What are the Challenges Faced by Islamic Banks in Making Financing Decisions toward Small Medium Enterprise (SMEs) in Malaysia?
[Dissertation (University of Nottingham only)]
This paper examines the challenges faced by Islamic banks in making financing decisions toward Small Medium Enterprises (SMEs) in Malaysia by analyzing three sets of applications used by banks, which are: (1) processes used by banks in assessing SMEs’ applications, (2) problems faced by banks during application process, and (3) monitoring the SME clients after financing has been granted.
Small-and-Medium Enterprises (SMEs) are considered as the backbone of the national economy. They have evolved to become key suppliers and service providers to large corporations, inclusive of multinational and transnational corporations. Some of the contributions by SMEs towards Malaysian economy are; providing value-added activities in the manufacturing sector, expanding output, creating employment opportunities especially in the services sector and contributing to broadening Malaysia’s export base.
However, because SMEs are often small and inexperienced as compared to many other larger and well-established multinational companies, banks are usually reluctant to lend money to them. SMEs are also considered as risky clients, have incomplete corporate governance, loose management, lack transparency in accounting information and do not keep proper records or meet conventional security requirements. These are few reasons why SMEs find it difficult to obtain financing from banks. From previous studies, researchers have argued that SMEs are characterized by lack of capital; therefore, granting financing to SMEs is considered as a high risk decision made by financial institutions. In this case, if a particular company defaults payment, it would reflect the bank’s financing ability in the future.
On the other hand, in accessing financing applications from SMEs, banks are faced with considerable uncertainties and risk. Usually, data on SMEs tend to be unreliable or unavailable, making the decision process for banks more difficult. Furthermore, most banks and private firms are newly established and have little history of working with each other. Thus, conventional risk management techniques such as credit scoring are of limited use in such contexts. Therefore, this raises a very basic question: how in the absence of business data, are Islamic banks able to provide financing to SMEs in Malaysia and what are the challenges faced by banks?
This study is focusing on the Islamic banking sector and as such two full-fledge Islamic banks in Malaysia have been chosen. Using questionnaires, documented evidence from banks and interview methods, this article investigates how do Islamic banks attempt to collect information from applicants for finance. The decision to focus on Islamic banks because, currently in Malaysia Islamic banking industry has boost out in the market and has been viewed as a new and promising alternative financing for SMEs. The aim of this study is to examine bank lending behavior, specifically, by investigating the challenges faced by Malaysian Islamic bank in the process of making financing decisions towards local Small Medium Enterprises (SMEs). From the studies, the availability of research findings on Western banks is contrasted with the scarcity of similar information on Islamic banks. Thus, this is the justification on why the dissertation is concentrating on Islamic banks. Finally, this paper discuss about the Islamic bank’s intervention strategies and efforts to support financing towards SMEs in Malaysia.
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