Academic journal article Journal of Southeast Asian Economies

Examining the Effect of Microcredit on Poverty in Malaysia

Academic journal article Journal of Southeast Asian Economies

Examining the Effect of Microcredit on Poverty in Malaysia

Article excerpt

I. Introduction

The poverty rate in Malaysia has declined dramatically after its independence. While 49.3 per cent of Malaysian households lived below the poverty line in 1970, the poverty rate has reduced significantly to 16.5 per cent in 1990, and further declined to 3.6 per cent in 2007 (EPU 2008). The reduction of poverty rate can be attributed to the rapid economic growth in Malaysia which generated higher-paid employment opportunities and profitable micro and small-scale business opportunities (Ministry of Finance Economic Report 2008/09). Moreover, the Government of Malaysia undertakes several strategies to increase productivity, diversify sources of income and improve the quality of life of the poor. These poverty reduction strategies were the integrated and integral part of Malaysia's core development plans. The government encourages and works together with private sectors and state-based poverty eradication organizations. The leading organizations working towards socio-economic development of the poor and hardcore poor households in Malaysia include: (1) Tabung Ekonomi Kumpulan Usahawan National (TEKUN, or National Entrepreneurs Economic Group Fund), (2) Agrobank, (3) Lembaga Kemajuan Ikan Malaysia (LKIM, or Malaysia Fisheries Development Board), (4) Yayasan Basmi Kemiskinan (YBK, Poverty Eradication Foundation), and (5) Amanah Ikhtiar Malaysia.

However, the client selection process as well as product and services offered by each programme are not the same. TEKUN was established in 1998 as a foundation under the Ministry of Entrepreneur Development and Cooperatives. It provides loans only to bumiputras who currently own and are directly involved in any business, even though they are not necessarily poor or hardcore poor. Agrobank provides microcredit to all Malaysian micro-entrepreneurs, which are labelled as "Entrepreneur Capital 1 Malaysia". It is also not primarily focused on poor and hardcore poor households in Malaysia. LKIM was established to offer several small-scale credit services to improve the socio-economic status of the fishing communities only. LKIM targeted fishermen, who do not necessarily have to be poor or hardcore poor. YBK was launched by the Selangor state government and it provides financial services only in that state. The objective of YBK is to improve the quality of life as well as produce entrepreneurs and small-scale businessmen among hardcore poor households in Selangor.

On the other hand, AIM was established in 1987 to provide small-scale financial services and training only to poor and hardcore poor in order to improve their socio-economic condition. AIM uses the group-based model of Grameen Bank, a Bangladeshi microfinance organization (MFO). This model has been replicated by many MFOs all over the world. AIM selects their clients based on their average monthly household income. Households with average monthly household income below the poverty line income (PLI) would be considered as absolute poor, while households with average monthly household income below half of the PLI would be categorized as hardcore poor. (Since 1976, the Malaysian Government has calculated the PLI based on the necessity of life and other basic needs, which includes food and non-food items.) AIM only selects those households whose average monthly household income falls below the PLI, which includes both poor and hardcore poor households.

AIM provides three economic loans, namely I-Mesra loan, I-Srikandi loan, and I-Wibawa loan. AIM also provides a recovery loan known as I-Penyayang loan. In addition, AIM provides education loan (I-Bistari) and housing/multipurpose loan known as I-Sejahtera. No legal action would be taken if borrowers fail to settle their payments. As at August 2010, AIM has extended their outreach to eighty-seven branches in Malaysia. There are 60,497 groups in 6,646 centres currently serving a total of 254,116 clients with a 99.42 per cent repayment rate (AIM 2010). …

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