Lending to Small Business in Malaysia

Empirical research has found lack of capital to be one of the main causes of small business failure (Fredland 1976, DiPietro and Sawhney 1977, Peterson and Shulman 1987). For many Malaysian small business owners, this lack of capital results from their difficulty in obtaining bank loans (Chee Peng Lim 1986). They claim that it is very difficult to get loans, especially from the commercial banks. These small business owners feel that commercial banks are not sympathetic to their needs. Commercial bank officers tend to emphasize the importance of establishing and maintaining relationships with their major corporate customers. This is because corporate customers generally bring more income to the bank and carry less risk (Turnbull and Gibbs 1987). On the other hand, Buerger and Ulrich (1986) argue that small businesses provide a potentially profitable market for commercial banks. They claim that small businesses are dependent on commercial banks for both short- and long-term financing and that meeting the financing needs of small businesses helps to build the local economy, which in turn benefits the banks as loans and deposits grow. The accessibility of small business to the loan facilities of commercial banks varies from country to country. Peterson and Shulman (1987) provide international evidence on bank financing of small business in four stages of development: start-up, survival, growth, and establishment. They reported that, at the start-up stage of business development, 91 percent of the small firms in West Germany had bank loans, as did 56 percent. in Canada, 21 percent in Japan, and 32 percent in the Netherlands. At the survival stage, 87 percent of small enterprises in West Germany had bank loans, whereas in Canada 73 percent had such loans, Japan 61 percent, and the Netherlands 60 percent. At the growth stage, in both West Germany and Japan 84 percent of small firms reported having loans, followed by Canada (77 percent) and the Netherlands (71 percent). During the establishment stage, 86 percent of small enterprises in West Germany had bank loans compared to Japan, Canada, and the Netherlands with percentages of 81, 67, and 67, respectively. In some countries, special government institutions or agencies are established to assist small businesses with their financing needs. In Malaysia, for example, many institutions were established by the government with the objective of providing capital to small businesses. The most popular agency among small businesses is called "MARA. " At the end of 1992, "MARA" had granted loans to 102,968 small businesses with a total value of RM 586 million (RM or Ringgit Malaysia, 1 US dollar = 2.50 Ringgit Malaysia). Another such agency is the Credit Guarantee Corporation (CGC), which was established on July 5, 1972 by the Malaysian government to assist small enterprises obtain credit from commercial banks at a reasonable cost. As of December 31, 1991, a total of 47,152 small enterprise loans valued at RM 1,170.2 million were guaranteed by this corporation. Although there are many similar agencies available to small businesses, they have not succeeded in solving small businesses' financial problems. Limited services, lack of funds, or overly complex loan application procedures are potential reasons why small businesses prefer to deal with commercial banks rather than the agencies established by the government. Unfortunately many of the commercial banks are not responsive to small business needs. The Malaysian government's intervention in helping small enterprises obtain loans from the commercial banks is also manifest in its regulatory policies. Using the Central Bank as its regulatory body, many guidelines have been introduced over time regarding commercial banks: 1. In 1972, small businesses and agriculture were deemed a "priority sector" by the Central Bank, and loans to these sectors were reported under a special column, i.e., "Bank Lending to Special Groups" in the Central Bank's annual report. …