Microcredit is the extension of very small loans (micro loans) to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. It is designed to enable them to start a small business (micro enterprise). This concept was founded in Bangladesh in 1983 through the establishment of Grameen Bank.
With the introduction of microcredit, loans are more accessible to the poor due to waived requirements for any collateral or guarantors. Besides, microcredit also offers more lenient income requirements, in some cases even not requiring any proof of income.
Microcredit / Microfinance in Malaysia
Microcredit is often used interchangeably with ‘microfinance’ in Malaysia because microfinance products in Malaysia at present only encompass micro loans and no other microfinance products (E.g. Micro-insurance).
The first institution in Malaysia that offered micro loans was Amanah Ikthiar Malaysia (AIM), which was developed in 1988 to provide loans only to the poor to assist them for setting up of micro enterprise. This was then followed by Yayasan Usaha Maju (YUM) and The Economic Fund for National Entrepreneus Group (TEKUN), which was established in 1988 and 1998 respectively.
Due to the importance of micro enterprise in the country’s economic growth, starting from 2006, the Malaysian government with the cooperation of Bank Negara has encouraged the involvement of more and more financial institutions in providing microcredit products to the public. Currently, there are seven commercial banks and three development banks which provide microfinance facilities.
Where to Apply for a Micro Loan
In Malaysia, there are several banks which provide micro loans. At this time of writing (Mar 2014), the banks are as follows:
(a) Commercial Bank
- Alliance Bank
- CIMB Bank
- Public Bank
- United Overseas Bank
- Bank Muamalat
(b) Development Bank
- Bank Rakyat
- Bank Simpanan Nasional
An applicant can go to selected branches of any of these participating banks to apply for a micro loan. Bank branches that provide microfinance facilities will display the National Microfinance Logo in the building.
Unlike home loans that use the reducing balance method, Micro loans in Malaysia use the flat interest rate calculation method. The calculation is relatively simple:
Total Interest Payable = Principal x Interest Rate p.a. x Number of Years
Differences between a Micro Loan and Personal Loan
Micro loans do share some similarities with personal loans. No collateral or guarantors are required to apply, fast approval, and both of them use flat interest rates. However, there are also some key differences:
|Micro Loan||Personal Loan|
|Requirement or Eligibility||
I.Must have valid business license/permit.
II.Must be owner operated and on a full time basis.
III.Must have been operational at least 6 months – 2 years
Eligible Economic Sector
I. Sales turnover not exceeding RM300,000 OR full-time employees not exceeding 5
Advantages of Microcredit
- Lenient eligibility requirements (eg: Maybank Micro only requires a valid business license and does not have any income requirement for the borrower)
- Generally, no collateral and guarantors are required
- Fast approval and disbursement, ranging from 1 to 10 working days
- Minimum documentation. Identity Card, Income proof (eg: pay slip and bank statement), utility bills and business registration form/license/permit
Disadvantages of Microfinancing/Microcredit
- Low loan size
- Short repayment period
- Flat interest rate
- Interest rate is normally higher compared to other loan packages
Perhaps, the most unique and distinct feature of microloans is its lenient income requirements. However, as a tradeoff, microcredit is often accompanied by high interest rates and short repayment periods.
If you are looking to finance a small business venture, you can consider a micro loan or a personal loan. Make use of Loanstreet's Personal Loan comparison tool to help you in your search for right product for your needs.