Accessibility to microcredit and its impact on small and medium sized enterprises' performance in Malaysia : A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy at Lincoln University

Small and medium-sized enterprises (SMEs) play a crucial role in Malaysia’s economic growth by creating employment, generating income and stimulating growth. However, access to finance among SMEs lags behind larger enterprises, which obstructs the growth and development of SMEs. The limitation of the formal financial institutions in providing credit to low-income groups such as SMEs gave rise to microfinance programs. The Central Bank of Malaysia has designed a micro financial institution framework to provide a platform for SMEs to access microcredit. However, according to Department of Statistics Malaysia only 32.1% of SMEs obtained finance from the banks and microfinance institutions in 2016. Thus, access to microcredit remains the major challenge to most SMEs. However, access to microcredit among Malaysian SMEs is not well documented. Given such a background, this study aims to bridge the gap in the literature by investigating the determinants of Malaysian SMEs’ accessibility to microcredit, since obtaining bank finance is not popular among small scale enterprises. Further, this study examines the relationship between access to microcredit and SMEs’ performance. The study employs logistic regression to investigate the determinants of accessibility to microcredit among SMEs. The results show being married, ethnicity, financial training, household income, age of the enterprise, ownership, networking with non-governmental organizations, networking with a microfinance institution, networking with business associations and distance of the business premises from the nearest microcredit provider are statistically significant in influencing SMEs’ accessibility to microcredit. In addition to determining the factors that influence accessibility to microcredit, this study attempts to determine the factors that affect the choice of microcredit providers such as commercial banks, development financial banks and microfinance institutions. Based on a multinomial logit model, owner characteristics such as gender, age, marital status and ethnicity have less influence on determining microcredit provider choices. However, different lending characteristics of microcredit providers for loans such as loan amount, distance of the business premises from the microcredit provider, loan processing, loan duration and mode of interest payments are significant in influencing microcredit demand among borrowers. This study also investigates the loan rate charged by microcredit providers for microloans. Analysis using ordinary least squares is performed to determine the factors that affect the finance rate charged to SMEs. The results show the rate charged on a microcredit loan can be explained by SME characteristics, loan characteristics, networking and creditworthiness. The Propensity Score Matching (PSM) estimation which shows a positive impact of microcredit suggests that access to microcredit is of the utmost importance in improving SMEs’ sales growth. After mitigating possible bias because of time-invariant unobservable factors based on the Difference-in-Difference method, the magnitude of the impact of microcredit on sales growth is relatively higher than PSM. However, the impact of microcredit on employment growth is unexpected. The endogenous switching regression model is used for dealing with endogeneity. The results are consistent with propensity score matching and difference-in-difference methods and, therefore, we can conclude that access to microcredit positively contributes to the performance of SMEs in Malaysia in terms of sales growth. However, this study does not find any significant relationship between the use of microcredit and employment growth.