Analysis of Microfinance Lending and Credit Assessment Methodology

Analysis of Microfinance Lending and Credit Assessment Methodology Microfinance Institutions (MFIs) core activities are driven by a social mission through provision of full range of banking needs to poor people for productive purposes, thereby contributing to the developmentl objective of poverty reduction. MFIs products and services includes micro-credit, micro-savings, micro-insurance and also remittances. Microcredit program is providing financial capital to the poor household in order to engage them in income generating activities for alleviating poverty mostly to finance small businesses agricultural loans. Typically this type of lending is not secured by any collateral but granted based on the client’s ability to generate the necessary financial means for repayment based on his or her business activities. Most of the terms and conditions for microcredit loans are flexible and easy to understand. However, there is no standard lending and credit assessment methodology employed by MFIs. We are motivated to explore and document this resear ch gap. 1.2 The Innovation and Development of Microfinance Industry in Malaysia The provision of microcredit is nothing new in Malaysia. Poverty eradication programs involve provision of credit at subsidised rate to the poor has been around since 1970s after formation of the New Economic Policy (NEP) that was instituted in 1970. The earlier micro credit program was mainly carried out by credit unions, co-operatives, specialised credit institutions and NGOs. The provision of small financing designated mostly to finance micro enterprises, agriculture sector for poverty reduction and to improve income of the Bumiputera. The legislation for microfinance regulation in Malaysia includes, Moneylender Act 2002, Banking and Financial Institution Act 1989, Development Financial Institution Act 2002, and Cooperatives Societies Act 1993, (Zakiah, 2004). The Microfinance business models are based on mass market, cooperatives, monoline and distributor network (BNM, 2010). Majlis Amamah Rakyat (MA RA), a council of trust to the Bumiputera and Credit Guarantee Corporation (CGC) are some of the pioneers to introduce micro credit to micro enterprises. The rural credit institutions comprising of Agriculture Bank of Malaysia (Agrobank), Farmers Organization Authority (LLP), Federal Land Development Authority (FELDA), Rubber Industry Smallholders Development Authority (RISDA) and other agro-based Co-operative Societies provide micro credit for the agriculture sectors. There are also a number of non-governmental organizations (NGOs) that engage in micro credit provision (Kasim and Jayasooria, 1993). These include Amanah Ikhtiar Malaysia (AIM), Yayasan Usaha Maju (YUM) and Sabah Credit Corporation (SCC) in Sabah, Koperasi Kredit Rakyat (KKR) in Selangor. Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN) is a government agency micro credit provider. While, Malaysian Islamic Economic Development Foundation (YaPEIM), a cooperatives institution providing Islamic microcredit program based on al -rahnu concept in Malaysia. Prior to 2003, Commercial banks involvement in microfinance program are just limited to extending lines of credit to AIM, and as a mediator for schemes such as the loan fund for hawkers and petty traders operated by the Credit Guarantee Corporation (CGC). In May 2003, the government launched a Micro Credit Scheme, particularly stimulating agricultural production activities as well as expanding small and medium enterprise activities. Two banking institutions namely Agrobank and Bank Simpanan Nasional (BSN), and AIM have been given the responsibility to carry out the scheme. The scheme is collateral free, and borrowers are eligible for a maximum loan of up to RM20,000 with interest rates charged at 4% per annum on reducing balance.