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A PROPOSED INTEGRATED CASH WAQF MICRO ENTERPRISE INVESTMENT (ICWME-I) MODEL FOR

MITIGATING THE FINANCIAL AND HUMAN CAPITAL DEVELOPMENT CHALLENGES OF MICRO

ENTERPRISES IN MALAYSIA

BY

MOHAMED ASMY BIN MOHD THAS THAKER

A dissertation submitted in fulfilment of the requirement for the degree of Doctor of Philosophy in Economics

Kulliyyah of Economics and Management Sciences International Islamic University Malaysia

MARCH 2015

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ii

ABSTRACT

This study has developed an Integrated Cash Waqf Micro Enterprise Investment (ICWME-I) Model that is aimed at enhancing financial and human capital development services for micro enterprises. In this model, Cash Waqf Institution (CWI) – an established separate entity of SIRCs or corporate sector will raise Cash Waqf fund in the form of real money and Waqf Certificate. CWI will equally provide financial services to micro enterprises by forming Musharakah Mutanaqisah (Diminishing Partnership) arrangement. Furthermore, prior to obtain financial services from CWI, micro enterprises have to join the human capital development programmes provided by CWI. CWI will provide training centre that offers various kinds of training programmes to equip them with various skills related to micro enterprises.

Thus, this model suggests ways of improving and meeting the need of micro enterprises in Malaysia by providing affordable financial and human capital development services. The study uses mixed method (interview and survey) approach.

The interview was conducted to validate ICWME-I Model in terms of its suitability, applicability and the prospects. The findings from interviews reveal that the experts have positive perception and attitudes towards the proposed ICWME-I Model.

Besides, the experts opine that ICWME-I Model is applicable in Malaysia and has tremendous benefits for micro enterprises. Similarly, the results from survey, analysed using Structural Equation Modeling (SEM) based on Theory of Reasoned Action (TRA) hypothesize that behavioral intention of micro enterprises to use ICWME-I Model is significantly and positively impacted by the attitude and subjective norm of micro enterprises. This thus suggests that when the micro entrepreneurs have a more positive view about the outcome of ICWME-I Model, the more favourable their attitude toward the behavior and subsequently, the stronger their intention to use ICWME-I Model to finance their businesses and also for human capital development.

Besides, it is believed that the social pressure groups that assert subjective norms, including family members, relatives, friends, neighbour and co-workers, influence the decision making process for micro enterprises who are interested in using ICWME-I Model in the future.

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ABSTRACT IN ARABIC

(CWI SIRCs

(CWI

Diminishing

Partnership CWI

CWI

ICWME-I

ICWME-I ICWME-I

SEM TRA

ICWME-I ICWME-I

ICWME-I ICWME-I

ICWME-I

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APPROVAL PAGE

The dissertation of Mohamed Asmy Bin Mohd Thas Thaker has been approved by the following:

______________________________________

Mustafa Omar Mohammed Supervisor

______________________________________

Jarita Duasa Co-Supervisor

_____________________________________

Moha Asri Abdullah Co-Supervisor

______________________________________

Norma Md Saad Internal Examiner

_______________________________________

Rosylin Mohd Yusof External Examiner

_______________________________________

Magda Ismail A. Mohsin External Examiner

________________________________________

Radwan Jamal Yousef Elatrash Chairperson

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DECLARATION

I hereby declare that this dissertation is the result of my own investigation, except where otherwise stated. I also declare that it has not been previously or concurrently submitted as a whole for any other degrees at IIUM or other institutions.

Mohamed Asmy Bin Mohd Thas Thaker

Signature………. Date………

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COPYRIGHT PAGE

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

DECLARATION OF COPYRIGHT AND AFFIRMATION OF FAIR USE OF UNPUBLISHED RESEARCH

Copyright © 2015 by Mohamed Asmy Bin Mohd Thas Thaker. All rights reserved.

A PROPOSED INTEGRATED CASH WAQF MICRO ENTERPRISE INVESTMENT (ICWME-I) MODEL FOR MITIGATING THE FINANCIAL AND HUMAN CAPITAL DEVELOPMENT CHALLENGES OF MICRO ENTERPRISES IN

MALAYSIA

No part of this unpublished research may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the copyright holder except as provided below.

1. Any material contained in or derived from this unpublished research may only be used by others in their writing with due acknowledgement.

2. IIUM or its library will have the right to make and transmit copies (print or electronic) for institutional and academic purposes.

3. The IIUM library will have the right to make, store in retrieval system and supply copies of this unpublished research if requested by other universities and research libraries.

Affirmed by Mohamed Asmy Bin Mohd Thas Thaker.

………. ………..

Signature Date

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DEDICATION

My Parents Mohd Thas Thaker and Ummul Nabisha and

My Wife Nor Ashikin

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ACKNOWLEDGEMENTS

In the name of Allah, The Most Compassionate, The Most Merciful. Alhamdulillah, all praise be to Allah, the Most Gracious and the Most Merciful. May His peace and blessings be upon our beloved Prophet Muhammad Sallallaahua’laihiwasallam and upon his family and his companions. My utmost thanks to Allah for His blessings and for granting me the persistence and the endurance to complete this thesis successfully.

I certainly would like to acknowledge with the gratitude for my supervisors Prof. Dr Mustafa Omar Mohammed for his wonderful support, valuable guidance, intellectual stimulus, assistance, support and encouragement and all countless help throughout my PhD journey. I had indebted to him for all the wisdom and experience that he shared with me throughout my PhD journey. I appreciate all his contributions of time and ideas to make my PhD journey more productive. I am also heavily indebted and thankful to my two co-supervisors, Prof Jarita Duasa and Prof Moha Asri Abdullah for their precious supervision that propelled me towards the completion of this thesis. I would not have completed this thesis if they had not offered such infinite patience, critical commentaries and productive arguments. It was my good fortune to have benefited greatly from their excellent supervision.

I would like to thank my family for all their love and encouragement. For my parents, Mohd Thas Thaker and Ummul Nabisha, who always pray for my goodness and raised me with an endless love and patience. I also owe my special thanks to my beloved wife, Nor Ashikin for her patience, sacrifice, understanding and assistance, and always been my sources of inspiration and happiness, throughout this long journey. To our first baby, who will be born in near time, I would like to say Alhamdullilah again to Allah SWT for His blessing and His reward. Also to my siblings, Raslan and his family, Faizanah and her family and Hassanudin, I would like to express my gratitude for their prayers and patience. My sincere appreciation is dedicated to my family in law Haji Ab Rahman and Hjh Rokiah for their support and prayer.

It is my pleasure to dedicate my special thanks and appreciation to my sponsors, particularly International Islamic University Malaysia and the Ministry of Higher Education of Malaysia for giving all the financial support throughout the duration of my studies. My gratitude also extended to the experts and micro entrepreneurs for their cooperation in answering the questionnaires for this study and everyone who has directly or indirectly contributed to the successful accomplishment of this thesis.

Lastly, I also would like to express my gratitude to all my friends and colleagues, who are all important for me, for their support and prayers throughout my PhD journey. If I write their names surely the paper will not be sufficient for all.

However I will try to mention some of them. Among them are Dr Athaur Rahman and family, Dr Hafiz Mursaleen, Dr Md Fouad Bin Amin, Dr Anwar Allah Pitchay, Dr Shabir A. Hakim, Dr Nafiu Oladokun Olaniyi, Dr Azura Omar, Dr Muhammad Abduh, Dr Rafiq Idris, Dr Omar Bhatti, Dr Abdul Momen, Dr Sakeeb Ferdaous, Dr

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Abdel Ghani Echabi, Dr Abdullah Ahmed, Dr Weni, Dr Maya Puspa, Hjh Rozita, Dr Marhanum, Dr Abideen Adewale, Dr Fany Al-Farisi, Dr Fatimah Salwa, Dr Hidayatul Ihsan, Dr Ahmed, Dr Azlin Alisa, and Bro. Nazrullah

May Allah always give His blessings to them in this world and the hereafter.

Ameen.

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TABLE OF CONTENTS

Abstract ... ii

Abstract in Arabic ... iii

Approval Page ... iv

Declaration ... v

Copyright Page ... vi

Dedication ... vii

Acknowledgements ... viii

List of Tables ... xiv

List of Figures ... xvii

CHAPTER ONE: INTRODUCTION ... 1

1.0 Introduction... 1

1.1 Background of Study ... 1

1.2 Problem Statement ... 15

1.3 Research Questions ... 17

1.4 Research Objectives... 17

1.5 Scope of the Study ... 18

1.6 Significance of the Study ... 18

1.7 Organization of the Study ... 20

CHAPTER TWO: OVERVIEW OF MALAYSIAN MICRO ENTERPRISES AND THE REVIEW OF RELATED LITERATURE ... 21

2.0 Introduction... 21

2.1 An Overview of Micro Enterprises in Malaysia ... 21

2.2 Availability of Micro Enterprises Financing ... 24

2.2.1 Microfinance ... 26

2.2.2 Commercial Bank ... 27

2.2.3 Development Financial Institutions (DFIs) ... 28

2.2.4 Government Agencies ... 30

2.2.5 Cooperative ... 31

2.3 The Issues of Existing Financial Model Faced by Micro Enterprises in Malaysia ... 32

2.4 Availability of Micro Enterprises Human Capital Development ... 37

2.4.1 Government and Private Model of Human Capital Development ... 38

2.5 The Issues of Existing Human Capital Development Model Faced by Micro Enterprises in Malaysia ... 41

2.6 Review of Proposed Cash Waqf Model... 45

2.6.1 Cash Waqf and Financing ... 46

2.6.2 Cash Waqf and Human Capital Development ... 49

2.7 Research Gap ... 51

2.8 Chapter Summary ... 53

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CHAPTER THREE: THEORETICAL FRAMEWORK AND

HYPOTHESIS DEVELOPMENT ... 54

3.0 Introduction... 54

3.1 The Role of Intention in Islam ... 54

3.2 Theory of Reasoned Action (TRA) ... 55

3.3 Empirical Applications of Theory of Reasoned Action and Hypotheses Development ... 58

3.3.1 Attitude ... 59

3.3.2 Subjective Norm ... 61

3.4 Chapter Summary ... 63

CHAPTER FOUR: DEVELOPING INTEGRATED CASH WAQF MICRO ENTERPRISE INVESTMENT (ICWME-I) MODEL ... 65

4.0 Introduction... 65

4.1 Conceptual Framework of Integrated Cash Waqf Micro Enterprises Investment (ICWME-I) Model ... 65

4.2 Model Specification ... 68

4.2.1 Waqif (Donor) Requirements ... 68

4.2.2 Cash Waqf Institution (CWI) ... 69

4.2.3 Micro Enterprises ... 70

4.3 Musharakah Mutanaqisah Financing Arrangement under ICWME-I Model ... 71

4.3.1 The Advantages of Musharakah Mutanaqisah Partnership... 74

4.3.2 Examples of Using Musharakah Mutanaqisah Financing Arrangement ... 76

4.3.2.1Purchasing Machinery or Equipments and Other Assets .. 76

4.3.2.2 Lack of Fund to Start-Up Business ... 77

4.4 Structure of Human Capital Development under ICWME-I Model ... 78

4.5 The Significance of ICWME-I Model ... 80

4.5.1 Impact on the Waqf ... 80

4.5.2 Impact on the Micro Enterprises ... 81

4.5.3 Impact on the Society and Economy ... 81

4.6 The Potential of Cash Waqf in Malaysia ... 82

4.7 Chapter Summary ... 85

CHAPTER FIVE: RESEARCH METHODS ... 86

5.0 Introduction... 86

5.1 Research Design ... 86

5.2 Qualitative Research Method ... 88

5.2.1 Data Collection: Semi-Structured Interview ... 89

5.2.2 Sampling Techniques ... 90

5.2.3 Respondents ... 90

5.2.4 Research Instrument ... 91

5.2.5 Data Analysis ... 92

5.3 Quantitative Research Method ... 93

5.3.1 Data Collection ... 94

5.3.2 Study Area ... 95

5.3.3 Population of the Study ... 95

5.3.4 Sample Size ... 96

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5.3.5 Sampling Technique ... 97

5.3.6 Research Instruments ... 98

5.3.7 Data Analysis ... 100

5.3.7.1 Structural Equation Modeling (SEM) ... 100

5.3.7.2 Evaluating the Fit of the Model ... 101

5.3.7.3 Absolute Fit Indices ... 102

5.3.7.4 Incremental Fit Indices ... 103

5.3.7.5 Parsimonious Fit Indices ... 105

5.3.7.6 Reliability and Validity ... 105

5.3.7.6 (a) Reliability ... 106

5.3.7.6 (b) Validity ... 108

5.3.7.7 Construct Validity... 108

5.4 Chapter Summary ... 109

CHAPTER SIX: RESULTS AND ANALYSIS OF INTERVIEWS ... 110

6.0 Introduction... 110

6.1 Findings ... 112

6.1.1 Importance of Micro Enterprises ... 112

6.1.2 Financial Problems ... 113

6.1.3 Human Capital Development Problems ... 115

6.1.4 Importance of ICWME-I Model ... 117

6.1.5 Suitability of ICWME-I Model ... 119

6.1.6 Institutional Platform- SIRC, SIRC’s Entity, Corporate Entity ... 122

6.1.7 Sustainability of ICWME-I Model ... 124

6.1.8 Challenges of ICWME-I Model ... 126

6.1.9 Awareness Cultivation ... 128

6.2 Chapter Summary ... 130

CHAPTER SEVEN: FINDINGS AND ANALYSIS OF THE QUESTIONNAIRE SURVEY ... 132

7.0 Introduction... 132

7.1 Descriptive Analysis ... 132

7.1.1 Data Collection ... 132

7.1.2 Distribution of Respondents by Gender, Age, Marital Status and Education Level ... 133

7.1.3 Distribution of Respondents by Business Characteristics... 136

7.1.4 Distribution of Respondents by Source of Financing ... 140

7.1.5 Distribution of Respondents by Status and Objectives of Applying Loan ... 143

7.1.6 Distribution of Respondents by Constraints in Accessing External Finance ... 146

7.1.7 Distribution of Respondents by Reasons for Not Applying External Finance ... 152

7.1.8 Distribution of Respondents by Experience... 155

7.1.9 Distribution of Respondents by Attending Training Program or Scheme ... 158

7.1.10 Distribution of Respondents by Awareness and Utilisation of Program or Scheme ... 161

7.1.11 Distribution of Respondents by Having the Skills ... 166

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7.1.12 Distribution of Respondents by Awareness of Cash Waqf ... 172

7.1.13 Distribution of Respondents by Willingness to Use ICWME- I Model ... 173

7.1.14 Descriptive Statistics of Survey Items of Theory of Reasoned Action ... 174

7.2 Structural Equation Modeling (SEM) ... 178

7.2.1 Evaluation of Measurement Model ... 178

7.2.2 Model Goodness-Of-Fit ... 178

7.2.3 Construct Validity ... 185

7.2.4 Full Structural Model Testing ... 188

7.3 Result of Hypotheses Testing ... 191

7.3.1 Research Hypothesis 1... 191

7.3.2 Research Hypothesis 2... 194

7.4 Multiple Regression Results ... 196

7.5 Chapter Summary ... 200

CHAPTER EIGHT: CONCLUSION, IMPLICATION, LIMITATION, AND FUTURE RESEARCH ... 201

8.0 Introduction... 201

8.1 Conclusion ... 201

8.2 Implications of the Study ... 203

8.2.1 Implications for Practice ... 204

8.2.2 Implications for Micro Enterprises ... 204

8.2.3 Implications for the Government and Policy Makers ... 206

8.3 Limitation of the Study ... 208

8.4 Suggestion for Future Study ... 209

BIBLIOGRAPHY ... 211

APPENDIX 1 INTERVIEW QUESTION ... 226

APPENDIX 2 ... 228

APPENDIX 3 ... 236

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LIST OF TABLES

Table No. Page No.

1.1 The MSMEs Contributions to GDP in Selected OIC Countries, 2011 4 1.2 The MSMEs Contributions to GDP in Selected Non-OIC Countries,

2011 5

1.3 Sources of Financing for MSMEs in Malaysia, 2010 12

2.1 The Definitions of Micro Enterprises in Malaysia 22

2.2 Number of MSMEs Establishment in Malaysia by Sectors 22

2.3 Profile of MSMEs by State in Malaysia 23

2.4 Gross Output and Value Added of Micro Enterprises by Sectors 23

2.5 Employment in Micro Enterprises by Sectors 24

2.6 List of Ministries, Agencies and Major Programmes 39

4.1 Cash Waqf Scheme in Malaysia 82

4.2 Waqf Share Collection by Perbadanan Waqf Selangor 83

4.3 Total Waqf Share of Waqaf An Nur Corporation Bhd 84

5.1 Research Question and Data Sources 89

5.2 Profile of the Interviewees 91

5.3 Research Question and Data Sources 94

5.4 Statistics of MSMEs Based on Component in Malaysia, 2011 95

6.1 Categorical Themes and Interview Questions 111

6.2 Importance of Micro Enterprises to the Economy 113

6.3 The Financial Problems 115

6.4 The Human Capital Development Problems 117

6.5 Importance of ICWME-I Model 118

6.6 Suitability of ICWME-I Model 122

6.7 Institutional Platform 124

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6.8 Sustainability of ICWME-I Model 126

6.9 Challenges of ICWME-I Model 128

6.10 Awareness Cultivation 130

7.1 Distribution of Respondents by Gender, Age and Marital Status 135

7.2 Cross-Tabulation of Age and Marital Status 135

7.3 Cross-Tabulation of Age and Educational Level 136

7.4 Distribution of Respondents by Business Characteristics 137 7.5 Cross-Tabulation of Gender and Number of Years in Businesses 137 7.6 Cross-Tabulation of Number of the Years in Businesses and Annual

Sales Turnover 139

7.7 Cross-Tabulation of Number of the Years in Businesses and Number

of Employee 140

7.8 Source of Financing 141

7.9 Cross-Tabulation of Number of Years in Business and Source of

Financing 142

7.10 Cross-Tabulation of Applying Loan and Objectives for Applying

Loan 144

7.11 Cross-Tabulation of Number of Years in Business and Objectives for

Applying Loan 146

7.12 Type of Problems during Raising Loan 150

7.13 Cross-Tabulation of Number of Years in Business and Problems

during Raising Loan 151

7.14 Reasons for Not Applying Loan 155

7.15 Respondent’s Experience 155

7.16 A cross-tabulation of Educational Level and Experience 156 7.17 A Cross-Tabulation of Number of Years in Business and Experience 158

7.18 Participation in Training Programmes or Schemes 159

7.19 Cross-Tabulation of Experience and Attending Training Programmes

or Schemes 160

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7.20 Cross-Tabulation of Number of Years in Business and Attending

Training Programmes or Schemes 160

7.21 Cross-Tabulation of Awareness Level and Reasons for Not

Participating in Programmes/Schemes 161

7.22 Cross-Tabulation of Awareness Level and Reasons for Not Aware of

Training Programmes or Schemes 165

7.23 Having the Following Skills among Micro Entrepreneurs 166 7.24 Cross-Tabulation of Number of Years in Business and Having Skills 169 7.25 Cross-Tabulation of Educational Level and Having Skills 172

7.26 Awareness of Cash Waqf 172

7.27 Willingness to use ICWME-I Model 174

7.28 Descriptive Statistics of Survey Items 176

7.29 Fit Indices for MM1 180

7.30 Fit indices for MM2 182

7.31 The Modification Indices 183

7.32 Fit indices for Final MM3 185

7.33 Cronbach Alpha 186

7.34 KMO and Bartlett's Test 186

7.35 The CFA Results for the Measurement Model 187

7.36 Inter-construct Correlation and Squared Correlation (SC) 188

7.37 Fit indices for Structural Model 191

7.38 Hypothesis Testing: The Effect of Attitude toward Behaviour on

Behavioural Intention of Micro Enterprises 192

7.39 Hypothesis Testing: The Effect Of Subjective Norm On Behavioural

Intention Of Micro Enterprises 194

7.40 Multiple Regressions Results 199

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LIST OF FIGURES

Figure No. Page No.

2.1 Life Cycle Model 25

2.2 The Microfinance Model 27

2.3 The Commercial Bank Loan Model 28

2.4 The DFIs Loan Model 29

2.5 The Government Agencies Loan Model 31

2.6 The Cooperative Model 32

2.7 The Model of Human Capital Development under the Government

Agency 38

2.8 The Model of Human Capital Development under the Agency 41

3.1 Model of Theory of Reasoned Action 56

4.1 Conceptual Framework of ICWME-I Model 66

4.2 Musharakah Mutanaqisah (Diminishing Partnership) Financing

Arrangement 72

4.3 Human Capital Development 78

5.1 Research Design 87

5.2 Simple Random Sampling 98

7.1 Initial Measurement Model (MM1) 179

7.2 Measurement Model 2 181

7.3 Final Measurement Model 3 184

7.4 Structural Model 190

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CHAPTER ONE INTRODUCTION

1.0 INTRODUCTION

This chapter is presents the background of the study. It is organized into eight sections. The first section introduces the background of the study followed by the second section that presents the problem statements. The third section discusses the research questions. In the fourth section, the objectives of the study are presented. The fifth section gives the scope of the study while the sixth section focuses on the significance of the study. The last section in this chapter presents the outline of the structure of the study.

1.1 BACKGROUND OF STUDY

The definition of micro, small and medium enterprises (MSMEs) varies according to international and country levels1. Generally, the concept of MSMEs is differentiated based on criteria such as the number of employees, the annual turnover and the assets of a company. For example, according to the World Bank’s definition, MSMEs are categorized according to the total employees and total assets (Ayagari et al., 2005).

Meanwhile, the Gulf countries define MSMEs based on three main criteria which are the number of employees, the annual turnover and the assets of a company (Hertog, 2010).

1 The term MSMEs will be used throughout the thesis instead of using SMEs. Although these two terms are similar in their context, the thesis prefers to use the term of MSMEs. It is due to the adequacy of the term of MSMEs in reflecting the segments or components of MSMEs accordingly. Furthermore, it is also to avoid inconsistencies among official SME definitions.

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According to East Asian countries, the definition of MSMEs is based on the sectors and the size of employee as well as annual sales turnover. For instance, in Malaysia, MSMEs are defined based on the nature and size of businesses. In services and other sectors (agriculture, mining and quarrying and construction), the number of employees and sales turnover should not exceed 50 and RM5 million respectively. In manufacturing industry, the number of employees and annual sales turnover should not exceed 150 and RM25 million, respectively (SME Annual Report 2010/2011).

MSMEs in Malaysia are further categorized into small enterprises; medium-sized enterprises, and micro enterprises (SME Annual Report, 2010/2011). Micro enterprises are companies with less than five employees and an annual sales turnover of less than RM300, 000. Meanwhile, whereas small enterprises are companies with less than 50 full time employees, and an annual turnover of not more than RM10 million. On the other hand, medium enterprises are companies that have between 51 and 150 employees with an annual turnover of between RM10 million and RM25 million.

MSMEs are considered as the backbone of many economies (Hoq et al., 2009;

Aris, 2006). They have emerged as highly vibrant and dynamic businesses in many countries. Majority of firms worldwide are MSMEs, which play a significant role in serving as a growth engine that contributes substantially to industrial output, exports and employment opportunities. They also make significant contribution in terms of introducing innovation and entrepreneurship skills. MSMEs represent about 95 percent of the total companies in most world economies. These enterprises contribute over 65 percent of employment and over 50 percent of the Gross Domestic Product (GDP). For example, MSMEs contribute about 85 percent and 51 percent of the GDP in the United Kingdom and United States, respectively (Alasrag, 2006). Meanwhile, in

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Japan, Korea, Taiwan and Germany, MSMEs comprise over 98 percent of the total business establishments and contribute to more than 65 percent of employment and over 50 percent of the gross domestic product (Amrina, 2009). Similarly, about 91 percent of formal business entities in South Africa are MSMEs which contribute between 50 percent to 60 percent to the GDP and provide about 61 percent of employment (Abor and Quartey, 2010). Hence, MSMEs occupy a prominent position in the overall national development strategy in most countries (Abdullah, 1999).

In Malaysia, MSMEs continue to contribute to the economy as part of the aim of achieving Vision 2020 and help in realizing the agitation of developed country status with high income and high-productivity economy (Razak, 2011). MSMEs in Malaysia constitute 97.3 percent of the total business establishment (645,136) and form about 52.7 percent of the total workforce. In terms of the total value added and output of the Malaysian MSMEs, they account for 30.2 percent and 28.5 percent respectively in 2010 (Economic Census: Profile of SMEs, 2011).

Despite the fact that MSMEs have tremendous potential in building stable economic growth, the contribution of the Malaysian MSMEs to the GDP is still lower compared to some countries in the Organization of Islamic Cooperation (OIC) and non-OIC countries. Furthermore, the 32.5 percent contribution of MSMEs to Malaysia’s GDP is low relative to their representation in the total business establishment (97.3 percent). For example, in five OIC countries (Morocco, UAE, Tunisia, Nigeria, Saudi), as shown in Table 1.1, the MSMEs representation in their respective economy range from 93 to 97 percent while the contributions of MSMEs to their economies range from 37 to as high as 60 percent. For example, MSMEs in UAE represent 94.3 percent of the total business and they contribute 60 percent to the total GDP of the country. On the other hand, Saudi Arabia has 97 percent of MSMEs’

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representation in its economy yet they contribute only 29.1 percent to the country’s GDP.

Table 1.1The MSMEs Contributions to GDP in Selected OIC Countries, 2011

Countries MSMEs Representation in the Economy (a)

MSMEs’ GDP Contributions (b)

Rank

UAE 94.3 60 1

Indonesia 100 57 2

Egypt 99.7 55 3

Morocco 93 50 4

Tunisia 97 51 5

Nigeria 97 37 6

Malaysia 97.3 32.5 7

Turkey 99.5 32 8

Pakistan 100 30 9

Saudi 97 29.1 10

Source: The data are compiled from the MSME websites of respective countries and the ranking were done by the author

Similarly, the contribution of Malaysia’s MSMEs to its GDP is also low when compared to the contribution of MSMEs in some non-OIC member countries. For example, (as in Table 1.2), MSMEs in Ghana constitute 92 percent of the business establishment, yet their total contribution to Ghana’s GDP is estimated to be 70 percent. Ghana is followed by South Africa where MSMEs representation in the business establishment is 91 percent but their contribution to the GDP is about 55 percent, which is even lesser. Meanwhile, in the case of Vietnam the contribution of MSMEs to its GDP is estimated at 40 percent, nonetheless, the MSMEs representation in the business establishment is as high as 97.1 percent.

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Table 1.2 The MSMEs Contributions to GDP in Selected Non-OIC Countries, 2011

Countries MSMEs Representation in the Economy (a)

MSMEs’ GDP Contributions (b)

Rank

Ghana 92 70 1

South Africa 91 54.5 2

Korea 99 49 3

Singapore 99 42 4

Vietnam 97.1 40 5

Argentina 98.2 40 6

Mexico 99 40 7

Malaysia 97.3 32.5 8

India 97.3 17 9

Source: The data were compiled from the MSMEs websites of respective countries and the ranking were done by the author

These scenarios have raised the question as to why MSMEs in Malaysia contribute less to the GDP despite their large representation in the total business establishment of the economy compared to other countries which seem to be more successful in contributing to the economy. The impressive performance of MSMEs in other countries such as Singapore and Korea is attributed to the strength of their financing facilities, human capital development and government policies. For example, in the case of Singapore, Ghosh et al. (1996) indicated that two main factors have enhanced MSMEs performance in the Island. The factors are: (1) good and skilled human resource development as more than 40 percent of the managers have vocational schooling and experience before they enter business, and (2) continuous support from the government policies to support MSMEs in terms of various financing schemes, training programmes and Research and Development program.

Likewise, in the case of Korea, findings by Song (2010) indicate that several factors have boosted Korean MSMEs performance among which are (1) continuous support by the government in terms of supporting innovative MSMEs through venture companies, supporting female entrepreneurs, and promoting cooperation between large companies and MSMEs, (2) the role of Korean financial institutions in providing

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various direct-loan schemes to assist MSMEs start-ups and expand the foundation of small business, and (3) establishment of the Institute of Korean SME Training and Center for Women Business to enhance the entrepreneur’s ability on technologies, management and other skills while providing education on start-ups for female entrepreneurs.

Apparently, it seems that the success of MSMEs largely depends on government support and policies, financial facility and human capital development.

This questions the strength of the Malaysian MSMEs in their performance and contribution to the country’s economic growth.

In terms of government policies and programmes, some studies point out that the Malaysian government has successfully introduced and continued to assist MSMEs through the implementation of several policies, programmes and extensive financial resource allocations to enhance the activities of MSMEs (Hashim, 2012;

SME Annual Report, 2010/2011; SME Annual Report, 2011/2012). For example, in 2004, the National SME Development Council of Malaysia (NSDC) was reinforced to formulate the strategies for the development of SMEs and coordinate the policies and programmes across more than 15 Ministries and 60 Agencies (SME Annual Report, 2010/2011). In addition, recently in July 2012, the Malaysian government also released the SME Masterplan (2012-2020) which is aimed at becoming the policy direction for MSMEs until the year 2020 to further accelerate growth through productivity gains and innovation.

In terms of programmes to assist MSMEs, the Malaysian government had implemented a total of 144 programmes for MSMEs in 2012 with the financial commitment of RM14.8 billion. The majority of the programmes mainly aimed at enhancing access to financing. Hence, a total of 42(29.2 percent) of such programmes

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received an allocation of RM 11.9 billion. This is followed by 32 (22.2 percent) programmes for human capital development with the allocation of RM 236.4 million.

The remaining programmes were for market access (31 programmes), innovation and technology adoption (28 programmes) and infrastructure (11 programmes). The Malaysian government has not relented in her support to the MSMEs. For example, in the 2013 Budget, the government has allocated a total of RM1 billion under the SME Development Scheme to accelerate the growth of MSMEs nationwide (Malaysian Budget Report, 2013). These policies towards the MSMEs by the Malaysian government indicate that the Malaysian government equally supports MSMEs through the implementation of various types of policies just like other countries.

Although there are various MSMEs programmes and policies provided by Malaysian government, it has however not been adequate to meet the need of micro enterprises, a component of MSMEs in particular (Hamid, 2003). Only the other two components of MSMEs namely small and medium enterprises received adequate support when compared to micro enterprises. The details behind the inability to adequately meet the need of micro enterprises are discussed in the subsequent parts.

The current part however focuses on the problems that are affecting the development of MSMEs.

Financial assistance remains the most common problem for MSMEs in Malaysia which has been confirmed by several studies (Hashim, 1999; Ting, 2004;

Saleh and Ndubisi, 2006; Abdullah and Mannan, 2010; SME Annual Report, 2011/2012; SME Masterplan, 2012-2020). Many of MSMEs are facing difficulties in accessing external financing because they are perceived as high-risk and high cost- service market segments (Duc et al., 2008; Vos et al., 2007). Furthermore, financial institutions have the notion that lending to MSMEs is commercially not viable

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