Global Entrepreneurship and New Venture Creation in the Sharing Economy Norhayati Zakaria University of Wollongong in Dubai, UAE Leena Ajit Kaushal Management Development Institute, India
A volume in the Advances in Business Strategy and Competitive Advantage (ABSCA) Book Series
Published in the United States of America by IGI Global Business Science Reference (an imprint of IGI Global) 701 E. Chocolate Avenue Hershey PA, USA 17033 Tel: 717-533-8845 Fax: 717-533-8661 E-mail:
[email protected] Web site: http://www.igi-global.com Copyright © 2018 by IGI Global. All rights reserved. No part of this publication may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this set are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI Global of the trademark or registered trademark. Library of Congress Cataloging-in-Publication Data Names: Norhayati Zakaria, 1969- editor. | Kaushal, Leena, 1977- editor. Title: Global entrepreneurship and new venture creation in the sharing economy / Norhayati Zakaria and Leena Kaushal, editors. Description: Hershey, PA : Business Science Reference, [2017] | Includes bibliographical references. Identifiers: LCCN 2017010752| ISBN 9781522528357 (h/c) | ISBN 9781522528364 (eISBN) Subjects: LCSH: New business enterprises. | Entrepreneurship. Classification: LCC HD62.5 .G62 2017 | DDC 658.1/1--dc23 LC record available at https://lccn.loc.gov/2017010752 This book is published in the IGI Global book series Advances in Business Strategy and Competitive Advantage (ABSCA) (ISSN: 2327-3429; eISSN: 2327-3437) British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the authors, but not necessarily of the publisher. For electronic access to this publication, please contact:
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Chapter 6
Access to Finance:
Exploring Barriers to Entrepreneurship Development in SMEs Shazida Jan Mohd Khan Universiti Utara Malaysia, Malaysia Abdul Rahim Anuar Universiti Utara Malaysia, Malaysia
ABSTRACT Over the years, Malaysian government has attributes to a number of supports programs to the small and medium enterprises (SMEs) sector. These includes the involvement of several government agencies, at both the federal and state levels, providing variety of programs to SMEs sector in achieving sustainable levels of growth and development. A well-developed financial infrastructure that is able to meet the diverse financing needs of SMEs is essential to support the competitiveness and continuous growth of SMEs.
INTRODUCTION Entrepreneurship plays a crucial role in triggering economy development which can be relates to the introduction of new product or new method of production, opening of a new market or finding of the new inputs supply or even opening a new organization. There are three attributes that consistently associated to entrepreneur behavior (Brockhaus, 1982): the need of achievement, the internal locus of control and a risk-taking propensity. Entrepreneurship is also believed to have culturally embedded phenomenon (Morris & Schindehutte, 2005). The term SMEs is an acronym for “small and medium scale enterprises”. They are firms or businesses arising as a result of entrepreneurial activities of individuals. Several definitions and meanings of SMEs exist due to their global diversity and characteristics (Darren & Conrad 2009). SMEs also can be defined according to industry to industry, county to country, size to size and number of employee to number of employee as to reflect industry, country, size and employment differences accurately. The DOI: 10.4018/978-1-5225-2835-7.ch006
Copyright © 2018, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Table 1. Differences Between Entrepreneurship and SME Entrepreneurship Definition Size Number of People Involved Purpose Degree of Risk
SME
Process where an individual discovers,
Firms or business ventures evaluates, and exploits opportunities manage by individuals independently owners
Large, Medium or Small
Small and Medium only
small to large Small
small to large Small
To discover, innovate and establish
To produce, buy and sell
Varies
Lower
Sectors
Private, government and not-forprofit
Private sector only
Key Attributes
High need for: achievement; internal locus of Control; creativity and innovation; growth
Organizational skills to manage efficiently, little innovation, moderate growth, moderate need for Achievement
Smooth Focus
High
Varies
Source: Adapted from Osai & Lucky, 2012, p. 350
following discussion will further define SMEs according to Malaysia context based on employment, number of employees, size, industry, country, asset value etc. Even though SME and entrepreneurship is used interchangeably both concepts may differ considerably (Osai & Lucky, 2012). Despites these differences both are importance to the growth of an economy. Entrepreneurship and SMEs is essential in providing job creation, encourage economic growth, economic development and allowing for greater socio-political- economic transformation. Both seem to share the same factors of success or failure. Both involved the need of achievement, the internal locus of control and a risk-taking propensity and facing socio-cultural challenges. In 2004 the Malaysian Government established the National SMEs Development Council (NSDC). The tasks of NSDC are to prepare strategies for SMEs development across all economic sectors, coordinate the tasks of related Ministries and Agencies, encourage partnership with the private sector, as well as ensure effective implementation of the overall SMEs development programmes. Initiatives under NSDC included enhanced access to financing, financial restructuring and advisory services, information, training and marketing coordination and a comprehensive SMEs database to monitor the progress of SMEs across all economic sectors. Programmes to be are premised on three strategic thrusts aimed at strengthening the infrastructure for SMEs development, building the capacity and capability of SMEs and enhancing access to financing by SMEs. The structured approach implemented in managing SMEs development programmes has enhanced the effectiveness and efficiency of these programmes, as well as has increased inter- and intra-Ministerial and agency collaboration and consultation in streamlining SMEs development programmes. Recognizing further their importance, the Malaysian government introduced SMEs Masterplan (2012-2020) towards achieving Malaysia’s goal of becoming a high income nation by 2020 in line with the New Economic Model. The masterplan has determined several strategic goals namely: • •
Increase business formation of SMEs by an average annual increase of 5% in business registration Reduce the share of informal sector to the Gross National Income (GNI) from 31% in year 2000 to 15% in year 2020.
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• •
Expand number of high growth and innovative SMEs by an average annual increase of 10%. Raise productivity of SMEs labor productivity from RM 47,000 per worker in 2010 to RM 91,000 per worker in 2020.
In the Tenth Malaysia Plan, SMEs contributed RM1, 606 billion to GDP across all sectors at 7.5% growth per annum. Several initiatives contributed to the growth of SMESs, including developing the SMEs Masterplan 2012-2020. The role of SMEs Corporation Malaysia (SMEs Corp.) was also strengthened and the coordination mechanism streamlined to enable the Master Plan to be implemented effectively (Eleventh Malaysia Plan, p.245). Based on the Economic Census 2011, there were 645,136 SMEs, making up 97.3% of total business establishments. In order to reflect the current business environment, the SMEs definition was revised on 1 January 2014, as shown in Table 3. In the Eleventh Malaysia Plan, the focus is on developing resilient and sustainable SMEs to achieve inclusive and balanced growth. The contribution of SMEs across all sectors is targeted to increase to 41% of GDP by 2020. The development of SMESs will be based on the SMEs Masterplan 2012- 2020, encompassing six strategies, as follows1: Strategy E1: Enhancing productivity through automation and innovation by promoting increased use of ICT and continuing the Technology Commercialization Platform (TCP) and Inclusive Innovation programmes; Strategy E2: Strengthening human capital development within SMEs by reskilling and upskilling workers through industry partnerships; Strategy E3: Enhancing ease of doing business by simplifying the process of formation and formalizing of businesses as well as increasing ease of access to financing; Strategy E4: Increasing demand for SMEs products and services by reviewing policies for procurement from SMEs and encouraging SMEs to obtain international standards and certifications to increase exports; Strategy E5: Creating home-grown champions through the Catalyst Programme to build high performing SMEs into regional and international players; and Strategy E6: Developing SMEs in Sabah and Sarawak by strengthening infrastructure, encouraging market expansion through e-commerce, reducing the cost of doing business, and increasing outreach of government assistance.
SMES AND ENTREPRENEURSHIP IN MALAYSIA Entrepreneurship figures prominently in the development agendas of many developing countries including Malaysia. Micro SMEs constitute a resource of great potential and can contribute significantly to the development of the country. The ability to harness their potential will helps to determine Malaysia strength and resilience in pursuing social, economic, and political development. Recently the government also encourage youth moving towards self-employment as part of the measure taken to overcome the issues of unemployment. Current uncertainties in global market demand and economic crisis situations have led to the need for any society or its communities at large to find opportunities in self-employment, including by the youths (Chigunta, 2001; Schoof, 2006). Besides, there is a significant demand of becoming entrepreneurs among youth. A study by the Institute of Youth Development Research Malaysia (IPPBM), youth index scores of 4673 youths are found to have a relatively high score of 68.6 in 2011 which have increased significantly from the score of 51.6 in 2006 and 63.3 in 2008. Currently youth 94
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represent tremendous potential which can be expanded through entrepreneurship program. According to the Economic Census 2011, Department of Statistics Malaysia (DOS), profile of SMEs identifies 97.3% (645,136) business establishments in the country are SMEs. In the Eleventh Malaysia Plan, SMEs is given special focus as they made up 98.5% of total establishments and 59% of total employment in the economy in 2015. This development may come as the outcome from high participation of providing programs and fund towards developing the SMEs. SMEs are given exclusive attention by the Malaysia Government as SMEs is to achieve growth targets and socio-economic agenda of the country. In 2012, SMEs’ total workforce grew 6.4% compared to 6% for Multinational National Companies (MNCs), and their share of the nation’s workforce rose to 57.4% in 2012 from 57.1% in 2010. Small and medium enterprises in Malaysia are on track to contribute 41% to the country’s gross domestic product by 2020 compared to 32% in 2012. Entrepreneurs were assisted in terms of financing, support services, and capacity building. The uncertainty in economy due to global crisis means bank financing will continue to be crucial for the SMEs sector and policy measures in many countries are still largely oriented towards facilitating SMEs’ access to debt finance unlike larger firms, SMEs need financial support in developing their business. In Malaysia, SMEs can seek financing from various types of financial institutions, including banking institutions (BI), development financial institutions (DFI), leasing and factoring companies, as well as venture capital companies, which provide equity financing. In addition, SMEs can also make use of various specific-purpose special funds set up by the Government to help SMEs (BNM 2005). Over RM9 billion in financial assistance was provided to businesses. Programs such Amanah Ikhtiar Malaysia (AIM) has provided capital to Bumiputera in pursuit of SMEs. Loans of RM8.6 billion benefited 413,278 micro and small businesses through AIM. Through these initiative entrepreneurs earning more than RM3, 500 increased from 27,770 in 2010 to 128,450 in 2014. TEKUN National is another microcredit program provided and supported by Malaysian non-governmental organization in encouraging SMEs activities. About 32.7% of entrepreneurs recorded an increase in revenue of 50-150% in 2013 after receiving support from TEKUN National. Malaysia Technology Development Corporation (MTDC), Malaysia Venture Capital Management Berhad, Malaysia Debt Ventures Berhad, and Multimedia Development Corporation (MDeC) also provide financial assistance totalling RM495.2 million, focusing on the development and their growth stage. Table 2. Major Indicators for SMEs, 2010-2020 Tenth Plan
Eleventh Plan
Item
2010
2015
2020
Achieved
Target
Contribution of SMESs to GDP (RM 20 Billion in 2020 prices)
262.9
371.9
578.6
1605.8
2,420.8
8.3
9.3
9.3
7.5
9.3
Annual growth rate (%) Share to GDP (%)
32.0
35.0
41.0
33.5
38.4
SMESs export (RM 20 Billion in 2020 prices)
100.3
147.8
243.7
634.0
995.0
Share to Total exports (%)
15.7
19.0
25.0
17.3
22.4
Share to total employment (%)
57.1
59.0
62.0
57.8
60.7
Note: 2015 numbers are estimated; 2020 numbers are forecasted Source: Eleventh Malaysia Plan, Chapter 8, p.10
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Along the support and encouragement by the government and non-government organizational, entrepreneur especially youth face a lot of other challenges that substantially hinder their progress, growth and subsequently their contribution to economic development. Among others, these entrepreneurs face the unique problems of uncertainty, innovation and evolution. In terms of definition, SMEs has been defined differently in different country due to several demographic factors and characteristics including size, location, structure, age, number of employees, sales volume, ownership through innovation and technology (Zeinalnezhad et. al, 2011). The common definition for SMEs in Malaysia (Table 2) was first introduced by the National SMEs Development Council (NSDC) in 2005. In line with the changes in the economy since the 2005, NSDC has reviewed and absorbed these economics changes by providing broader definition of SMEs and account the developments of the economy (NSDC, 2013). SMEs are classified based on the number of employees and/or the value of assets, sales turnover, or capital. Whereas, ADB Asia SMEs Finance Monitor 2013 defined SMEs in Bangladesh, the People’s Republic of China (PRC), India, the Republic of Korea, Malaysia, Thailand, and Viet Nam by sector while other economies adopt a single SMESs category. Kazakhstan, the PRC, India, Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam define SMESs by law, while others practically classify them for the purpose of implementing government and/or ministerial policies and strategies. The policy on SMESs are also differs by country because of the different level of economic and social development and political concerns. Some policies focus on micro enterprises or micro and small enterprises (SMEs), while others address micro, small, and medium-sized enterprises (MSMESs) or SMEs. The contribution of entrepreneurs to an economy varies according to its phase of economic development. Porter, Sachs and McArthur, (2002) proposed three phases of economic development; “factordriven economies,” “efficiency-driven economies” and “innovation driven economies” (see Table 5). The Global Entrepreneurship Monitor (GEM) Malaysian has introduced Total Early Stage Entrepreneurial Activity (TEA) and Entrepreneurial Employee Activity (EEA) rates as benchmarks the development of an entrepreneurship in Malaysia. Overall, Malaysia’s TEA rate is fairly low and within the efficiency-driven economies. It is the third lowest and share this spot with Romania. This result is not in tandem with its positioning as an efficiency-driven economy because low new business ownership rates are more in the domain of innovation-driven economies. However, the TEA rate for Malaysia has increased by 0.56% to 4.96% compared to previous year (GEM Report, 2010, p.23). Malaysia’s early stage entrepreneurial activity rate (TEA) seems to increase only marginally over 5 years. In this respect Table 3. SMEs Definition in Malaysia SMEs Category Manufacturing
Services & Other Sectors
Micro Sales turnover of less than RM300,000 OR full-time employees less than 5
Small Sales turnover from RM300,000 to less than RM15 million OR full-time employees from 5 to less than 75
Sales turnover from RM15 million to not exceeding RM50 million OR full-time employees from 75 to not exceeding 200
Sales turnover from RM300,000 to less than RM3 million OR full-time employees from 5 to less than 3
Sales turnover from RM3 million to not exceeding RM20 million OR full-time employees from 30 to not exceeding 75
Source: Circular on New Definition of Small and Medium Enterprises (SMEs), 2013
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Table 4. SMEs definition in Asia SMEs finance monitor countries
it is like the innovation-driven economies. This is in part due to the many job opportunities available in the country. This is also evidenced by the fact that the majority (65%) of early-stage entrepreneurs are motivated by opportunity, rather than because they have no other option for work (18%). While according to Malaysia SMEs Annual Report (2015), percentage of individuals who are in the process of starting or are already running new businesses in Malaysia (TEA) was at 2.9% in 2015, as compared to 6.6% in 2013 and 5.9% in 2014. This trend demonstrates that less people are pursuing entrepreneurial opportunities and innovative initiatives. Despite Malaysia being amongst the few economies in the Asian region where finance and physical infrastructure to support entrepreneurship are widely available the country’s TEA rate is the lowest in the region.
SMES CHALLENGES There are too many issues that have been discussed in the SMEs literature with regards to the challenges and business difficulties. There are several challenges that can be identified as (IFSB, 2015, p.14): • • •
Increased transaction costs; Lack of skilled human resources; Adverse legal and regulatory environments;
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Table 5. Phases of Economic Development Phases Entrepreneurship in Factor-Driven Economies
Economic development consists of changes in the quantity and character of economic value added (Lewis, 1954). These changes result in greater productivity and rising per Capita incomes, and they often coincide with migration of labor across different economic sectors in the society, for example from primary and extractive sectors to the manufacturing sector, and eventually, services (Gries and Naude, 2008). Countries with low levels of economic development typically have a large agricultural sector, which provides subsistence for the majority of population who mostly still live in the countryside. This situation changes as industrial activity starts to develop, often around the extraction of natural resources. As extractive industry starts to develop, this triggers economic growth, prompting surplus population from agriculture to migrate toward extractive and emergent scale-intensive sectors, which are often located in specific regions. The resulting oversupply of labor feeds subsistence entrepreneurship in regional agglomerations, as surplus workers seek to create self-employment opportunities in order to make a living
Entrepreneurship in Efficiency-Driven Economies
As the industrial sector develops further, institutions start to emerge to support further industrialization and the buildup of scale in the pursuit of higher productivity through economies of scale. Typically, national economic policies in scale intensive economies shape their emerging economic and financial institutions to favor large national businesses. As increasing economic productivity contributes to financial capital formation, niches may open in industrial supply chains that service these national incumbents. This, combined with the opening up of independent supplies of financial capital from the emerging banking sector, would spur opportunities for the development of small-scale and medium-sized manufacturing sectors. Thus, in a scale-intensive economy, one would expect necessity-driven industrial activity to gradually fall and give way to an emerging small-scale manufacturing sector.
Entrepreneurship in Innovation-Driven Economies
As an economy matures and its wealth increases, one may expect the emphasis in industrial activity to gradually shift toward an expanding service sector that caters to the needs of an increasingly affluent population and supplies the services normally expected of a high-income society. The industrial sector evolves and experiences improvements in variety and sophistication. Such a development would be typically associated with increasing research & development and knowledge intensity, as knowledge generating institutions in the economy gain momentum. This development opens the way for the development of innovative, opportunity-seeking entrepreneurial activity that is not afraid to challenge established incumbents in the economy. Often, small and innovative entrepreneurial firms enjoy an innovation productivity advantage over large incumbents, enabling them to operate as „agents of creative destruction.‟ To the extent that the economic and financial institutions created during the scale-intensive phase of the economy are able to accommodate and support opportunity-seeking entrepreneurial activity, innovative entrepreneurial firms may emerge as significant drivers of economic growth and wealth creation.
Source: The Global Entrepreneurship Monitor (GEM) Malaysian Report, 2010, p.13-14
• • • • • • •
Insufficient access to technology; Lack of market accessibility; Lack of product standardisation; Insufficient bank policies that utilise movable collaterals; Lack of information sharing between financial institutions; Lack of financial literacy of both clients and personnel; and Insufficient branding strategies for banking products and services.
These challenges can be separated into different stages and it is conclusive that lack of adequate funding is a key challenge for SMEs at every stage of their evolution especially during inceptions and development stages (IFC, 2014): •
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Inception Stage ◦◦ Lack of Initial Capital for Setting up the business ◦◦ Bureaucratic processes when formally registering the business ◦◦ Lack of well-trained labor force ◦◦ Unstable political environment
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•
•
Development Stage ◦◦ Lack of funds to expand the business ◦◦ Lack of enough business skills ◦◦ Insufficient infrastructure ◦◦ Lack of well-trained labor force ◦◦ Weak business environment and corruption Maturity Stage ◦◦ Insufficient demand conditions ◦◦ Unstable political environment ◦◦ Insufficient infrastructure ◦◦ Threats from informal sector ◦◦ Lack of intra-industry partnerships
Banks in developing countries consider SMEs to be too risky – in particular, because these enterprises have insufficient collateral and credit history. SMEs of developed countries also face a similar problem. Policymakers, development agencies, private sectors and researchers should address this problem more thoroughly. Offering innovative and diverse financial products to SMEs on a global scale can improve the access to finance and reduce the enormous financial gap. Determining alternate means of assessing the potential viability of SMEs will provide a further framework of providing funding to the SMEs that will contribute to the growth of the community and the economy. SMEs are incubators for innovation, as they are usually more responsive and adaptable to local conditions than are large corporations. Islamic financing institutions focus highly on social welfare. These institutions can contribute to financing SMEs significantly and reducing the gap (IFSB, 2015, p.15). Lack of access to credit, also remained as the most discussed challenges in literature (Smit & Watkins2012). The inaccessibility to finance is listed as one of the primary external constraints faced by SMEs. Accessibility to finance is a major factor affecting the growth and success of SMEs, thus adequate access to financing is critical to enable SMEs to contribute to the economic development of the nation. In Malaysia, the non-availability of finance has been the most frequently cited problem encountered by SMEs, and it is also a crucial issue to many of them. Chee (1986) noted that majority of SMEs indicates an inadequate working capital and lack of access to commercial lending as their major problem. Recent development in SMEs and support from the Government support program, the access to finance is no longer a leading problem but rather more to how the information on financing received and perceived by the SMEs besides the process of applying and their requirement in accessing the financing. In 2016, a total of 27 entrepreneurship programmes are being implemented by various Ministries and agencies in Malaysia. They include SMEs programmes for growth and expansion as well as programmes for business start-up. These entrepreneurship and SMEs programmes are important in ensuring that the productivity and contribution of SMEs to the national GDP would be increased. The first census study on small and medium enterprises (SMEs) in Malaysia was carry out by the Department of Statistics, Malaysia (DOS) in 2005. The study shows that most SMEs used their own internally generated funds and funds sourced from friends and family (F-F) members to finance their operations. Only 16% of SMEs respondents indicated a reliance on financing from financial institutions (that is, banking (BIs) and development financial institutions (DFIs)). In contrast, 50% of large companies indicated that financial institutions were their main source of funding. According to past literatures (Beck & Demirguc-kunt, 2006; and Kyaw, 2008), finance from friends and family members play a more 99
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Table 6. Excess to financing: The Economic Census 2005 Own
Others
F-F
BIs
DFIs
total
SMEs
34%
25.7%
23.6%
13.4%
2.7%
518996
Large
37.2%
4.7%
5.3%
43.6%
2.6%
4136
Source: Economic Census 2005, Department of Statistics Malaysia
significant role in developing countries than the developed ones. Financial institutions were the main source of financing for medium-sized enterprises. However, micro and small enterprises depended mainly on their own internally generated funds. Indeed, only 10% of micro enterprises indicated that they relied on financial institutions for financing2. The Economic Census 2011 reported Malaysia SMEs is accounted for 97.3% or 645,136 of total business establishments in 2010. SMEs’ concentration is in the services sector with 90% or 580,985 establishments. Meanwhile, 6% of total SMEs (37,861) are in the manufacturing sector, followed by 3% in the construction sector (19,283) and the remaining 1% (6,708) in the agriculture sector and 0.1% in the mining and quarrying sector. Even though the Economic Census 2011, used broader definition for SMEs, more extensive than 2005, it is found that 58.1% sourced of the financing for micro came from internally generated funds or from shareholders (see Figure 1). Thus this indicates challenges to the government to encourage these SMEs to use the financing programs offered and financial institutions financing programs as part of their business development. The Economic Census 2005 highlights lack of collateral as the main obstacle faced by SMEs when seeking financing from banking institutions. This is followed by insufficient loan documentation and lack of financial track record, as well as business viability. Almost 10% of respondents indicated long processing time as a problem. The findings are not are also seems reflected in other countries study such as European SMEs. The study also revealed that lack of collateral mostly affects micro and small enterprises, while poor business performance and insufficient information are the main reasons for medium enterprises failing to obtain financing from banking institutions. Lack of adequate financial resources due to limited financial resources has failed to meet operational and investments needs (Collins, Kofi & Bright, 2015). European Commission Report (2008) also list other problems such as issues in information and understanding the issues of taxation, lack of skill, access to public procurements, unfair competition, labor law, access to single market as part of hindering for SMEs development. Few of the challenges of SMEs in accessing loans in the banking institutions are listed as (Collins et al., 2015, 18-19): 1. Stringent Conditions: Collateral is the main constraints as banks are demand for collateral as to mitigate risks. 2. Strict Vetting of Credit Applications: The application are taking much time that loans are delayed and issued when intended purposes have expired. 3. Unaware of Factors Financial Institutions Take into Considerations: The lack of understanding in the operations of banks. In another perspective, many SMEs in developing countries lack information about marketing channels and fail to establish marketing networks. Hashim and Wafa (2002) disclose that lack of knowledge regarding marketing techniques, branding, customer loyalty, and also, the lack of good contacts with other local and international enterprises are among drawbacks facing by SMEs in Malaysia. 100
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Figure 1. Excess to Financing the Economic
GOVERNMENT SUPPORT PROGRAMS ON FINANCING SMES The Malaysian government have worked closely along the government policies and experienced a number of transformations to suit the current needs of the SMEs and business environment through a number of supports programs to the SMEs sector. These includes the involvement of several government agencies, at both the federal and state levels, providing variety of programs to SMEs sector in achieving sustainable levels of growth and development. According to past literature these programs focuses mostly on financial and credit assistance, technical and training assistance, extension and advisory services, marketing and market research, and infrastructure supports (Abdullah, 1999). These programs have assist SMEs by providing management expertise, land/building facilities, and information about the market and tax deduction. Summary for the agencies that involved encouraging SMEs’s entrepreneurs is showed in Table 7. In regard to Shariah-compliant microfinance and SMEs programmes, there are several Shariahcompliant microfinance and SMEs programmes in Malaysia offered by the federal government, state government, and nongovernmental organizations or banking institutions. As part of Malaysia policy of financial inclusion, SMEs were also been given priority. The Central Bank of Malaysia’s Financial Sector Blueprint 2011–2020 charts the development of an inclusive financial system as an efforts on creating innovative channels, products and services, empowering the underserved through financial literacy and capacity building and strengthening financial institutions and infrastructure. A holistic monitoring and evaluation framework were emphasis to measure the state of financial inclusion more effectively. Zarina (2013) stated in her study the level of financial inclusion in Malaysia
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Table 7. Support program by the agency Agency
Support Program
Amanah Ikhtiar Malaysia (AIM)
Provide financial, guidance and training to the entrepreneurs of poor and low-income families. AIM provides the Capital Financing, Compulsory savings and Welfare Fund to achieve the objective.
Majlis Amanah Rakyat (MARA)
• Conducting entrepreneurship training to produce Global entrepreneurs. • Develop Technopreneurs in the fields of high technology through a strategic partnership of cooperation. • Provide business advisory services to strengthen and increase the capacity of entrepreneurs and businesses and meet the needs of Global Standards. • Providing integrated marketing program to penetrate the global market. • Establishing a strategic network for Holistic Entrepreneurship Development.
Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN)
Providing Microfinance and Entrepreneurship Development Support.
Perbadanan Usahawan Nasional Berhad (PUNB)
Provide opportunities to Bumiputera entrepreneurs achieving business success through the provisions of financial and corporate support.
Malaysia Venture Capital Management Berhad, (MAVCAP)
Invest in small companies with the potential to succeed.
Malaysia Technology Development Corporation (MTDC)
Provide opportunities for new generation of Technopreneurs through comprehensive nurturing services that support them all the way from laboratory ideas to full commercialisation.
Malaysia Debt Ventures Berhad (MDV)
• Provide innovative, flexible financing solutions and Specialized funding programs for SMEs • Provide industry expertise and advisory services
Multimedia Development Corporation (MDeC)
Create an ideal and conducive platform to nurture Malaysian Small and Medium Enterprises (SMEs) in the ICT sector, to become world-class businesses whilst attracting participation from global ICT companies to invest in and develop cutting edge digital and creative solutions in Malaysia
Source: Author
is measured at 0.77, indicating high financial inclusion in the country. Although the level of financial inclusion in Malaysia is relatively high, improvements must be made to ensure that financial inclusion brings significant economic and socio-political impact to the society at large. Apart of an effort is providing Islamic Finance as a catalyst for inclusive growth. The foundational philosophy of Islamic finance relies heavily on the economic and social development factor, including financial inclusion in the form of servicing the unbankable of the society, such as some of the SMEs (BNM Insight Report, 2016, p.5) Over the years, financial institutions which accounted for 96% of total SMEs financing have been the main pillar in supporting the growth of SMEs. The share of SMEs financing to total business financing of financial institutions had risen further to 46.6% in 2015 from 43.8% in 2014. Malaysia offers a wide and diversified financing landscape for SMEs. Financial Institutions (FIs) which comprise banking institutions (BIs) and development financial institutions (DFIs) are the main source of financing for SMEs in the country. SMEs can also have access to a wide range of special funds and schemes made available by the Government through various Ministries and agencies, including Bank Negara Malaysia. Aside from these sources of financing, there are also options from non-banking avenues such as venture capital companies, factoring and leasing, and microfinance institutions. The emergence of FinTechs opens up greater financing options for SMEs which include Equity Crowdfunding (ECF) Framework, Investment Account Platform (IAP) and Peer-to-Peer (P2P) lending3 as shown in Figure 2.
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Figure 2. Financial Landscape for SMEs Source: SMEs annual report, p.85
Access to Financing and Performance: A Case Study In the Eleventh Malaysia Plan, the government has provided programmes in assuring the development of SMEs. This attention is match with world recognition on SMEs role. SMESs is becoming increasingly prominent and successfully in providing business activity in urban or rural area. According to the Economic Census 2011, SMEs account for 97.3% or 645,136 of total business establishments in 2010. SMEs’ concentrations are in the services sector with 90% or 580,985 establishments. Meanwhile, 6% of total SMESS (37,861) are in the manufacturing sector, followed by 3% in the construction sector (19,283) and the remaining 1% (6,708) in the agriculture sector and 0.1% in the mining and quarrying sector. Ironically, most of the SMEs are microenterprises, forming 77% of total SMEs in Malaysia in 2010. Small-sized SMEs accounted for 20%, while medium-sized SMEs constitute the balance 3%. Microenterprises were predominant in the services sector, accounting for close to 80% of SMEs in the sector.
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Recognizing the important role played by SMEs in the nation’s economic activities, the government introduced numerous assistance programmes and incentives called government-support programmes (GSPs). Over the years, number of agencies and ministries involved in providing support to SMEs has increased predominantly. However, despite the programmes, the role of finance has been viewed as a critical element for the performance of small and medium sized enterprises. As for micro SMEs in Malaysia, the Government-support programmes give priority in five most critical areas, namely, financial and credit assistance; technical and training assistance; extension and advisory services; marketing and market research; and infrastructure supports. In addition, the programmes also provide management expertise on finance, land/building, facilities, and information about the market and tax deduction (Rafidah et al, 2014). Besides the GSPs, accessibility to finance is a still considered as a major factor affecting the growth and success of SMEs, thus ad equate access to financing is critical to enable SMEs to contribute to the economic development of the nation Previous studies have revealed limited access to financial resources available to smaller enterprises compared to larger organizations and the consequences for their performance and development (Levy, 1993). Ironically, smaller enterprises face higher transactions costs than larger enterprises in obtaining credit (Saito & Villanueva, 1981). From a bank’s perspective, the financing to SMEs is often regarded to be of higher risk due to the relative opaqueness of these firms as compared to larger firms (Berger & Udell, 2006). The common financial challenges for micro SMEs in Malaysia are the lack of capital and lack of access to credit. According to Census Study 2005 and 2011, the non-availability of finance has been the most frequently cited problem encountered by SMEs and majority of SMEs indicated inadequate working capital and lack of access to commercial lending as their major problem. The government has initiated various funds to help the micro entrepreneurs in getting funds to start the business as well as to expand the business. In Malaysia, entrepreneurs were assisted in terms of financing, support services, and capacity building. To give SMEs better access to financing, over RM9 billion worth of financial assistance was provided to more than 414,000 Bumiputera businesses. Programs such Amanah Ikhtiar Malaysia (AIM), TEKUN National, Malaysia Technology Development Corporation (MTDC), Malaysia Venture Capital Management Berhad, Malaysia Debt Ventures Berhad, and Multimedia Development Corporation (MDeC) are among the provider of financial assistance to Bumiputera. The following discussion is part of a case study done on SMEs in Malaysia. The study involved 830 respondents from different business characteristics. The discussion will only look on the challenges in financing for the SMEs and their performance. Table 8 describes the aspects of the personal profile which include gender, age, ethnicity, and level of education. In Malaysia, the age for youth is defined as those between 15 and 40 years old but the main focus of development programs in the country are for those ages of 18 to 25. `More than 52.7 per cent of the respondents represent youth and 47.2 per cent of the respondent’s age 41 years and above. The youth entrepreneurs studied were mainly local Malays. A majority (50.6%) of the selected entrepreneurs were of Malay ethnicity while the remaining youths (42.9%) were of Chinese ethnicity followed by the Indians. The level of education was low among the respondents for the study. Their educations qualifications are only limited to secondary schools. The success of SMEs is closely connected to education level. Several other factors (information, financing and institutional support) were also identified that have preventing SMEs to work at their full potential. However a number of program and support were given by the Malaysian government agencies through the government business support services in providing guide to suit the current needs of the SMEs and business environment. In terms of gender, 62 per cent
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Table 8. Entrepreneur Characteristics Characteristics
Category
Frequency (N=830)
Percent (%)
Gender
Male Female
518 312
62.4 37.6
Age
15-24 years 25-34 years 35-40 years 41 years and above
43 173 222 392
5.2 20.8 26.7 47.2
Ethnicity
Malay Chinese Indian others
420 356 25 29
50.6 42.9 3.0 3.5
Education Background
off school Primary / UPSR PMR / SRP / LCE or equivalent SPM / SPVM / MCE and equivalent STPM / HSC and equivalent Certification diploma bachelor postgraduate others
9 35 53 445 50 36 108 85 7 2
1.1 4.2 6.4 53.6 6.0 4.3 13.0 10.2 0.8 0.2
of the respondents were male and only 37 per cent are women with 50 per cent Malays, followed by Chinese and Indian. Table 9 provides some background of their business profile. With regard to the duration of their business establishment, the majority of the respondents (61.6%) owned businesses that were 5 years and above. Only a small minority owned their micro SMEs less than 5 years (30.6%). The majority of the businesses undertaken at the time of the study by the youth entrepreneurs were in the services sector (82.3%) with a majority business status of sole proprietorships (69.6%). Referring to Table 10, personnel savings is the main source of capital to finance their business (73%). These supported the earlier finding by the Economic Census 2005 and Census 2011 that the personal saving among SMEs are being the first choice compare to other types of listed sources of capital. The second choice of source of capital is loans from family and followed by bank loans. Only 5 per cent choose Table 9. Business Profiles Characteristics
Category
Frequency
Per cent
Establishment
less 5 years 5 years and above
319 511
38.4 61.6
Business Sector by DOS
services manufacturing construction agriculture environment
683 89 38 14 6
82.3 10.7 4.6 1.7 0.7
Business Status
sole proprietorships partnership limited company others
578 57 191 4
69.6 6.9 23.0 0.5
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micro finance or government programs. Surprisingly banks loans are more preferred compared to micro finance. The results reflect the size of micro business and also their type business that may not require high startup capital. However, to support the government intention to build up the SMEs as engine of growth, these micro SMEs need to be given special attention. This demand for further revision on these choices and identify what lack in micro finance program that discourage application from micro SMEs. These may also hider their development and ability to expand their businesses. In assuring the development and continuity of the SMEs accessibility to financing is essential throughout their development lifecycle – from seed capital during start up, through to growth investment in their development stage. However, they face significant challenges in accessing finance, thus limiting their ability to rise above SMEs status and restrict their economic growth. From 830 respondents, 71 per cent agreed that their choice of capital sufficient in supporting the business (Table 11). Only a small number of respondents agreed that micro finance (3.4 per cent) and banks loans (6.6 per cent) provide sufficient source of funding. Interestingly the same finding also found during the Economic Census Study in 2005 and 2011.
Table 10. Sources of Capital Personal Savings
Micro Finance Institute / Government
Loans from family
15-24
30 69.8%
1 2.3%
25-34
116 67.1%
35-40
Heritage Assets
Borrowing from friends
Bank loans
6 14.0%
-
-
12 6.9%
26 15.0%
6 3.5%
169 76.1%
12 5.4%
18 8.1%
41and over
298 76.1%
19 4.8%
Total
613 73.8%
44 5.3%
Age
Others
Total
6 14.0%
-
43 100%
3 1.7%
10 5.8%
-
173 100%
6 2.7%
1 0.5%
16 7.2%
-
222 100%
16 4.1%
14 3.6%
6 1.5%
38 9.7%
1 0.3%
392 100%
66 8.0%
26 3.1%
10 1.2%
70 8.4%
1 0.1%
830 100%
Table 11. Sufficiency of Sources of Capital Sources of Capital
Sufficiency of Resources
Total
Yes
No
Others
1
-
1
Heritage Assets
16
10
26
Micro Finance Institute / Government
28
16
44
Personal Savings
432
181
613
Loans from family
48
18
66
Bank loans
55
15
70
Borrowing from friends Total
106
9
1
10
589
241
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Access to Finance
Despite various governments’ incentive in developing the agriculture sectors, this sector is the least type of business accoutered by the entrepreneur. The agricultural sector has a huge potential to create jobs but needs to polish its image in order to attract more young people. To do this, governments have started programs and provide relevant education and training. In Budget 2016, RM90 million is allocated for Youth Agro-entrepreneur Development Programme in the form of in-kind grants such as Agriculture Entrepreneurs Financing Fund, rebranding Malaysian Agricultural Research and Development Institute (MARDI), Department of Veterinary Services, Department of Agriculture and the Department of Fisheries as well as to implement the Multiplier Farm Project for breeding cattle and free-range chicken. In order to ensure the success of these programs and training, more announcements on the programs needed. This will help to spread wider information and attract younger entrepreneur to involve in agriculture sectors. The questionnaire also requires the respondent to describe their alternative’s sources of capital. The finding shows that most responded favored bank loans and family loans as their alternatives sources of capital. Only five respondents agreed to consider government agency as their alternative source of capital despite all the programs implemented by Malaysia government in building and sustaining the SMEs. As for the amount needed as startup capital, most of the respondent had a start-up capital of RM10, 000 up to RM100, 000. This amount is expected to increase in years to come as cost for raw materials as part of their production sources is increasing every year. For the age group of 40 and above shows great changes in their pattern for source of capital. As this group is considered matured and have involved longer in SMEs gave better chances and higher credibility in applying loans through micro finance and bank loans. Youth entrepreneur less interested in micro finance provided by the government or even bank loans maybe due to their financial credibility which does not met the application requirement. During the study, these young entrepreneurs also expose their need for book keeping training and communication skills. Partnerships with large firms will be initiated to provide more business opportunities for SMEs. Entrepreneur development organizations (EDOs) such as SMEs Corporation Malaysia (SMEs Corp), SMEs Bank, and MTDC will continue to provide entrepreneurial training relevant to market needs. Table 12. Sources of Capital by Sectors. Sectors
Personal Savings
Micro Finance Institute / Government
Loans from family
Heritage Assets
Borrowing from friends
Bank loans
Others
Total
Services
504 73.8%
33 4.8%
58 8.5%
21 3.1%
9 1.3%
57 8.3%
1 0.1%
683 100%
Manufacture
65 73.0%
8 9.0%
5 5.6%
2 2.2%
1 1.1%
8 9.0%
-
89 100%
Development
28 73.7%
2 5.3%
1 2.6%
2 5.3%
-
5 13.2%
-
38 100%
Agriculture
11 78.6%
1 7.1%
1 7.1%
1 7.1%
-
0 0.0%
-
14 100%
environment
5 83.3%
-
1 16.7%
-
-
-
-
6 100%
Total
613 73.9%
44 5.3%
66 8.0%
26 3.1%
10 1.2%
70 8.4%
1 0.1%
830 100%
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Table 13. Alternative Sources of Capital The second source options for loans
Source of start-up capital
Total
Yes
No
Bank loans
51 (73.9%)
18 (26.1%)
69
Family Loans
43(45.3%)
52 (54.7%)
95
Revolving Fund
7 (58.3%)
5 (41.7%)
12
Government Agency
5 (71.4%)
2 (28.6%)
7
Not Necessary
4 (80.0%)
1 (20.0%)
5
Investor
1 (100.0%)
-
1
Sell Land
-
1 (100.0%)
1
111 (58.4%)
79 (41.6%)
190
Total
Table 14. Startup Capital RM < 1,000
RM 1,000-5,000
RM 5,001-10,000
RM 10,000-100,000
RM >100,000
Personal Savings
14 2.4%
65 10.9%
100 16.8%
393 66.1%
23 3.9%
595
Micro Finance Institute/ Government
2 5.0%
3 7.5%
9 22.5%
24 60.0%
2 5.0%
40
Loans from family
1 1.6%
7 10.9%
12 18.8%
39 60.9%
5 7.8%
64
Heritage Assets
3 12.0%
1 4.0%
5 20.0%
16 64.0%
-
25
1 11.1%
1 11.1%
7 77.8%
-
9
2 3.0%
9 13.6%
14 21.2%
37 56.1%
4 6.1%
66
-
-
-
1 100.0%
-
1
22 2.8%
86 10.8%
141 17.6%
517 64.6%
34 4.3%
800
Sources of Capital
Borrowing from friends Bank loans Others Total
Total
The Young Entrepreneur Fund (YEF) is another special fund allocated by the Government as part of its continuous strategy of acculturation and creation of new entrepreneurs among Malaysian youth. The purpose of this fund is to provide alternative access to the young entrepreneurs in obtaining financing to start their new business as well as for the needs of their existing business. Interestingly the alternative source in financing their capital is bank loans followed by family loans. Bank loans are favoured by the entrepreneur as source of capital apart of personal savings. Bank Negara Malaysia (BNM) in recent years has been promoting inclusive finance to enables access to suitable and affordable financial services. It is proven as in 2015 the inclusion index has increased from 0.77 in 2011 to 0.90. Nevertheless, there are still gaps, predominantly among low-income households, when it comes to usage of financial products and services. To address the gaps, BNM has undertaken various measures which include encouraging
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FIs to provide micro saving products with low committed periodical savings, offer affordable micro insurance/ micro takaful products by insurance companies and takaful operators, support the provision of customized micro financing solutions for SMEs (SMEs Annual Report, 2015, 94).
CONCLUSION The SMEs sector forms the backbone of economic development, private sector employment, capital investments, and GDP growth. Despite their importance to economic output, SMEs still have inadequate access to finance and other banking services. As a result, most of the SMEs tend to be concentrated in less capital intensive sectors, such as retail and wholesale trade. This scenario not only restricts the development of smaller enterprises, but also retards economic activity in these countries (IFC, 2014). A well-developed financial infrastructure that is able to meet the diverse financing needs of SMEs is essential to support the competitiveness and continuous growth of SMEs (BNM, 2005). SMEs could be disappearing if they not able to compete in challenging business world. According to report from OECD (2013), banking sector still remains weak potential role for filling the financing gap that SMEs need. However from business perspective bank financing should be crucial for the SMEs sector and policy measures oriented facilitating SMEs’ access to debt finance. Unlike larger firms, SMEs need financial support in developing their business. According to the Malaysia Economic Census 2011, profile of Small and Medium Enterprises identify 97.3% (645,136) business establishments in the country are SMEs. Whereas according to Malaysia 11th Plan, small and medium enterprises (SMEs) will be given special focus as they made up 98.5% of total establishments and 59% of total employment in the economy in 2015. Malaysia has increased the participation of providing programs and fund towards developing the SMEs. During the Tenth Plan, regional economic corridors have provided several initiatives to uplift the lives of communities in surrounding areas. A number of initiatives were implemented across the regional economic corridors to enable local communities to benefit from the development taking place in the region. Despite various measures and high amount of loans and financing extended to s the findings of the case study revealed that accessibility of financing remains an issue in developing SMEs. Financing assistance in the form of special funds and financing packages to targeted groups need to be a continuous effort. Financing alone however is not sufficient. The initiatives on financing will be complemented and supported by capacity building programmes to evolve strong and well-managed SMESs that would improve their prospects for better access to financing.
ACKNOWLEDGMENT A special thanks to the Ministry of Higher Education for a research grant under Niche Research Grant Scheme (NRGS) for research on Youth Entrepreneurship and Talent Development
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REFERENCES Abdullah, M. A. (1999). Small and medium enterprises in Malaysia. Brookfield: Ashgate. Bank Negara Malaysia. (2005). Annual Report. Retrieved from http://www.bnm.gov.my Bank Negara Malaysia. (2005). SMEs Access to Financing. Retrieved from www.bnm.gov.my/files/ publication/SMEs/en/2005/chap_6.pdf Bank Negara Malaysia. (2013). Circular on New Definition of Small and Medium Enterprises (SMEs). Retrieved from http://www.bnm.gov.my/ Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & Finance, 30(11), 2931–2943. doi:10.1016/j.jbankfin.2006.05.009 Berger, A. N., & Udell, G. F. (2006). A more complete conceptual framework for SMEsfinance. Journal of Banking & Finance, 30(11), 2945–2966. doi:10.1016/j.jbankfin.2006.05.008 Brockhaus, R. H. (1982). The psychology of entrepreneur. In C. A. Kent, D. L. Lexton, & K. H. Vesper (Eds.), Encyclopedia of Entrepreneurship (pp. 39–71). Englewood Cliffs, NJ: Prentice Hall. Chee, P. L. (1986). Small industry in Malaysia. Berita Publishing. Chigunta, F. (2002). Youth Entrepreneurship: Meeting the Key Policy Challenges. Wolfson College, Oxford University. Collins, O. K., Kofi, N., & Bright, K. (2015). The Challenges Behind SMEs’ Access To Debts Financing In The Ghanaian Financial Market. International Journal of Small Business and Entrepreneurship Research, 3(2), 16–30. Darren, L., & Conrad, L. (2009). Entrepreneurship and Small Business management in the Hospitality Industry. Jordan Hill, UK: Elsevier Linacre House. Department of Statistics. (2005). The Economic Census 2005. Percetakan Nasional Malaysia Berhad. Department of Statistics. (2011). The Economic Census 2011. Kuala Lumpur, Malaysia: Percetakan Nasional Malaysia Berhad. Hashim, M. K., & Wafa, S. A. (2002). Small and medium sized enterprises in Malaysia: Development issues. Prentice Hall. Hassan M. Kabir. (2015). Entrepreneurship, Islamic finance and SMEs Financing. IFSB 7th Public Lecture on Financial Policy and Stability. Kyaw, A. (2008). Financing Small medium Enterprises in Myanmar. Institute of Developing Economies Discussion Paper No. 48, Japan External Trade Organization. Levy, B. (1993). Obstacles to developing indigenous small and medium enterprises: An empirical assesSMEsnt. The World Bank Economic Review, 7(1), 65–83. doi:10.1093/wber/7.1.65
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Morris, M., & Schindehutte, M. (2005). Entrepreneurial Values and the Ethnic Enterprise: An Examination of Six Subcultures. Journal of Small Business Management, 43(4), 453–479. doi:10.1111/j.1540627X.2005.00147.x OECD/European Commission. (2014). Policy Brief on Access to Business Start-up Finance for Inclusive Entrepreneurship: Entrepreneurial Activities in Europe. Retrieved from https://www.oecd.org/ Saito, K. A., & Villanueva, D. P. (1981). Transaction costs of credit to the small-scale sector in the Philippines. Economic Development and Cultural Change, 29(3), 631–640. doi:10.1086/451275 Schoof, U. (2006). Stimulating Youth Entrepreneurship: Barriers and incentives to enterprise start-ups by young people. Series on Youth and Entrepreneurship. Geneva: International. Zarina Abd Rahman. (2013). Financial Inclusion In Malaysia: Tracking Progress Using Index. Retrieved from www.bis.org/ifc/publ/ifcb38t.pdf Zeinalnezhad, M., Mukhtar, M., & Sahran, S. (2011). A Study on benchmarking models and frameworks in industrial SMEs: Challenges and issues. International Journal on Advanced Science. Engineering and Information Technology, 1(1), 6–11.
KEY TERMS AND DEFINITIONS Access to Finance: A way of getting financing to support from the beginning of the SMEs establishment, their business development and how the impact on performance. Challenges: The difficulty facing by the entrepreneur in Malaysia SMEs. Economic Census: Study done by the Department of Statistics Malaysia and provide the overall performance of Malaysia SMEs and entrepreneurship. Entrepreneurship: Individual involved in business in different category according to the definition given under SMEs. Government Support Program: Government imitative in providing support to the entrepreneur. SMEs: Referring to Small and Medium Enterprises operating in Malaysia. Sources of Financing: Financing facility provided by the government of Malaysia and financial institutions.
ENDNOTES 3 1 2
Adapted from the Eleventh Malaysia Plan, Chapter 8, p.29 Excerpt from http://www.bnm.gov.my/files/publication/SMEs/en/2005/chap_6.pdf., 124. Excerpt from SME Annual Report, pp.84-99
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