MICROCAPITAL.ORG STORY: Exclusive Interview On The Current State Of Microfinance In Malaysia And Challenges Facing The Sector: Observations From The Assistant Governor Of Bank Negara Malaysia

In a recent Microcapital.Org exclusive written interview with the Malaysian central bank, Bank Negara Malaysia [1], the Assistant Governor Mr Muhammad bin Ibrahim provided the following responses to a series of questions about the current state of microfinance in Malaysia and challenges facing the sector. Previous Microcapital.Org stories on microfinance in Malaysia have been set out in the Bibliography section below [2] – [5].

Question 1

Recent statistics suggest that the size of the microfinance market in Malaysia is in the region of Ringgit Malaysia (RM) 1.7 billion (approximately USD 490 million) as at 2008. Annual growth rates of the market were stated to be about 35% between 2000 and 2008.

Do you expect the microfinance sector to continue to grow in Malaysia at similar rates in the short to medium term?
Do you think the current financial crisis, which may have adversely affected micro enterprises and SMEs, will lead microfinance lenders in Malaysia to impose more stringent criteria before disbursing microloans?

Response:

Microfinance has been given priority by the government over the last few years. Microfinance has been expanding rapidly in the recent years, growing an average of 33.4% since year 2000, with financing outstanding as at end-June 2009 totaling RM2.0 billion (approximately USD 575 million). This translates to over 360,000 micro enterprises benefiting from Pembiayaan Mikro schemes in Malaysia, with average size of financing of RM10,500 (approximately USD 3000).

There are over 435,000 micro enterprises in Malaysia [according to the Census of Establishments and Enterprises 2005 issued by the Malaysian Department of Statistics]. This represents a potentially vast market segment and opportunity for further expansion in supply of innovative products and services by the providers of microfinance. While we expect growth in both demand and supply of microfinance to continue in the long term, we anticipate growth to moderate in the near term due to the current challenging economic environment.

Nevertheless, a new measure was recently introduced to ensure that microenterprises continue to receive adequate access to financing. The Government has introduced the Small Entrepreneur Guarantee Scheme (SEGS) [6] to incentivise lenders to disburse microloans to viable microenteprises by providing guarantee covers of up to 100% to micro enterprises. Risk-sharing schemes like these enhance the credit standing of micro enterprises, hence improving the likelihood for viable micro enterprises with little track record or no collateral to obtain financing to support the working capital needs of the business.

Question 2

Have you observed a demand for other microfinance related products? In particular, do you anticipate a demand for microinsurance products and also Islamic microfinance (or Sharia compliant) products?

Malaysia is increasingly developing a reputation as a regional and global hub for Islamic banking.

In the context of microfinance, are there plans to develop Sharia-compliant products so as to afford more choices to Muslim clients in Malaysia?

If so, do you anticipate a growth in Islamic products such as Ar-Rahnu interest free lending (particularly in the non-urban areas) or other products that use the Islamic concepts of Qardhul (benevolent loans) and/or Wadiah Yah-Amanah (trustworthiness)?

Response:

Some microfinance products offered in Malaysia are already Shariah compliant – based on concepts of Ar-Rahnu (provided by Bank Rakyat) [7], Qardhul (provided by Amanah Ikhtiar Malaysia) and Bai’ Al Inah (provided by several participating financial institutions providing Pembiayaan Mikro). It is useful to note that products and services developed under Shariah compliant principles are also available and open to Muslim and non-Muslim customers.

While still in its nascent stage, we have observed a growing demand for microinsurance and microtakaful products, with several players now offering such products. The products on offer are affordably priced, simple and easy to understand, and are often distributed through cooperatives, which are well-placed to understand the needs of their members. I believe the insurers and takaful operators will recognize the commercial potential represented by this large untapped segment and would expect to see a greater proliferation in insurance and takaful products customised for micro businesses. Equally important is the need to educate the microenterpreneurs, towards enhancing their understanding on the importance of having insurance to protect one’s business premise and assets from unforeseen circumstances and events.

With the growth of Islamic financing in Malaysia and increasing demand for microfinancing products, the market for Islamic microfinance products is expected to expand rapidly. To facilitate the development of this market, Bank Negara Malaysia has embarked on various financial education and outreach initiatives to improve public awareness on the importance of good financial management. Businesses and households can access comprehensive information on the various financial products and services provided by conventional and Islamic financial institutions online from www.bankinginfo.com.my and www.insuranceinfo.com.my.

Question 3:

The government recently announced measures to enhance the opportunity for locally-incorporated foreign commercial banks to increase their potential by providing financial services to the underserved sectors of the economy. We understand that, with immediate effect, locally-incorporated foreign commercial banks can establish up to ten microfinance branches in Malaysia and that additional branches will be considered based on the effectiveness of these branches in serving micro enterprises.

Given that this measure is already in place, has any foreign commercial bank incorporated microfinance branches in Malaysia further to this announcement?

Banks such as HSBC [8] and Citibank [9] have already started to invest in the microfinance sectors of rural China and other parts of Asia. Do you anticipate an increase in the participation of foreign banks as a result of the recent announcement?

Response:

There are two locally-incorporated foreign banks providing Pembiayaan Mikro at present, and with the announcement of the liberalisation measures, foreign banks can now participate more actively and meaningfully in the provision of microfinance services.

The flexibility accorded under the recent liberalisation measures will enhance the role of foreign players in contributing meaningfully towards the nation’s financial inclusion agenda.

Question 4

We understand that the key microfinance providers in Malaysia are domestic commercial banks (i.e. Alliance Bank [10], Ambank [11], CIMB Bank [12] etc) and some development financial institutions (i.e. Agrobank [13], Bank Rakyat [14]).

Do you think there is room or need for other players to enter the microfinance sector in Malaysia (i.e. non profit groups or informal/self help organisations that focus on financial education and business development training for microfinance clients, for example) particularly as a means to improve outreach in non-urban areas?

Response:

Commercial banks are recent participants in the provision of microfinance compared to some more established non-profit organizations such as ;

Amanah Ikhtiar Malaysia (AIM) [15], which was formed in 17 September 1987 to provide self-help group lending to the “hard core poor” for income-generating projects; and
Yayasan TEKUN Nasional (TEKUN) [16] was established in 9 November 1998 to provide direct lending and advisory services to start-ups and micro businesses.

We now have six commercial banks and three development financial institutions providing microfinance to meet the business financing needs of microentrepreneurs. In terms of access, there are over 1,542 branches located in urban, semi-urban and rural areas offering microfinance facilities. Combined with the increased network resulting from strategic partnerships between providers of microfinance with other organisations with large branch networks (e.g. Post Office), there are an additional 224 access points for microentrepreneurs to apply for microfinancing nationwide.

Bank Negara Malaysia continues to encourage the participation of more financial institutions in the Pembiayaan Mikro scheme. With more than 2,900 branches nationwide, financial institutions have the infrastructure and ability to effectively reach out and provide Pembiayaan Mikro products without incurring much more incremental cost.

Question 5

Customer protection has become a much talked about issue in the microfinance world. Many cite the absence of customer protection laws and principles as the reason for poor governance and negative trends such as over-indebtedness.

How has the issue of customer protection been addressed under the Malaysian legal system, and to what extent are microfinance institutions regulated in Malaysia?

Response:

The financial market in Malaysia provides many different types of products to consumers to meet each individual’s unique needs. To ensure that the prices charged for these financial services fairly reflect the cost of providing these services, Bank Negara Malaysia has issued guiding principles on the imposition of fees and charges on financial products and services to all financial institutions.

Consumers have to protect themselves by knowing the features of any financial product and understanding the objectives and risks attached to each product. To facilitate consumers in better comprehending the features of financial products which they purchase, Bank Negara Malaysia has developed a comprehensive disclosure framework for retail financial products and services to ensure key features, risks and returns, fee and charges and major terms affecting the customer’s obligations, effective lending rate and total repayment amount for different loan packages are fully disclosed to consumers.

Also, Bank Negara Malaysia has established the Credit Counseling and Debt Management Agency (better known by its Malay acronym “AKPK”) [17] to provide an avenue for individual borrowers to seek advice and assistance for over indebtedness. The AKPK’s debt management and credit counseling services are offered free of charge to individuals. As at end July 2009, AKPK has successfully served about 97,000 customers, of which 31,000 have received assistance to restructure their debts and more than 66,000 have benefited from the credit counseling services. Guidelines have also been issued by financial institutions to ensure that they conduct debt recovery exercises in an ethical manner.

Microfinancing offered in Malaysia under the existing banking system is conducted in a regulated environment, which facilitates the practice of fair pricing, full disclosure and ethical debt recovery processes. Non-profit organizations such as AIM and TEKUN are monitored by Board Members, which comprise of representatives from Government Ministries to ensure that the organizations stay focused on their respective mandates in poverty reduction and practice ethical lending behavior.

Question 6

MFIs in many countries range from loose and informal foundations/non profit groups to fully regulated financial institutions. The diversity of players makes it challenging for a comprehensive regulatory framework to be developed and for foreign investors to participate in the microfinance industry.

Given that microfinance is a fast growing industry where knowledge and experiences vary from country to country, what do you think are the positive aspects of the microfinance sector in Malaysia that other jurisdictions can learn from? In addition, what do you think are the biggest challenges facing the microfinance sector in Malaysia today?

Response:

Banking institutions that offer microfinance are regulated and supervised by Bank Negara Malaysia. This provides consumers and investors the confidence that the microfinance industry in Malaysia is conducted in sustainable and equitable manner.

While Bank Negara Malaysia has taken a lead role in promoting sustainable microfinance, the success of Pembiayaan Mikro in Malaysia is the result of close collaboration with key players in the banking industry, who recognize the great growth potential of the microfinance sector. The Pembiayaan Mikro framework leverages on the existing infrastructure and branch networks of commercial banks and DFIs that enable extensive reach to the Malaysian public within a short span of time. The framework is designed to ensure easy, fast and convenient access to financing for those who need it the most.

Going forward, there is a need to create greater awareness amongst the microenterprises on the products offered under the microfinance framework, as some of these micro businesses still have the misconception that commercial banks only provide big loans to long established companies with significant collateral. To create more awareness, the Prime Minister had launched the National Microfinance Logo to serve as a recognizable brand. All branches of participating FIs that offer microfinance are required to display the logo prominently at the entrance to their premises to inform the general public on the availability of Pembiayaan Mikro. There are other means that participating FIs should also explore such as using the latest innovations in mobile technologies as a cost-effective delivery channel to reach borrowers located in rural areas.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Bank Negara Malaysia: www.bnm.gov.my/

[2] MICROCAPITAL STORY: Malaysia Allows International Banks To Provide Microfinance

[3] MICROCAPITAL STORY: Bank Negara Malaysia Launches a $56.6m Micro Enterprise Fund

[4] MICROCAPITAL STORY: Malaysia’s Central Bank to Offer African Governments Assistance in Developing National Microfinance Strategies

[5] MICROCAPITAL STORY: South Asian Bank CIMB intends to deliver RM515 million (USD 152 million) in Micro-credit Loans

[6] Small Entrepreneur Guarantee Scheme: http://www.smidec.gov.my/detailpage.jsp?page=banknegara11

[7] Bank Rakyat Ar-Rahnu Scheme: http://www.bankrakyat.com.my/web/guest/arrahnu;jsessionid=D64158ACB63E0F534755B98E0CF41E6E#

[8] HSBC: www.hsbc.com/

[9] Citibank: www.citi.com/

[10] Alliance Bank: www.alliancebank.com.my/