The Factors Financial Institutions Rejected Malaysian SMEs Loan Application

Journal of Environmental Treatment Techniques

2020, Volume 8, Issue 1, Pages: 202-206

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal weblink: http://www.jett.dormaj.com

The Factors Financial Institutions Rejected

Malaysian SMEs Loan Application

1,2

Raihayu Mustafa , Mohd Fazli B Mohd Sam , Albert Feisal B Ismail

Faculty of Technology Management and Technopreneurship, Universiti Teknikal Malaysia Melaka, 75450 Melaka, Malaysia

Centre for Robotics and Industrial Automation (CeRIA), Fakulti Kejuruteraan Elektrik (FKE), Universiti Teknikal Malaysia Melaka,

5450 Melaka, Malaysia

Received: 24/06/2019

Accepted: 02/10/2019

Published: 30/02/2020

Abstract

SMEs companies can be considered as a back bone of national economy. Same goes to SMEs companies in Malaysia where the

SMEs companies play an important role in the economic development of Malaysia. Finance is one of the important aspects for the

growth of SMEs companies and has always been an obstacle for SME companies to continue growing. To date various studies have

been conducted about SMEs challenges with extensive perspective and examines different factors that may be responsible for the

unstable and limited growth of SMEs. Malaysian government has provided numerous schemes for training to boost up SMEs

companies. Most financial institution hardly approves SMEs loan application because SMEs companies are considered risky. Besides

that, most of SMEs incapable fulfill requirement asked by financial institution such as the collateral, good business banking history,

the complete support document and etc. By analyzing previous literature review on the topic of SMEs challenges found that one of

main challenges to Malaysian SME is accessing credit.

Keywords: SME Challenges, SME financing, Financial Institutions

SMEs sector in Malaysia can do better regarding their

Introduction

contribution toward the national GDP growth and the

increasing number of employments but because of some

constraints they become stunted. One of the major problems

faced by SMEs is the financial constraint. There are

difficulties for them in having access to credits from the

financial institutions (4).

Malaysia SMEs companies play an important role for the

national economy because they have exerted much influence

on social-economic development based on its outstanding

contribution to employment and GDP growth. In 2015 the

number of employment is 64.5% and increasing in 2016 by

5.3% while for GDP growth increase by 36.6% in 2016

The aims of this study are 1) to identify the challenges

faced by SMEs in obtaining credit in Malaysia, 2) to find out

the solution that limits the SMEs in obtaining credit from

financial institution.

where in 2015 the GDP is 36.3%. Besides that, the numbers

of exporting our product also increase from 2015 by 17.7% to

016 by 18.6% (5, 8, 9).

A search of Malaysia's SME literature reveals a gap in the

study that examines the factors affecting the performance of

SMEs in Malaysia. Furthermore, although there is successful

historical evidence about the development of SMEs in

Malaysia, the development of SMEs in eastern Malaysia such

as Sabah is slower compared to Malaysia's peninsula.

According to Zindiye, 2008, a study was conducted in

Zimbabwe's industry but this may not be generalized directly

to SMEs in Malaysia because the culture, standard may be

different from others countries (2, 11,15).

2 Literature Review

2.1 Research Model

Figure 1 showed the research model which have been

adopt and adapt. There are numerous previous studies

regarding this research topic but most of it discuss only on

the surface. There are four independent variables that give

impact toward the Malaysian Sme’s performance. The

independent variables are credit access, administration, bank

charges and fees, and package facilities. Most of financial

institutions rejected the Malaysian Sme’s loan application

because of these independent variables.

Corresponding author: Raihayu Mustafa, Faculty of

Technology Management And Technopreneurship. Email:

Raihayu_mustafa@yahoo.com.my.

Journal of Environmental Treatment Techniques

2020, Volume 8, Issue 1, Pages: 202-206

H3: There is a positive relationship between bank

charges and fees and performance of SMEs in the

manufacturing industry in Malaysia.

.6 Package Facilities ( IV 4 )

According to Nurbani, 2011, mention that SME’s

financial problem still occur due to the facilities packaged by

the financial institution are limited. It is difficult for SME’s

industry whenever they plan to do the loan application.

H4: There is a positive relationship between the package

fasilities and performance of SMEs in the manufacturing

industry in Malaysia.

Source: Waari and Mwangi (2015)

Figure 1: Research Model of SMEs Performance

.2 Electric and Electrical Industry

Since the 2010s, in Malaysia the electrical and electronic

industry has become the leading manufacturing sector. This

industry has a part of distribution to the production output,

exports, and employment of the country. In 2016, Malaysia

generated 156,665 GWh of gross electricity which coal is the

main source of energy used for electricity generation. In

2.7 Theory Of Constraint

According to Rahman 1998, in the mid 1980s the theory

of constraint first been presented in a books of Eli Goldratt’s.

The purpose of this theory can be considered as the

opportunity for improvement in a system. Management

attention and awareness on the constraint occur are important

because the constraint may lead the organizational to achieve

its goal (3, 7,10, 11, 16,17).

016, Malaysia's installed capacity increased to 33,023 MW

from 30,439 MW in 2015 by 8.5 percent and the annual

increase in electricity sales in 2016 amounted to RM49.4

billion, up 6.7 per cent. (1)

Methodology

.3 Credit Access ( IV 1 )

Nurulhasanah (2016), mentioned that the challenge for

.1 Research Design

The research applied the quantitative method as it

small and medium-sized enterprises is not a new discussion

in the literature review, especially since 1983 until now. Lack

of access to credit is one of the most discussed challenges.

According to Teoh and Chong (2008), it argued that lack of

access to credit is the major obstacles to the development of

entrepreneurship.

H1: There is a positive relationship between the credit

access and performance of SMEs in the manufacturing

industry in Malaysia.

approach. Numbers of respondent were selected as the

resemblance of the authority of the SMEs manufacturing in

electrical industry. For the primary data the survey will be

conducted by using questionnaire method in order to generate

data for this study. The questionnaire consists of 4 sections

and using the likert scale.

Besides that, secondary data also had been used such as

the journal, books, article and so forth. The validity and

reliability of data will be concerned as it will show the quality

of the study. The total number of respondent will be 150,

which consist of 4 states Kuala Lumpur, Selangor, Johor and

Pulau Pinang. These four states are among the highest

number of SMEs manufacturing in electrical industry. The

result were then be analyzed using the SPSS.

.4 Administration ( IV 2 )

John (2011) mentioned that problem related to finance

includes the lack of track record required by the bank. Bank

difficult to reflect either the company is doing well or not in

the business. According to Asma (2015) showed that SMEs

in most countries have very limited access to formal funding.

Building and sustaining small and medium-sized enterprises

is difficult because the majority of financial institutions felt

that SMEs are risky being offered the capital.

H2: There is a positive relationship between the

administration and performance of SMEs in the

manufacturing industry in Malaysia.

Data Analysis

.1 Normality Test

Table 1 displays skew and kurtosis values for all

independent and dependent research variables. First, the

results show that the value of skewness ranges from 0.036 to

.813 for all independent variables. In contrast, the kurtosis

ranges from -0.189 to 0.819 for all variables. According to

West, Finch & Curran, 1995, based on the result, all

independent variables and dependent variables are clearly

shown to be acceptable in terms of normality. This is because

the skew and kurtosis value for all variables is consistent with

the thumb rule where the value is less than two and seven

respectively.

.5 Bank Charges and Fees ( IV 3 )

High bank charges and fees, high borrowing cost and

other charges will be faced by the SME if they manage to

obtained loan from the financial institutions (6). According to

Wanjohi et al 2008, SME’s in Kenya rather seek other

alternatives which low interest rate loan such as the pyramid

scheme because of the high borrowing cost from the financial

institutions.

Journal of Environmental Treatment Techniques

2020, Volume 8, Issue 1, Pages: 202-206

Table 1: Summary of Skewness and Kurtosis

Skewness

Std. Error of Skewness

Kurtosis

Std. Error of Kurtosis

Valid

150

Missing

IV1(1)

IV1(2)

IV1(3)

IV1(4)

IV2(1)

IV2(2)

IV2(3)

IV2(4)

IV3(1)

IV3(2)

IV3(3)

IV3(4)

IV4(1)

IV4(2)

IV4(3)

IV4(4)

DV1(1)

DV1(2)

DV1(3)

DV1(4)

.235

.190

.235

.280

.723

.813

.603

.723

.077

.036

.097

.193

.456

.519

.477

.524

.309

.498

.539

0.198

-.312

-.406

-.312

-.204

.054

.372

.136

.054

-.349

-.423

-.307

-.230

.391

.702

.488

.277

-.364

-.189

.819

0.394

Table 2: Results of Reliability Test: Cronbach’s Alpha

Variables

Construct

Cronbach's Alpha

Number Of Items

DEPENDENT VARIABLE

INDEPENDENT VARIABLE 1

INDEPENDENT VARIABLE 2

INDEPENDENT VARIABLE 3

INDEPENDENT VARIABLE 4

SME PERFORMANCE

CREDIT ACESS

ADINISTRATION

0.879

0.968

0.957

0.971

0.987

BANK CHARGES AND FEES

PACKAGE FACILITIES

.2 Reliability Test

4.3 Pearson’s Correlation Analysis

Nunnally et al. (1994) stated that a value greater than

.60 is considered acceptable for Cronbach's alpha

The correlation coefficient in the Pearson correlation

between each pair of independent variables should not exceed

0.90 (Hair, Black, Anderson and Tatham, 2006). According

to Hair et al, 2006, this is because if the correlation value

exceeds 0.90, the data may be suspected of having serious

collinearity problem. In Table 3, the highest coefficient of

correlation between credit access and performance of SMEs

is 0.840 and is still below 0.90. It is therefore assumed that in

this research there is no multicollinearity problem.

coefficient. The closer the alpha of Cronbach is to 1.00, the

more reliable the scale will be (Armstrong and Foley, 2003).

This indicates, therefore, that the items used in the build are

reliable and consistent. As been showed in the table, all the

cronbach’s alpha are closed towards 1.00 which indicates that

all variables are reliable.

Journal of Environmental Treatment Techniques

2020, Volume 8, Issue 1, Pages: 202-206

Table 3: Pearson Correlation Matrix

.840

.713

.476

.774

.666

.503

.818

.615

.541

.605

.000

Pearson

Correlation

.000

Sig. (2-tailed)

150

Table 4: Coefficients

Model

Constant)

Unstandardized Coefficients

Standardized Coefficients

Beta

Sig.

Std. Error

(

-.052

.351

.200

.177

.261

.087

.031

.023

.032

.028

-.603

11.455

8.527

5.550

9.429

.548

.000

.395

.248

.184

.312

.4 Multiple Linear Regression Analysis

Table 6 shows that all the independent variables are

organization can growth and expand well. As a result, it will

lead to a better performance.

significant related to the dependent variable as all the four

independent variables met the rule of thumb where the p-

value is less than 0.05. Then, an unstandardized coefficient

linear equation is formulated: Performance of SMEs = -.052+

Lastly, the result shows that there is a significant positive

relationship between package facilities offer by financial

institution with performance of SMEs. This is consistent with

the findings of past researches in the context of package

facilities affect the performance of SMEs such as Nurbani

(2011) and Anthony (2015).

In conclusion, the research goals of this study have been

achieved. Development of hypotheses, theoretical framework

and design of research were designed to achieve the research

goals. There are four determinants in this study that have a

significant impact on small and medium-sized enterprises

.351CA + 0.200AD + 0.177BC + 0.261PF Where, N = 150

CA = Credit Access AD = Administration BC = Bank

Charges And Fees PF = Package Facilities by evaluating the

unstandardized coefficients linear equation formed above, it

is found that each independent variable has varied relative

importance of association with the dependent variable.

(

SMEs) performance.

Discussion and Conclusion

According to this research study, there is a significant

Based on the results, credit access, administration, bank

charges and fees and package facilities by financial

institutions are significantly linked to the company's

performance. The independent variable that have the

strongest positive relationship with SME performance are the

credit access and package facilities by financial institutions,

followed by administration and bank charges and fees.

Recommendations for the academia, they could study in

deep more about these topics and should find another gap to

be solve. As for the industry which is the Malaysian Sme’s,

they should improve on the gap that had been discusses and

the financial institution should educate the sme companies,

what is the correct way for they to do the loan application in

future. The government also should play their roles which

provides scheme that are suitable for the sme industries, send

them to training or make an exhibition to make the sme

companies exposed about this matters.

negative relationship between credit access and performance

of SMEs in Malaysia's manufacturing industry. This study

found out that with sufficient credit access will lead to the

increasing of business performance of SMEs, and an

insufficient credit access will lead to bad performance of

SMEs. This result supports prior researches such as Siti

(2009), Abdul (2016) and Anthony (2015).

The result also indicates that there is a significant positive

relationship between the administration and performance of

SMEs. This result is supported by studies carried out by

Hasnah (2013) and Nurbani (2011), where they found that the

good administration works by the organization can lead to a

higher organization performance.

In the research, bank charges and fees is found to have a

significant positive relationship with increased performance

of SMEs in Malaysia. This result is consistent with the prior

researches' findings (Henry, 2016) where lower bank charges

and fees for loan application will enhance the overall

performance of SMEs in Malaysia. With the decrease of bank

charges and fees, the SMEs will easier to obtain the loan and

they could pay the loan as schedule without problem and the

Acknowledgement

This study supported by Universiti Teknikal Malaysia

Melaka (UTeM), Ministry of Higher Education (MOHE),

Malaysia. All errors and omissions are the responsibility of

the authors.

Journal of Environmental Treatment Techniques

2020, Volume 8, Issue 1, Pages: 202-206

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