Microfinance / Microcredit in Malaysia

microcredit, microfinance, microloan, micro loan, loan,

There’s a saying that banks only lend to those who do not need it. All over the world, lower income groups face difficulties getting access to financing. They are often rejected by banks due to their lower financial capacity and lack of collateral. Their limited access to credit facilities has in some ways contributed to the issue of the poor being unable to improve their own position. Eventually, this led to the introduction of one of the greatest concepts in finance – Microcredit.

What's covered in this article?

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
AmBank
CIMB Bank
Public Bank
Maybank
United Overseas Bank
Bank Muamalat

(b) Development Bank

Agrobank
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.

Microfinance / Microcredit in Malaysia ?

Interest Calculation

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
Loan Amount	Relatively small, generally ranging between RM1,000 to RM50,000	The loan amount is larger, generally ranging from RM5,000 to RM200,000.
Loan Tenure	The loan tenure is relatively shorter, normally up to 5 years at most.	Personal loans can have longer loan tenures, up to 10 years.
Requirement or Eligibility	Emphasis on validity of business. E.g.: 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	Emphasis on income requirements and Debt Servicing Ratio. Eg: Minimum monthly salary requirement for Maybank Personal Loan is RM2, 500.
Eligible Economic Sector	Some loans are only for specific economic sectors. E.g.: PBMicro Finance is only for agriculture, services and manufacturing sector E.g.: BSN Teman Mesra is only for manufacturing, service and retail sector.	Irrelevant
Customer Type	Self – employee Micro enterprises. The definition of micro enterprise is as in the following: I. Sales turnover not exceeding RM300,000 OR full-time employees not exceeding 5	Any individual that can show proof of income
Financing Purpose	Working capital and capital expenditure Financing for fixed assets not allowed Not for personal use Banks perform random checks on the proper use of the money	No limitations on use

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

Conclusion

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.

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