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Comparison Malaysia private debt institutions with other countries.

According to Standard Charter Bank (2013)s statistics, on average, 60 Malaysian declaring


bankruptcy every day. Comparing with household debt to GDP in other developing Asian
countries for 2014, Malaysia secured the first position with a value of 87%, South Korea 86%,
Thailand 84%, Taiwan 82%, Japan 75% and Singapore 72%, Hong Kong 62%, China 25%,
Indonesia 15.8%, India 15% (World Bank, 2014). Such a high level of household debt make
them vulnerable to indebtedness if there is rise in interest rate and living cost because around
44% of their total income they are just spending as loan repayment. Latest data from the fourth
quarter of the year 2014, showed that Malaysias household debt-to-gross domestic product
(GDP) ratio is 146 per cent, an increase from 139 per cent during the same period in 2007.

In Malaysia, the banking system, with its extensive branch network and increasingly flexible
financing packages, is the largest provider of household credit in Malaysia, accounting for 84%
of total household debt as at end-2014. Other than bank system, Treasury Housing Loans
Division, Development Financial Institutions, and insurance companies are also providing
household debt in Malaysia. On the other hand, majority of the Malaysian utilize this debt either
to buy/build property or motor vehicles, however, others use this for personal use, securities, or

credit

cards.

In the same way, mortgage to GDP value for Malaysians was 32%, while it is 44% for Singapore,
20% for China, 17% for Thailand, and only 2% for Indonesia (IMF, 2013).

Function of Debt Institutions in Malaysia.


Financing Household Credit
As mentioned above, debt institutions especially banking sector plays the role of Providers of
household credit to Malaysian, which they utilize either to buy property, vehicles, personal

goods, or securities. Banking institutions in Malaysia offer two types of mortgage loans, namely,
conventional and Islamic. Conventional loans account for 90% of mortgages. Banks typically
offer plain-vanilla mortgages at fixed or variable interest rates or a combination of the two.
Approximately 83% of residential mortgages are variable rate mortgages, with adjustable rates
pegged to the base lending rate (BLR) of individual institutions. In an increasingly competitive
environment, banks also offer mortgage packages with repayment flexibility, such as graduated
repayment schemes (lower initial instalment payments that increase gradually over time) and
loans with longer maturities.
The products offered under Shariah-based Islamic house financing generally have the same
characteristics as conventional mortgages but are based on the concept of Bai Bithaman Ajil
(BBA).3 Islamic mortgages carry mainly fixed interest rates. However, banking institutions have
begun to offer variable rate Islamic mortgages following a review of the BBAs variable rate
financing mechanism conducted in November 2004 to promote efficiency in the pricing of this
mode of financing.
Mobilizing Saving for Capital Formation
The commercial banks help in mobilizing savings through network of branch banking. People in
developing countries have low incomes but the banks induce them to save by introducing variety
of deposit schemes to suit the needs of individual depositors. They also mobilize idle savings of
the few rich. By mobilizing savings, the banks channelize them into productive investments.
Thus they help in the capital formation of a developing country.
Financing Industry

The commercial banks finance the industrial sector in a number of ways. They provide shortterm, medium-term and long-term loans to industry. In India they provide short-term loans.
Income of the Latin American countries like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks also advance long-term loans to industry.

Microfinance Malaysia

Malaysian government established microfinance sector in order to reduce poverty especially in


Bumiputra and to reduce the dependency of poor people on the government by promoting the
concept of self reliance. As a result, three microfinance institutions, namely, Amanah Ikhtiar
Malaysia (AIM, the first microfinance institute in Malaysia established in 1987), Yayasan Usaha
Maju (YUM) and Economic Fund for National Entrepreneurs Group (TEKUN) has been
established. AIM is a non-government organisation (NGO) while YUM and TEKUN are under
the Ministry of Agriculture and Agro-based Industry Malaysia.
Amanah Ikhtiar Malaysia (AIM)
A project carried out by the researchers of Centre for Policy Research of University Science
Malaysia (USM), namely, Dr David Gibbons and Professor Sukor Kasim, paved the road for the
development of AIM under the project name Ikhtiar sponsored by sponsored by the Asia and
Pacific Development Centre (APDC), Islamic Economic Development Foundation of Malaysia
(YPEIM) and the Selangor State Government. Project Ikhtiar was successful and has shown
that a group lending system similar to the Grameen Bank model based on the principle that get a
loans are better than charity to interrupt poverty started in Bangladesh by Muhammod Yunas in
1976, can be applied in Malaysia. The basic idea of Grameen was that rural or village people
have potential but little or no resources for the execution of their skill, providing microloan will
encourage them to utilize their skill for the betterment of their families. On a similar lines, AIMs
micro lending services have been widely offered throughout Malaysia.

Table-1. AIMs Loan Schemes


Name
Ikhtiar Loan Scheme 1 (Skim
Pembiayaan Ikhtiar 1 SPI 1)
Ikhtiar Loan Scheme 2 (Skim
pembiayaan Ikhtiar 2 SPI 2)
Ikhtiar Loan Scheme 3 (Skim
Pembiyaan Ikhtiar 3 SPI 3)
Single Mother Loan Scheme
(Skim Ibu Tunggal - SKIT)

Income and Amount


income of not more than RM340
(USD89) / Max loan amount up-to 4900
income exceeding RM600 (USD158) /
Max loan amount up-to 9900
income exceeding RM1,000 (USD263)/
loan up to RM10,000 (USD2,631)
Income not exceeding 425 to 1200 based
on State/ special Education loan Scheme
up to RM1,000 (USD263) & special
housing Loan Scheme up to RM5,000
(USD1,315)

Repayment
50 weeks to 100
weeks
50 to 150 weeks
150 weeks
50 weeks to 100
weeks

Yayasan Usaha Maju (YUM)


A project carried out by the researchers of Institute for Development Studies Sabah (Institute for
Development Studies Sabah) or IDS and Rural Development Corporations (KPD) under the
name of Project Usahamaju (PU) in 1988, which paved the road for the second Grameenmodelled microfinance institution in Malaysia is Yayasan Usaha Maju located in Sabah. On
January 26, 1995 Chief Minister Datuk Salleh Tun Said has announced plans PU incorporation
into a trust called Yayasan Usaha Maju. Sabah is the second largest state in Malaysia after
Sarawak (Sabah, 2009). There are 32 officially recognised ethnic groups in Sabah, with Kadazan
the largest group, followed by Bajau and Murut (Sabah, 2009). Sabahs economy traditionally
relied heavily on timber exports and some agricultural products such as cocoa and rubber (Sabah,
2009). In 1970, Sabah was one of the richest states in Malaysia but in 2007 it was recorded as
one of the poorest (Sabah, 2009). In the Ninth Malaysia Plan (2006-2010), Sabahs poverty was
three times higher than the national average, caused by the inequitable distribution of wealth
between the state and the federal government (Sabah, 2009).

National TEKUN
National TEKUN formerly known as the National TEKUN Foundation is an agency under the
Ministry of Entrepreneur and Cooperative Development, which was established on 9 November
1998. The aim of the establishment of the National TEKUN is to provide financing facilities to
Bumiputera easy and fast to start and develop their business. National TEKUN now under the
Ministry of Agriculture and Agro-Based Industry
Malaysian microfinance institutions (AIM, YUM, TEKUN) have different types of lending
systems and provide services to a different strata of people. AIM and YUM offer loans to poor
and hard-core poor women members, whereas TEKUN gives loans to both poor and not-so-poor
men and women borrowers. AIM uses a group lending scheme, whereas TEKUN and YUM use
an individual lending scheme.
AIM and TEKUN provide services all over Malaysia, while YUM operates only in Sabah state.
In terms of repayment rates, the three Malaysian microfinance institutions have dissimilar
degress of success. In 2008 for example, AIM achieved a commendable repayment rate of
98.98% (AIM, 2009), YUM achieved 90.72% (YUM, 2009) while TEKUN only achieved a loan
repayment rate of 85.0% (Tekun, 2009).
In general, microfinance institutions can be divided into three types: group lending, village
banking (a bank managed and operated by the village members), and individual lending(standard
bilateral lending contracts).

Table 1: Comparison of Malaysian microfinance institutions, Grameen Bank and the BPR

system
Characteristic

AIM

TEKUN

YUM

Target borrower

Female only

Both female and male

Female only

Service outreach

All over Malaysia

All over Malaysia

Sabah only

Loan eligibility

People who live at or below


the poverty line

People who live at or


below the poverty line and
not-so-poor people

People who live at or


below the poverty line

Lending design

Group lending

Individual lending

Individual lending

Loan size

Min: RM1,000
Max: RM20,000

Min: RM500
Max: RM50,000

Min: RM100
Max: RM20,000

Loan instalment

Weekly

Weekly, monthly and


seasonally.

Weekly

Grace periods

1 week after receiving the


loan

Flexible - according to the


project

1-2 weeks after receiving


the loan

Management
charge

10%

4%

10% per 50 weeks for


General Loan Scheme.
18% per 50 weeks for
Short-Term Loan
Scheme.

Compulsory
savings

RM1-RM15 per week

5% from annual
repayment

2% from the loan

Table 2: Comparison of Malaysian microfinance institutions, Grameen Bank and the BPR
system
Malaysian
Microfinance
Institutions
(AIM, TEKUN YUM)

Microfinance
institute

Microfinance
institute Bank

Grameen BankBangladesh

Perkreditan
Rakyat (BPRIndonesia)

Type of institution
Source of operation

Subsidised
Unsubsidised
(i) Management fees
(i) Interest rates
(ii) Government grants and(ii) Savings
soft loans

Unsubsidised
(i) Interest rates
(ii) Savings
(iii)
Investment
from borrower
and local people
Individual lending

Lending design

AIM

: Group
lending
TEKUN: Individual
lending
YUM : Individual
lending

Group lending

Product offered

Microcredit

Microcredit

Microcredit

Micro-saving

Micro-saving

Micro-insurance
Pension fund

Lending contracts
(i) Interest rate

Fixed to all kind of


loan schemes.

Different on each
loan schemes

Different on each
loan schemes

(ii) Repayment mode

AIM and YUM:


Weekly to all kind of
business and
borrowers.

Flexible according to
borrowers business
revenue cycle.

Flexible according to
borrowers business
revenue cycle.

According to

According to

(iii) Grace periods

TEKUN: Weekly
mostly to small
business activity and
monthly/seasonally to
agricultural businesses
AIM
: 1 week

YUM : 2 weeks
harvesting cycle
TEKUN : According to
harvesting cycle.

harvesting cycle

Low transaction cost, Risk Hedging, and Efficient Risk Pricing


Financial intermediation promotes the risk pooling phenomena, having large resources and
skilled person, these private institutions will lower the transaction cost, better evaluation of
creditors liquidity, and efficient pricing of borrowing that otherwise be higher.

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