Harmonizing to 2010 CIA World Factbook estimates in 2009, Malaysia has population of 25,715,819. The unemployment rate has increased from 3.325 % in twelvemonth 2008 to 5 % in twelvemonth 2009. Malaysia has successfully eradicated poorness where it is apparent from the crisp diminution in the per centum of poorness, which decreased from 49.3 % in 1970 to 6.1 % in 1997 to 6.0 % in 2002 and less than 5 % in 2007.

Table 1: Malaysia Poverty Statistics: 1970 – 2007

Incidence ( % ) 49.3 37.7 37.4 20.7 17.1 8.9 6.1 8.5 6.0 5.7 3.6

Incidence of hardcore poorness

n.a. n.a. n.a. 6.9 3.9 2.1 1.4 1.9 1.0 1.2 0.7

Note: n.a. Not available

Beginning: Malaysia Economic Planning Unit ( 2010 )

hypertext transfer protocol: //www.epu.gov.my/household-income-poverty

2.2 Informal Source of loans

Pawnshop is one of the most popular beginnings of informal loans. Pawnshops operate by imparting money to persons while accepting their personal belongings as security or pledge. Pawnshops accept valuable points such as old-timers, coins, gold, Ag, used ware and so on as collateral. Pawnbroker’s shops purchase these points at a monetary value which is lower than market monetary value so that they can sell at price reduction and still generate net income.

Another beginning of informal loans is money loaners who are besides known as loans sharks or friends and households. These types of loan are normally little with short adulthoods. Due to the irregulated nature of this type of loan, involvement rates could run from zero up to 100 % . Some loaners charge high involvement rate because they need risk premium to counterbalance the default hazard. Loan sharks may bear down high involvements and violently punish clients who fail to refund.

These beginnings of loans are popular as loans can be obtained in a short period of clip. Besides, they involve low dealing costs and less paperwork. However, loans obtained through these beginnings are little.

2.2 Microfinance in Malaysia

Microfinance in Malaysia had its roots in the Ikhtiar Project pioneered by Universiti Sains Malaysia in twelvemonth 1985. This pilot undertaking in north-west Selangor has the differentiation of being the first Grameen reproduction in the universe, and was conducted with an allotment of merely RM2, 000. The success of the pilot undertaking led to the constitution of Amanah Ikhtiar Malaysia ( AIM ) as an independent trust organic structure in 1987 to advance microcredit throughout the state in order to assist eliminate hardcore poorness. A really important milepost was the determination, within AIM ‘s first twelvemonth of operation, to pay out loans merely to female borrowers although adult females made up merely a 3rd of the Sahabat when the installation foremost started. The determination was based non so much on gender considerations as the really matter-of-fact one of much higher refund rate on the portion of female borrowers ‘ 95 per centum as opposed to 78 per centum for all borrowers. It had besides been found that the work forces were non able to run into the recognition subject of AIM in footings of being able to organize the groups of five which were the footing for forming the loan activities and besides to carry through the demand of go toing the hebdomadal meetings, in maintaining with the Grameen theoretical account. ( hypertext transfer protocol: //www.undp.org.my/uploads/undp_malaysia_nurturingwomenentrepreneurs_publication.pdf

The development of a vibrant and sustainable microfinance industry is portion of Bank Negara ‘s strategic aim of accomplishing greater fiscal inclusion, guaranting that all economic sectors, parts and communities have entree to full scope of fiscal merchandises and services [ 18 ] .

Harmonizing to Cahmhuri and Basri ( 2001 ) , Microfinance was introduced in Malaysia since 1986 to retroflex Grameen Bank ‘s successful specialized in bringing system, stressing targeting, informality of bringing and presenting recognition to the ‘doorstep of the hapless. Microfinance has been portion of the poorness relief schemes by making the hapless who usually would be excluded from the formal recognition sector [ 49 ] .

Harmonizing to Bank Negara Malaysia ( 2009 ) , Malaysia is recognized because of the attempts of bettering entree to funding. Among 183 states, Malaysia has been ranked by the World Bank as figure one in footings of ‘getting recognition ‘ . As terminal of 2009, there were entire of 449, 703 microfinance borrowers in Malaysia. RM2.4 billion was approved through authorities bureaus and formal fiscal system.

Some of the innovators like Credit Guarantee Corporation ( CGC ) , Majlis Amanah Rakyat ( MARA ) , and council of trust to the Bumiputera have introduced microfinance services. The rural recognition establishments such as Farmers Organization Authority ( LPP ) , Agro based Cooperative Societies, Federal Land Development Authority ( FELDA ) , and Agriculture Bank of Malaysia ( BPM ) offer agriculture sectors micro recognition. Non-government Organizations ( NGOs ) such as Yayasan Usaha Maju in Sabah, Koperasi Kredit Rakyat in Selangor and Amanah Ikhtiar Malaysia ( AIM ) have besides engaged in microfinance programmes [ 49 ] .

Harmonizing to Yab Dato ‘ Najib ( 2009 ) , there are several microcredit programmes provided without collateral, including Amanah Ikhtiar Malaysia ( AIM ) , Tabung Ekonomi Kumpulan Usahawan Nasional ( TEKUN ) , Bank Simpanan Nasional ( BSN ) and AgroBank. Entire microcredit financess provided under the assorted programmes exceed RM1.5 billion and are channelled to little concern in urban and rural countries. An extra RM300 million is provided for the microcredit programme under AgroBank to help husbandmans and agro-based concern in rural countries every bit good as RM50 million for TEKUN [ 31 ] .

2.3.1 Microfinance institutional Model

Prior to 2006, the microfinance industry participants comprised mostly of authorities bureaus functioning the hapless and the informal funding system. To heighten support for the growing of microenterprises through improved entree to the formal fiscal system, the National SME Development Council approved a sustainable microfinance model named Pembiayaan Mikro in 2006. The model identified three schemes enterprises:

– To specify the parametric quantities of an appropriate micro financing merchandise.

– To raise consciousness on microfinancing.

Since its launched, the figure of take parting fiscal establishments in the Pembiayaan Mikro enterprise has increased to nine ( CIMB, Public Bank, Alliance Bank, AmBank, UOB, Eon Bank, Agrobank, Bank Simpanan Nasional, Bank Rakyat ) . The active engagements of these establishments have expanded entree to micro funding through over 1,800 contact points countrywide.

A figure of fiscal establishments have adopted a mass market theoretical account whereby fiscal establishment provides microfinance merchandises through its bing subdivision web. Others, like Bank Rakyat, have adopted a concerted theoretical account which provides microfinance to its members. Bank Simpanan Nasional has been mandated to supply microfinance while Bank Pertanian would go on to supply microfinance to micro endeavors in the agribusiness and agro-based sector. Some have employed the distributer web theoretical account, which leverages on the distributive capablenesss of strategic concern spouses. Another is the monoline theoretical accounts with a dedicated microfinance operation, formed with its ain distinguishable stigmatization and procedures designed to unambiguously appeal to micro endeavors.

In order to advance broader consciousness of the handiness and benefits of Pembiayaan Mikro, legion enterprises were implemented including the creative activity and show of the Pembiayaan Mikro Son at premises that offer Pembiayaan Mikro, the direct distribution of circulars to more than 397,000 micro endeavors, characteristics articles in the newspaper and advertizements on telecasting and wireless.

Under Pembiayaan Mikro, outstanding micro funding of the nine take parting fiscal establishments stood at RM616.5 million affecting 57,403 clients as at terminal 2009. This represented an one-year growing of 29.1 % and 27.1 % severally. A study conducted to estimate the public presentation of micro endeavors after having micro funding, showed an increased capacity of micro endeavors to function the markets and clients. Besides, the study besides found that micro enterprises that received micro funding were able to put and spread out their concern capablenesss, thereby lending to an mean addition in gross and employment of approximately 18.5 % p.a. and 10 % p.a. severally ( hypertext transfer protocol: //www.bnm.gov.my/files/publication/fsps/en/2009/cp02_001_whitebox.pdf ) .