs offered by the government compared to the small and
medium enterprises. However, this prominent group of SMEs seems to be lagging behind
compared to the other two enterprises in terms of support particularly the support related to
financing and human capital development.
For example, in 2010, the Malaysian government allocated RM 6.3 billion for financing
SMEs programs. However, only 17.4 percent of micro enterprises access to this allocation (.
It is worth noting that most of the government funds are channelled to SMEs through
intermediaries, notably the banks, financial and micro credit institutions. As can be seen
from Table 3, in 2010, almost 59 percent of the micro enterprises used internally generated
fund as source of financing their businesses. Comparatively, the other two enterprises, small
and medium enterprises, could easily utilised financing from external sources. For example,
33% of small and 51.7 % of medium enterprises had used external financing as a source of
financing access to funds from financial institutions compared to only 17.4 percent for micro
enterprises.
These statistics obviously indicate that micro enterprises face the problem of accessing
external financing facilities, which have mostly benefited the small and medium enterprises.
As micro enterprises constitute the largest share of SMEs, they should receive more financial
support. This is to enable them to be competitive in contributing more towards the growth of
the economy. On the contrary, micro enterprises have relatively very little access to external
financing compared to small and medium enterprises. This indicates that there is a limited
direct help in terms of external financing from the government for micro enterprises in
Malaysia in spite of high competition among other enterprises.
Hassan et. al (2010) examined the financial constraints faced by the micro enterprise
entrepreneurs in Malaysia. Based on their observation, they found that in general micro
enterprise entrepreneurs face financial difficulties particularly during the start up. Although
many programs have been provided by the government to support micro entrepreneurs
financially, yet only 13% thus far have successfully received this funding. In addition, they
found that the rigidity of the procedures to access financial programs hampers the smooth
success of the programs.
Furthermore, Selamat et.al (2011) examined the challenges that affected the performance of
micro-enterprise in Balik Pulau, Penang where most of the Malay ethnic group is
concentrated. Using 21 respondents and in–depth interview, they found that most of the
micro-entrepreneurs faced the problem of limited access to capital and low level of
knowledge.
According to Aris (2007), micro enterprises have difficulty in accessing external financing
due to lack of collateral, insufficient documents to support loan application, absence of
financial track record, the nature of their business and long loan processing time. On the other
hand, the financial institutions are also reluctant to extend financing for micro enterprises due
to the risks involved in their business (Hassan et.al 2011).
The risk in micro enterprise business is compounded due to the poor quality of human capital.
Many of the micro entrepreneurs have low level of education, low level of productivity and
lack skills. Yet they do not receive sufficient fund from the government’s financing programs
to develop their human capital. Inspite of these financial difficulties, micro enterprises also
provided with training or developmental programs to uplift the knowledge and skill of their
human resource by the government agencies. However, a study by Hamdan et.al (2012)
found that the training sessions provided by the program management teams are not effective
to promote participants’ capability in generating higher business profits which directly affect
their skill development.
It is an obvious fact that proper access to finance helps small businesses or start-up
businesses for liquidity purposes. With sufficient capital, they can operate their businesses
smoothly and expand to higher stages of enterprises. However, without sufficient capital,
they are unable to develop new products, conduct research and development in R&D, invest
in information and communication technology (ICT), get more working capital for growth
and meet the growing demand of the market (Ghosh & Rosa, 1997; Fogel, 2001; Mambula,
2002).
Meanwhile, for human capital resources, an individual with a higher level of education,
experiences and proper training is confident in dealing with customers and financial
institutions (Storey, 1994; Hashim, 2008; Hamdan et.al, 2012). He/she also will know about
the skills of management, marketing, finance and information technology as he/she would
have gained valuable experience in running a business. In contrast, absence of proper
education level, training and experience among the entrepreneurs will affect the business
operation.
In summary, evidences show that micro enterprises in Malaysia have hardly received
considerable funding from financing institutions, which consider micro enterprises as risky
businesses that lack collateral, have insufficient documents to support loan application and
have no financial track record. Most of the micro enterprises have to rely on internal funding
from family members, friend and their savings. Furthermore, this prominent group of SMEs
also suffers from human resource deficiency. Most of these enterprises have semi-skilled
human capital resources due to their low level of education, improper training and limited
availability of relevant training courses.
Hence, apparently, it is evident that the existing conventional model is unable to cater for the
financing and human capital needs of the micro enterprises. It is also unable to create a long-
term sustainable growth for SMEs in general and micro enterprises in particular that can
contribute to the Malaysian economy. There is therefore a need for developing a model that is
able to overcome all the financing constraints [risk, collateral, documentation and track
record] imposed on the micro enterprises. The new model should be able to provide
sustainable fund at a low cost taking into consideration the risky nature of the micro
enterprises. It should also provide funds without demanding collateral, documents to support
loan and track record report. With proper funding, micro enterprises will also be able to
overcome the problem of human capital development. Thus, the present paper proposes an
Integrated Cash Waqf Micro Enterprise Investment (ICWME-I) model for enhancing the
development of micro enterprises in Malaysia.
Suorce :
International Islamic University Malaysia
Kulliyyah of Economics and Management Science
Mohamed Asmy Bin Mohd Thas Thaker1*, Mustafa Omar Mohammed2
PhD Candidate, Department of Economics
Link :
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