Thaker&Sakaran - Discussion On Islamic Finance and Small Medium

Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics)
Volume 11 (2), July 2019

P-ISSN: 2087-135X; E-ISSN: 2407-8654
Page 303 - 340
Discussion on Islamic Finance and Small Medium

Enterprises’ Financial Accessibility
Hassanudin Mohd Thas Thaker1* & K Chandra Sakaran2

*
Corresponding author
Abstract. This study attempts to provide some understanding of SMEs’ access to

finance in Malaysia using Islamic finance and its successfulness. The innovation that
taking place in the Malaysia financial landscape has benefits the SMEs in accessing
financial assistance without relying on the traditional mode of financing. The role of
government of Malaysia is also undisputable in supporting the progression of SMEs
via various policy implementation. Apparently, in the context of Indonesia, the role
SMEs is also undeniable in boosting up the growth of Indonesian economy. Statistically
speaking, SMEs in Indonesia represent about 99 percent in all economic sector and
involved labor participation of almost 95 percent. Although the contributions are
wider, the issue of financial accessibility still becomes one of the main hurdles that
block the development of SMEs in Indonesia. Therefore, the present study has used
content analysis to critically look at the success of SMEs financing in Malaysia based
on Islamic financing provides some recommendations based on Malaysian SMEs
financing successfulness for Indonesian authority to further restructure and enhance
their existing financial assistance to the SMEs based on Islamic financing.
Keywords: SMEs, Financing, Islamic Financing, Malaysia, Indonesia
Abstrak. Studi membahas tentang akses Usaha Kecil Menengah terhadap pembiayaan
keuangan Islam di Malaysia dan keberhasilannya. Inovasi dalam lanskap pembiayaan
di Malaysia memberikan manfaat terhadap UKM di negara tersebut dalam
mengakses bantuan pembiayaan tanpa harus mengandalkan moda pembiayaan
tradisional. Peran pemerintah Malaysia juga tidak dapat dipungkiri dalam upaya
mendukung perkembangan UKM melalui berbagai kebijakan. Dalam konteks
Indonesia, peran UKM dalam mendongkrak perkembangan ekonomi Indonesia
pun tidak dapat dibantah. Secara statistik, UKM di Indonesia mewakili sekitar 99
persen pada semua sektor ekonomi, serta melibatkan partisipasi pekerja hampir 95
persen. Meskipun memiliki kontribusi yang lebih luas, akses terhadap pembiayaan
masih menjadi salah satu kendala utama yang menghambat perkembangan UKM di
Indonesia. Untuk itu, penelitian ini mengkaji secara kritis kesuksesan UKM Malaysia
yang menggunakan pembiayaan Islam, untuk kemudian menjadi rekomendasi bagi
pihak berwenang di Indonesia dalam upaya restrukturisasi dan peningkatan bantuan
pembiayaan bagi UKM berdasarkan mekanisme pembiayaan syariah.
Kata kunci: UKM, Pembiayaan, Pembiayaan Syariah, Malaysia, Indonesia
Department of Economics and Finance, Sunway University, Malaysia.

1
Faculty of Business, Economics and Accounting, HELP University, Malaysia.

2
E-mail: [email protected]
304 Vol. 11 (2), July 2019
Introduction
Malaysia is one of the leading Southeast Asian economies aiming of
becoming a nation of high-income status by 2020. Over the years, the Malaysian
economy has gone through a dramatic transformation from an economy dependent
on agriculture and commodity export to a more diversified and open economy
with a much greater global connection. The Real GDP growth rate on average
of 6.4 percent per annum since 1970 (OECD,2016), which was crucial for the
Malaysian government to address the development and equity agenda. Prior to
the implementation of the New Economic Policy (NEP), Malaysia’s development
policy was mainly focused on enhancing economic growth with a great focus on
the export market. The economy achieved a decent average annual growth of
6 percent, but there was an inadequate emphasis on the distributional aspects,
causing in socioeconomic inequalities among the ethnic groups with negative
social consequences lead to a racial riot in 1969 (Economic Planning Unit,2017).
It was after this incident; the Malaysian government decided to introduce the
NEP in order to address the socio-economic problems. This policy combined
growth aspirations with the main objective of forming a fair, just and unified
nation. Unlike other nations where the lower of the income bracket is comprised
of ethnic minorities, the Malay majority in Malaysia earns lower incomes despite
being more than half of the total population. (Saari, Dietzenbacher, Los, 2015).
The NEP was implemented with two key objectives, that is to eradicate poverty
regardless of ethnicity and to ensure economic opportunities were available to all
Malaysians regardless of background. The importance of SMEs in Malaysia can
be traced back to the early 1970s with the implementation of the NEP targeted
enhancing people’s well-being and addressing the economic disparity of the various
races. This is done through restructuring of the society aimed at attaining income
parity and employment opportunities for all. The NEP set a restructuring target
of 30: 40: 30, whereby 1990, the holdings of the Bumiputeras should reach 30 per
cent, other Malaysians 40 per cent and the foreigners 30 per cent, in the context
of an expanding economy marked the beginning of a much active participation
of Bumiputras in businesses, which includes the formation of micro, small and
medium enterprises.
It was evident that the small and medium enterprises play a key role in the
economic development, social uplifting and political stability of every country. It
is now regarded as a backbone of national economy (Peters & Waterman, 1982;
Amini, 2004; Radam et al., 2008 as cited in Khalique,2011). The successfulness
of SMEs in Malaysia contributed by many factors, especially with regard to the
http://journal.uinjkt.ac.id/index.php/iqtishad
https://dx.doi.org/10.15408/aiq.v11i2.7343
Hassanudin Mohd Thas Thaker. Discussion on Islamic Finance 305
financial accessibility as the Malaysian authority give high emphasis on Fintech in

helping the entrepreneur to raise capital for a start-up the businesses. And, this
successfulness is contributed by conventional and Islamic finance.
Given this, the objective of the paper is to discuss the possibility and
potential of Islamic finance in Indonesia in providing capital to Small and
Medium Enterprise (SMEs) or ventures. Firstly, this research will highlight
the successfulness of SMEs in Malaysia then this study will provide some
recommendation to the Indonesian authority in developing the progression of
SMEs in their country. As evidenced in many works and published economic
report, the SMEs is playing an important role in terms of GDP in various socio-
economic aspects. However, the issue of financial accessibility seems to obstruct
the development of SMEs in Indonesia. Given this problem, the study will look
into how Islamic finance can help in mitigating the issue of financial accessibility
and allows active participation of SMEs in Indonesia by considering Islamic
finance in terms of financial support.
The remaining structure of the paper is structured as follows; section one
will discuss the introduction part followed by second part which discussion on
the Malaysian SMEs in general based on available literatures. The third part will
focus on the methodology employed in this research, and finally there would be
discussion on analysis part with regard to potential of Islamic finance and SMEs
in Indonesia
Malaysia’s Definition of SME

SME definition, which was accepted at the 14th NSDC Meeting in
July 2013 covers all sectors, namely services, manufacturing, agriculture,
construction and mining & quarrying. The definition is based on two main
criteria, namely (i) sales turnover and (ii) number of full-time employees.
SMEs in the manufacturing sector are firms with a sales turnover not exceeding
RM50 million or a number of full-time employees not exceeding 200. As for
the services and other sectors, SMEs are defined as firms with sales turnover not
exceeding RM20 million or number of full-time employees not exceeding 75.
The following table provides the definition of category, namely micro, small and
medium is as follows:
306 Vol. 11 (2), July 2019
Table 1. Definitions of SME in Manufacturing sector

Size of firms Sales turnover(RM) Number of employees
Medium RM15 million ≤ RM50 million 75 ≤ 200
Small RM0.3 million < RM50 million 5 < 75
Micro Below RM 0.3 million Less than 5
Notes: This table portrays the definition of SMEs in manufacturing sector. The definition differs
across medium, small and micro. The source for this table is extracted from the SME Annual Report,
2015/16.
Table 2. Definitions of SME in Services and other sectors

Size of firms Sales turnover(RM) Number of employees
Medium RM3 million ≤ RM20 million 30 ≤ 75
Small RM0.3 million < RM3million 5 < 30
Micro Below RM 0.3 million Less than 5
Notes: This table portrays the definition of SMEs in service sector and other sectors. The definition
differs across medium, small and micro. The source for this table is extracted from the SME Annual
Report, 2015/16.
SMEs Development In Malaysia

There is growing recognition of the important role of SMEs as an economic
agent and government have given a high priority to SME development as they
strive to achieve sustainable and inclusive growth. The importance of SMEs in
Malaysia begins with the implementation of the NEP in 1971 with the objectives
of eradicating poverty and improve the welfare of the people and restructuring the
society in order to eliminate ethnic economic imbalance. The policy encourages the
Bumiputra participation in business, especially by starting in small scale through
various government initiatives and programmes. The implementation of Malaysia
Industrial Plan and the establishment of the Small and Medium Corp (SME Corp),
by the Ministry of International Trade and Industry(MITI) further strengthened the
development of SMEs (Ziaul Hoq et al. 2009). In 1992 The National Development
Policy (NDP) replaced the NEP, and as stated by Athukorala & Menon (1999), the
NDP consideration was to amend ethnic difference using various agencies which
were responsible for the development of entrepreneurship, managerial capability
and skills among the Bumiputra.
In order to encourage and support the SMEs, the government through the
Ministry of International Trade and Industry(MITI) established an agency known
as Small and Medium Industries Development Corporation (SMIDEC) in 1992.
This agency was required to make the SMEs more capable and competitive in the
global market. Various programmes and initiatives were introduced to enhance
SMEs capability and competitiveness by providing financial accessibility, capacity
building opportunities, market penetration, brand development, human capital
development, technology and innovation enhancement and advisory services.
The government continues to pay great attention to the development of
SMEs decided to establish the National SME Development Council (NSDC) in
2004. This marked the commencement of a new chapter in the SME development
in Malaysia. NSDC was entrusted in formulating and implementing strategies for
SME development involving all economic sectors, coordinate SME programmes
executed by the relevant ministries and agencies and also to the enhancement
partnership with the private sector. Among the initiatives carried out by the NSDC
comprised of enhancing access to financing, financial restructuring, advisory
services, information, training and marketing coordination and a comprehensive
SME database to monitor the progress of SMEs across all economic sectors (SME
Corp, 2017).
SMIDEC was later appointed by NSDC in 2007 as a single agency to
formulate policies and strategies for SMEs and also responsible for coordinating the
various programmes across relevant ministries and agencies. In 2009, SMIDEC was
rebranded and known as the Small and Medium Enterprise Corporation Malaysia
(SME Corporation Malaysia). SMEs needing relevant information and advisory
services can now refer to SME Corporation Malaysia, which is done via One
Referral Centre (ORC). SME Corp has now become the nation’s key organization
responsible for developing an innovative, resilient and globally competitive SMEs
and also improve wealth creation and social well-being of the nation.
SME Corp. Malaysia was also entrusted in developing and implementing the
SME Masterplan (2012-2020), providing the policy direction of SME development
in order to achieve a high-income nation status by 2020. It is through this plan the
growth of SMEs was accelerated through the implementation of innovation and
productivity-related strategies. It was done by fostering a close alliance with relevant
industry associations and strategic partners from the public as well as private sectors.
The government in its 2017 budget has given special attention to the SMEs and
declaring 2017 as the start-up and SME promotion year. A sum of RM70 million
was allocated for the SME Masterplan for the purpose of implementing the High
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Impact Programmes. The six High Impact Programmes is summarized in the

following table.
Table 3. HIPs of SME Masterplan
HIP 1: Integration of HIP 2: Technology HIP3: ME Investment

Business Registration and Commercialization Partner(SIP)
Licensing Platform(TCP)
Create a single registration Establish a national network of Provide early-stage financing
point through the interfacing a privately managed platform through the establishment of
of the current National to promote innovative ideas the investment of investment
Business Registration System, from proof of concept to the companies to invest in
that is, MyCoID and the commercialization stage. potential SMEs in the form
national Business Licensing debt, equity or hybrid of
System, that is, BLESS both.
HIP 4: Going Export(GoEx) HIP 5: Catalyst Programme HIP 6 : Inclusive Innovation
programme
Offer customized assistance Create home-grown Empower the bottom
to new exporters and SMEs champions through a targeted 40%(B40) of the income
venturing into new markets. approach with support in group to leverage on
Export-ready SMEs can avail the area of financing, market innovation through the
to comprehensive support access and human capital transformation of the rural
assistance. development. community through the
hand-holding approach.
Notes: This table shows the High Impact Programmes for SMEs in Malaysia. Altogether, there are
6 HIPs under the SMEs master plan. The details of this were extracted from the SMECorp, 2017
published report.
In this budget, the government also announced a reduction in the corporate

tax rate from 19 percent to 18 percent for the first RM500,000 for SMEs and the
incremental revenue would also be subject to a lower tax rate, which will be enjoyed
by all businesses (Nee, 2016). The government has also allocated a sum of RM350
million to assist and support SMEs to access to foreign market, whereby RM130
million was allocated for promotion purpose to be carried out by MATRADE, SME
Corp. Malaysia and MIDA. RM200 million allocated for financing and insurance
credit purpose providing a coverage up to RM1 billion by EXIM Bank. A 2 percent
rebate amounting to RM 20 million was allocated for the scheme of “Syarikat
Jaminan Pembiayaan Perniagaan” (SJPP).
In order to enhance the income of B40 households, RM290 was allocated
to encourage the development of B40 entrepreneurs under various programmes,
such as, Mobileprenuer Programme by GIATMARA (RM30 million), Agropreneur

programme (RM100 million), eUsahawan and eRezeki programmes under
MDEC (RM100 million) and RM5,000 per taxi driver to purchase new vehicles
with individual taxi permits given (RM60 million). To encourage Bumiputera
entrepreneurs a total of RM 1.4 billion was allocated under various government
agencies programmes, such as SME Bank (RM100 million), Amanah Ikhtiar
Malaysia (RM100 million), TEKUN (RM300 million), PUNB (RM200 million),
MARA (RM120 million) and TERAJU (RM600 million). As for the Indian and
Chinese entrepreneurs a sum of RM200 million and RM90 million was allocated
respectively. As for the women entrepreneurs, a total of RM2 billion was allocated
for I-KIT, I-KeuNita and Women Career Comeback programmes (Ministry of
Finance Malaysia,2017).
SMEs is also important to the economies of Asia, where it constitutes 98
percent of all enterprises and 66 percent of the national labor force on average
during 2007–2012 (Yoshino & Taghizadeh-Hesary, 2016). Taking into account
the significance of SMEs the Association of Southeast Asian Nations (ASEAN)
establishes ASEAN SME Agencies Working Group (SMEWG) to develop a
Strategic Action Plan for SME Development (SAPSMED 2016-2025). The aim
of the plan is to enhance the engagement of SMEs and to make the SMEs globally
competitive and innovative by 2025. As reported in the SME Annual Report, 2016,
the goal of this action plan is to promote technology, productivity and innovation,
increase access to finance, enhance market access and internationalization, enhance
the policy and regulatory environment, and promote entrepreneurship and human
capital development.
The group has also carried out projects, such as the Digital Economy Action
Plan and Work Agenda (DEAP), organizes workshops in order to improve internet
accessibility of SMEs. Access to the Internet Economy. It provides opportunity for
SMEs to exchange information on the challenges they face and also highlights best
practices for supporting SME access and raises awareness of private-sector efforts to
integrate SMEs into global and regional markets. The further opportunity of SMEs’
access to global markets was created in 2016, through APEC initiative of funding the
‘New Era of Growth for APEC SMEs through Online-to-Offline (O2O) Business
Models’ project in cooperation with top e-commerce organizations such as eBay,
Amazon and Alibaba.
310 Vol. 11 (2), July 2019
SMEs Socio-Economic Contributions

SMEs play a vital in the economic growth of Malaysia (Chelliah, Sulaiman
et al. 2010; Hashim 2007; Othman, Sulaiman et al. 2008, as cited in Madanchian
M., et al., 2015). Apart from creating job opportunities, SMEs also contributes to
the development of big and multinational corporations (Aman & Tahir, 2011). The
SME development framework was established to enhance the overall contribution
of SMEs to the Malaysian economy from 2015 to 2020. SME development
framework vision is to create globally competitive SMEs to enhance wealth creation
and contribution to social well-being. The SME development framework goals
consist of increasing business formation, increasing the number of high growth
and innovative firms, raise productivity, and intensifying formalization. Six focus
areas were identified comprising of enhancing innovation and technology adoption,
human capital development, accessibility to financing and market, legal and
regulatory environment, and infrastructure to achieve the goals, and eventually the
vision of the framework. Acquiring of reliable database, proper monitoring and
evaluation, effective coordination and effective business services through proper and
effective institutional supports needed to execute the action plans effectively.
As a result, SMEs progress well over the years with its contribution to GDP
increasing from 29.6 percent in 2005 to 36.3 percent in 2015 (SME Corp, 2017).
SME GDP grew moderately by 6.1 percent in 2015 compared with the underlying
growth of 7.9 percent recorded in 2014. The growth was nevertheless higher than
the overall GDP of the country by 5.0 percent. The aim of the 11th Malaysian Plan
(2015-2020) was to have the SMEs to contribute 41 percent of the country’s GDP
and to constitute about 97.3 percent of total business establishments and provide
65 percent of the total employment and 23 percent of the total exports by 2020
(Planning 2015).
With the economy enjoying an encouraging growth and also through
a development model emphasizing on equitable growth, including increased
participation of the Bumiputera (ethnic Malays and indigenous groups) in the
modern economy, resulted in a gradual decline the high levels of income inequality
inherited at independence. The Gini coefficient for Bumiputera during the inception
of NEP 1971 was 0.466, and it has raised to 0.506 in 1976 but has declined in1979
to 0.468, and it continued to decline until the year 1989 at 0.429. NEP came to an
end in 1990 and National Development Policy (NDP) was introduced and since
then, there have been fluctuations in the Gini coefficient for Bumiputera. Starting
at 0.442 for 1992, and it decreased to 0.441 in 1995, then increased back to 0.448
in 1997, and to 0.433 in 1999 (Economic Planning Unit, 2017).
In 2010, the Malaysian Prime Minister Najib Razak introduced a new

economic plan, known as the New Economic Model (NEM) aiming at shifting
the affirmative action from ethnic-based to need-based with the aspiration of
becoming a high-income nation by 2020 (NEAC, 2010). The policy intended to
make the nation to become more competitive and also investor-friendly. The main
objectives of the NEM are “high income, sustainability and inclusiveness”. The Gini
coefficient is 2009 for Bumiputra was 0.440, Chinese 0.425, Indians 0.424 and
others 0.495. The Gini coefficient for the Bumiputra and Chinese has decreased
after 2 years of the implemented of the NEM. As for India, the Gini coefficient rose
from0.424 to 0.443. However, the latest data in 2014 shows that all of the ethnic
groups have narrowed down the gap and reduced the Gini coefficient (Economic
Planning Unit,2017).
The Millennium Development Goals Report (MDGR, 2015) indicates
that Malaysia has achieved most of the goals and objectives. Absolute poverty has
been largely eradicated. The benefits of development have been felt at the national,
regional, state levels, and in many cases, the community and individual levels.
Remarkable progress in the country is observed in many areas, as revealed by the
Millennium Development Goals Report for Malaysia in 2015. The reduction of
absolute poverty (based on the national poverty line, which is twice higher than
the MDG conventional of USD1.25 per capita) from 16.5 percent in 1990 to 0.6
percent in 2014. With the drastic decline in absolute poverty, the government has
turned its attention to the vulnerable part of the population, the bottom 40 (B40)
household income group. These groups comprise a large and heterogeneous group
of 2.7 million households in 2014. The focus, thereby moved towards equitable
economic participation, with more support for the bottom 40 percent of households
by income (B40).
SMEs Challenges
Most of the business establishment all around the world is dominated
by SMEs. As in Malaysia, 98.5 percent of the total business establishments of
907,065 are SMEs. The micro-business in Malaysia constitutes about 76.5 percent
(693,670), 21.2 percent (192,783) are small businesses and 2.3 percent (20,612) are
medium enterprises). The focus of these SMEs was in the services sector increased
89.2 percent or 809,126 establishments with largest subsector in the distributive
trade. Another 5.3 percent of the total SMEs (47,698) were in the manufacturing
sector, followed by 4.3 percent in the construction sector (39,158) and 1.1 percent
10,28) in the agricultural sector and the remaining 0.1 percent (865) in the mining
312 Vol. 11 (2), July 2019
and quarrying sector (SME Corp, 2017). It is recognized, however, that SMEs in
many countries face severe and numerous challenges. According to Ahmad & Seet
(2009), apart from the SME huge establishment, but the failure of SMEs in the first
five years is also extremely alarming. It was reported that in Malaysia, the failure rate
was as high as 60 percent (Nordin, Hamid & Woon, 2011; Chong, 2012; Husin
& Ibrahim, 2014). The failure rate continues to rise even with various government
assistance and programs targeting the new entry SMEs (Chong, 2012).
Beh (2013) highlighted the key factor for SME failure was the owners unaware
of the business challenges in terms of financial accessibility and management ability
and skills. The funds provided by the government or any other sources are used
without proper records and future plans. Ting (2004) identified many challenges
encountered by the Malaysian SMEs and the five key issues identified through various
researches are the financial constraints, inadequate human resource developments,
inability to adopt more advanced technology, asymmetric information on potential
markets and customers, and increasing global competition from economic
integration. He also concluded that there is a high possibility of SMEs failing if
these challenges are not addressed making them less competitive in the new rapidly
developing world of globalization
Similarly, Wang (2003) pointed some of the challenges facing SMEs in a
globalized environment, namely, financial constraints, low productivity, lack of
managerial capabilities, access to management and technology, and a heavy regulatory
burden. Agyei-Mensah (2010), confirmed that the most common problems of
SMEs are related to inadequate capital, cash flow and inventory control.
A study done by Mckinsey, 2011 shows a productivity gain of 11 percent
among SMEs that use the web. In addition, a web-based entrepreneurship foster
creativity and innovation and competition. Although, there are many benefits of
ICT, most businesses in Malaysia, in particular SMEs are still slow in adopting ICT
due to financial constraints, inadequate technical knowledge, and high cost of the
technical team and soft applications. Only 20 percent of SMEs in Malaysia uses
ICT extensively in their daily operation.
It can be concluded that Malaysian SMEs continues to face domestic and
external challenges that despite these governmental programmes hindering their
resilience and competitiveness. They include:
• Difficulty in getting funding from the financial institutions and government or
funds are given with a high interest rate due to the high risk and lack of financial
transparency. A lack of human capital is the most significant challenge facing
Malaysian SMEs. It is often too expensive for SMEs to employ a professional

and competent workforce.
• The level of competition faced by SMEs in the domestic market has intensified
due to the entry of new international competition resulting from the economic
integration
• A lack of access to better technology and ICT, which hinders more efficient and
productive business operations.
• A high level of bureaucracy in government agencies hinders efficient SME
business development operations.
• A low level of research and development expenditure.
Methodology
Under the methodology section, firstly, there will be a discussion of the
research goal followed by second discussion on the sampling procedure together
with data collection.
Research Goal
The purpose of this study is to highlight the successfulness of SMEs in
Malaysia in accessing financial assistance from Islamic banking. By looking into
Malaysian successfulness, then this study will provide some recommendation to the
Indonesian authority in developing the progression of SMEs in their country. As
evidenced in many literatures and published economic reports, the SMEs is playing
an important role in terms of GDP in various socio-economic aspects. However,
the issue of financial accessibility seems to obstruct the development of SMEs in
Indonesia. Given this problem, the study will look into how Islamic finance can help
in mitigating the issue of financial accessibility and allows active participation of
SMEs in Indonesia. During the development of this paper, the available qualitative
and quantitative methods of economic research were used including comparative
analysis and graphical illustration methods in understanding the said issue in more
vibrant way.
Sample and Data Collection

As for sample and data collection, the materials are firstly collected from
the available literature review with regard to the SMEs and financial accessibility
in Malaysia and difficulties of SMEs in Indonesia. The literatures are available in
314 Vol. 11 (2), July 2019
the various source of engines especially in journal database such as Science Direct,
Springer and many other. As for Indonesian SMEs details, this research uses the
data obtained from World bank website, Marsh and McLennan report, PwC report,
Ministry of Cooperative and Small Medium Enterprise, Otoritas Jasa Keuangan
(OJK), Bank Indonesia website. Basically all these as stated above are based on
secondary data. Once done with this scope, from this knowledge, the paper will
explore more on the potential of Islamic finance in the context of Indonesia by
referring to Malaysia as a reference and provide some recommendation to the
Indonesia authority in solving the said issue and enhance further the development
of SMEs in their country.
Analysis and Results

The section on literatures divided into several parts; firstly, it will introduce
the overall successfulness of SMEs financing schemes implementation in Malaysia.
Later on, the discussion will continue with the Islamic Banking System (IBS),
Practices and contribution towards SMEs in Malaysia. The third section reveals
about the Indonesian SMEs and its challenges followed by the Islamic banking
(IB) and its involvement in SMEs of Indonesia. The last section will discuss
the recommendation to the Indonesian authority based on Malaysian SMEs
successfulness and the potential of Islamic finance.
The successfulness of SMEs financing schemes implementation in Malaysia

The report of SME development published by the SMECorp in 2016 reveals
that the financial institutions serve as a primary source of fund to the financial
accessibility by the SMEs in Malaysia. At the end of 2015, the total financing to
SMEs by financial institutions recorded a growth of 14.6 percent which was valued
at RM274.5 billion that extended to 729,983 SME accounts. The share of SME
finance from the entire total business financing had incremented to 46.6 percent in
2015 compared with 2014 where the total percentage was just 43.8 percent. The
loan approval remains at above 80 percent and total financing rose to RMRM285.5
billion as of June 2016.
The Credit Guarantee Corporation Malaysia Berhad (CGC) is considered as
the main pillar in providing guarantees to the SMEs in letting the SMEs access to
the financial accessibility from the financial institution. The CGC progressing well
in leverage part for SMEs and creating opportunity for the new and existing SMEs
by supplying them direct financing schemes to starts-up and encourage women
entrepreneurship as well as involvement in the green technology and enterprise

the intellectual property. Furthermore, the CGC is not only limited to the loan
accessibility and guarantee but also provide advisory services with regard to the
business development, credit information and credit rating with cooperation from
Credit Bureau of Malaysian Sdn Bhd. From 1972 till 2015, CGC had provided
financing to more than 437,00 businesses which were valued at RM59 billion. In
2016, this institution estimated the loan approval for about 8,650 accounts valued
at RM4 billion. Case in hold, CGC has also established new ways in processing the
loan and disbursement of funds such as Portfolio Guarantee (PG) where the banks
are allowed to choose the customers in accordance with criteria determined and loan
process application on a portfolio basis. In doing so, it enabled both CGC and the
banks to speed up the approval and disbursement of loan to the SMEs.
The successfulness of CGC further continues by the establishment of two
new schemes for specific groups, namely:
i) BizWanita –i
This financing scheme is designed for women entrepreneur who owned the
business. The purpose of this scheme is to minimize the gaps for women
entrepreneurs in terms of accessibility. Two months after the introduction
which was on October 2015, CGC had approved RM10 millions of financing
to 76 SMEs. The establishment of this scheme has bridge the gap between
gender equality between man and women entrepreneurs effectively.
ii) Special Assistance Scheme-I (SAS –i)
Under this scheme, the entrepreneur can recover back their business loss due to
the natural disaster such as floods, tsunami and earthquake. The funds then can
be utilized for buying new assets, as well as for working capital. The financing
scheme is based on the Murabahah concept, and the coverage is ranged from
RM20,000 till RM200,000 and the tenure is 5 years. The allocated fund for
this scheme by government is RM35 million.
Furthermore, in 2015, the government of Malaysia invested RM4.4 billion to
accelerate the financing to the SMEs via 36 programmes. The selected programmes
include:
i) Soft Loan Scheme for SME (SLSME)
This scheme is under the Ministry of International Trade and Industry (MITI)
with the collaboration of Malaysian Industrial Development Finance Berhad
(MIDF). This scheme specifically to help existing and new start-up companies
to raise working capital, financing fixed assets, relocations of business operation
316 Vol. 11 (2), July 2019
and to improve SMEs competitiveness. In the year of 2015, there were RM174.5
million approved for about 187 SMEs comprises of many industries.
ii) Dana Pinjaman Perniagaan Kecil dan Sederhana (PKS)
Under this scheme, the entrepreneur benefits from various activities
implemented in this scheme such as Dana 1-SME, Tabung Usahawan Siswazah,
Dana Usahawan Negeri Terengganu, Skim Modal Asas, Skim Pembiayaan
Ekonomi Desa (SPED), Program Usahawan Agro-Based, and the ASEAN Japan
Development Fund. As for the initial stage, there were 87 entrepreneurs selected
for various programme under this scheme and successfully benefited from the
socio-economic point of views.
iii) Sharia Compliant SME Financing Scheme (SSFS)
The MITI collaborated with SME Corp. Malaysia permitted discount more
than RM20 million to 874 SMEs under the SSFS scheme. Under this, the
government will pay 2 percent of the financing charges imposed by Islamic
banks. Through the Business Accelerator Programme (BAP), SMEs is also
ratified extra financing valued to RM183.2 million in the form of loan and
grant for more than 879 SMEs.
iv) Dana Modal Teroka
The Ministry of Finance (MOF) together with Kumpulan Modal Perdana Sdn.
Bhd has spent RM10.9 million in giving financing for venture capital especially
in the electrical and electronics-related businesses (E&E). In 2015, two
companies have successfully invested and developed 11 intellectual property
(IPs) with 24 knowledge-based employees.
v) Program Sokongan Bahan Mentah kepada Usahawan Kayu Bumiputera
The Malaysian Timber Industry Board (MTIB) with the cooperation of the
Ministry of Plantation Industries and Commodities (MPIC) able to sourcing
out RM67.2 million worth of contract sales in 2015. From the RM67.2
million, RM10.2 million was allocated for programme which has benefited 62
Bumiputera entrepreneur in the timber industry.
vi) Business in Transformation (B.I.T.)
In producing new entrepreneur, Ministry of Domestic Trade, Cooperative
and Consumerism (KPDNKK) established a programme called Business in
Transformation (B.I.T) wherein 2015, the programme channeled RM2.3
million to 324 SME entrepreneurs which have resulted in job creation by 1,
557 new job opening.
Islamic Banking System (IBS), Practices and contribution towards SMEs in

Malaysia
By definition, IBS can be defined as a banking system that their operations
and activities are strictly based on the Sharia rules and principles. From 1960,
Islamic banking (IB) recorded well development and progression, although the IB
still in pioneering bank compared to the conventional banking who had established
more than 420 years ago. One of the unique characteristics of IB is the concept
of profit and loss (PLS) scheme where the transactions are done via Mudharabah
(profit – sharing) and Musharakah (joint-venture). Basically, under this scheme, all
assets and liabilities of lenders are assimilated, and with this type of arrangement,
Islamic banks will lend on a longer-term basis to support the projects that have
higher risk higher return characteristic. Subsequently, it will promote economic
growth. However, as per scholar views, they recommend profit/loss sharing scheme
over other trading modes, Murabahah is preferred in this context and has been
extensively used by majority of IB due to its permissibility. Furthermore, under
Murabahah financing, the buy and sell activities with equal instalment is flexible
and easier to understand, administer and monitor (Suzuki & Uddin, 2016).
The literature evidence by Kessler et al. (2007) mentioned that SMEs
encourages entrepreneurship, and by expanding the assistance to SMEs will result
in economic expansion under the landscape of IB. Dhumale and Sapcanin (1999)
found that IB schemes such as Murabahah, Mudharabah and Qardhul Hasan are
the tools that mostly suited with SME requirement. Apparently, Qardhul Hasan,
Murabahah and Ijarah financing flexible in usage wise and easy to implement in
determine the capital needs (Qardhul Hasan), equipment and assets (Murabahah)
and Leasing (Ijarah) for SMEs (World Bank-IDB, 2015). Undeniably, the schemes
such as Mudharabah and Musharakah seem to have a higher potential in contributing
significantly towards the development of SMEs as it satisfying the concept of
risk-sharing. Theoretically speaking, various financial schemes can fit for various
purposes but is subject to the risk-profiles of the SMEs. Case in hold, in 2003,
the study by Ismail and Razak shows that 95 percent of all financing in SME are
approved based on Ijarah, Bay Bithaman Ajil, and Murabahah financing schemes.
This research actually looking at all the pattern of debt-equity financing for SMEs
financing that taking place from 1993 to 1997. The study concluded that SMEs
prefer to select debt financing instead of equity financing to set-up or expand their
businesses. Manan et al. (2011) also postulate that majority of Malaysian SMEs
choose debt financing like Murabahah, Bay Bithaman Ajil and Ijarah as sources of
external capital.
318 Vol. 11 (2), July 2019
Basically, the philosophical basement of Islamic finance is purely depending

on economic and social development, including the part called financial inclusion
which is called unbankable of the society like SMEs. The financial inclusion can be
solved by Islamic finance which was based on asset-based and equity-based, thus it
can serve as an alternative to conventional financing (financial exclusion). As per
discussion above, it is very clear that Islamic banking incorporates the risk-sharing
features and well link of credit to collateral that is ensemble for SMEs in promoting
the comprehensive economic growth. In Malaysia, the assistance to allow for the best
financial inclusion by the SMEs is channeled via two main types of financing which
are based on Islamic way, namely (i) asset-based and (ii) equity-based. With this
approach, the financing issue, especially for the SME, is tackled in an appropriate
way. Under the asset-based, Islamic finance will ensure the transaction is fulfilling
the requirement of real economic activity with thorough close to financial linkage
to the financial asset. In contrast, equity-based financing is a profit and loss sharing
between financial providers and entrepreneurs for their interest business at initial
stage. This is suitable for SMEs who needs equity financing for their ventures or
businesses.
Figure 1. Financing Availability for SMEs under Islamic Financing
Notes: This figure shows the availability of financing under Islamic financing for SMEs in Malaysia. It
is divided into two categories, namely, (i) asset-based financing and (iii) equity-based financing.
The existence of these type of financing to the SMEs and consistent with the
Sharia principle have been recognized by various parties, especially policymakers
in many countries. The OIC, Organization of Islamic Cooperation placed high
importance to the development SMEs and developed various policies to further
enhance the development of SMEs through active usage of Islamic financial product
which is more linked to the real economic activity. In doing so, it allowed SMEs
in member countries to tap into rapidly growing pool of Sharia-compliant funds.
Undeniably, the role of General Council for Islamic Banks and Financial Institutions
together with the Islamic Development Bank (IDB) keeps researching and introduce
various innovative financing that can accelerate the growth of SMEs in worldwide
and promoting the role of Islamic finance in social finance aspect.
Further explanation of the availability of Islamic SMEs financing in Malaysia,
which are based on asset-based and equity-based are given in table 4:
Table 4. Summary of Islamic SMEs Financing in Malaysia

Practiced by Islamic
Islamic Asset
Banks
– Based Description Advantages for SMEs
(Selected Banks), in
Financing
Malaysia
Murabahah This financing is an  The financing usually  HSBC Amanah
agreement between fixed during the  SME banks
financial providers financing period.  Maybank Islamic
and clients where the  The client will know  Kuwait Finance
financial provider buys all the details related House (KFH)
the assets as per client to the price and  OCBC Al-Amin
requirement and then mark up and highly
sell them to the client as transparent.
cost-plus mark-up. It is  Suitable for short-term
usually paid in monthly financing.
installment.  The management
of SMEs remain
independent
 Not much issue on
collateral.
Ijarah This is a transaction that  Allowing financing,  SME Bank
dealings with leasing although with lesser  Bank Islam
based activities. Under collateral and credit Malaysia Berhad,
this, one party leases an history. This is because Al- Ansar SME
asset to be utilized by the lessor can retain Financing
a client for agreed time back the lease assets in  Maybank Islamic
period, and appropriate the case of default.  OCBC Al- Amin
fees need to be paid by  This financing is  Bank Muamalat
client. Other types of suitable for SMEs for
Ijarah would be Ijarah the medium and long
Wa Iqtina where the term period.
financier leases assets to  Not much
clients for specified rental documentation
charges, while only one processes involved.
of the parties buys or sells
the assets at the terminal
period of lease.
320 Vol. 11 (2), July 2019
Bai- Salam This is a forward sale  Provide working  SME Bank

contract where the capital financing,  Bank Muamalat
advance payment is paid which is based on
for commodities which Sharia complaint.
going to be delivered  Usually benefits to
in the future date. This those SMEs involved
is especially for the in agricultural
agricultural product. business.
Basically the Salam  Preferably useful for
contract can be used short-term financing.
to financing working
capital for SMEs.
Islamic Practiced by Islamic

Equity- Banks
Description Advantages for SMEs
Based (Selected Banks) in
Financing Malaysia
Musharakah In this financing, the  Sharia-compliant as  SME banks
partnership agreement it is purely based on  Bank Islam
made by two or more profit and loss sharing. Malaysia Berhad
than two parties where  Possibility to obtain  HSBC Amanah
all involved parties will a higher percentage  Kuwait Finance
supply the capital to a of profit than House (KFH)
joint venture to share entrepreneur capital  Bank Muamalat
its profit or losses. The contribution.
profit is distributed  SMEs who are looking
among parties based for long – term
on agreed proportion financing may go for
and ratio. However, the this type of financing.
losses must be borne by
parties with respect to
their capital contribution
Diminishing This type of financing is  The profit and loss  Al-Huda CIBE
Musharakah a contract or agreement sharing is based on  Affin Islamic Bank
where the entrepreneur market rate.  Bank Islam
agreed to buy the share  Possibility of retaining Malaysia Berhad
of investment of other the SMEs or for the  Kuwait Finance
partners over time until start-up businesses House(KFH)
the entrepreneur owns over long –run.  CIMB Islamic
100% of the venture.  The advantage in Bank
terms of bridge the
gaps of financing, not
giving up equity over
medium to long term.
Muḍārabah The partnership  Based on profit  CIMB Islamic

agreement between sharing only. Bank
the supplier of fund  There is no need to  RHB Islamic
and an entrepreneur contribute fund to the  SME Banks
who is acting as a fund venture.  Kuwait Finance
manager. In the case of  Possibility to bargain House(KFH)
profit, the distribution the profit distribution
of profit will be ratio.
taking place as agreed.  Suitable for long –
However, if its loss, term SMEs financing.
it is borne by capital
provider.
Notes: This table shows the Islamic finance that is available to the Malaysian SMEs. There are two
categories, namely, (i) asset-based financing and (ii) equity-based financing.
Indonesian SMEs and its challenges

The role of SMEs and entrepreneurs in Indonesia undeniably important in
boosting up the growth of the Indonesian economy. Looking at the fact given
by Bellefleur in the USAID report in 2012, SMEs occupied almost 99 percent in
economic sectors in Indonesian market and involved labor participation almost
95 percent. In terms of GDP contribution, the SMEs is account for 57 percent,
but unfortunately it represents only 0.24 percent of the population from the entire
population in Indonesia. As for definition and categories of SME, the below table
provide an overview of it.
Table 5. Categories of SMEs in Indonesia

Categories Description
Micro Industry Net assets more than IDR50,000,000
Net sales revenue of IDR300,000,000
Small Industry Net assets more than IDR50,000,000 to IDR500,000,000
Net sales revenue of IDR300,000,000 to IDR2,500,000,000
Medium Industry Net assets more than IDR500,000,000 to IDR100,000,000,000
Net sales revenue of IDR2,500,000,000 to IDR50,000,000,000
Notes: This table shows the definition of SME in the context of Indonesian and its classifications.
There are three categories includes micro-industry, small industry and medium industry.
According to the statistics shown by Ministry of Cooperatives and SMEs in

2012 at Indonesia, the SMEs participation rate has spread to various industry consists
322 Vol. 11 (2), July 2019
of agriculture, mining, livestock, electricity, construction trading, hoteling, real estate

and many others. Not only that, as evidenced in the literature, SMEs in Indonesia
have robust impact on the next export of Indonesia. According to Nugroho (2012),
the contribution of SMEs export equivalent to 15.81 percent of total net export in
2010 to 2012, among the popular export area are handicraft, fashion and accessories,
furniture, food and beverages and finally beauty product. Due to diversity in terms
of businesses, the SMEs plays an important role in regional development as well,
particularly in rural territorial. The performance of SMEs compared with corporates
seem relatively low in terms of contribution to the GDP. There are 5,000 corporates
involved in businesses with the percentage of contribution about 38 percent to the
GDP compared with 700,000 SMEs altogether involved in various businesses but
only contributes 22 percent to the Indonesian GDP. The details of employees and
outputs in Indonesian enterprises in 2013 are disclosed in Figure 2 below:
Figure 2. Enterprises, Employees and GDP of Indonesia
Notes: This figure reveals the details of the number of enterprises, employees and its contribution to
the Indonesian GDP.
The development and growth of SMEs in Indonesia can be classified into

four parts as per illustrated by Nugroho (2012), namely:
i) Firstly, the flexibility involves to SMEs where the SMEs become a subcontractor
to the larger firms and obtain their own market to survive. Given such
flexibility it allowed the SMEs to maintain the business and survive although
the economic crisis occurred.
ii) Looking at SME growth, it depends on the maturity stages of the SMEs. Usually
the SMEs in early stages, the starting point would be like household industries
and later become manufacturers in coming stages.
iii) The increase in income for individuals have created new market for SMEs as the
customer demand pattern encounter the shift in paradigm to more sophisticated
and innovative product. With this transformation, the growth level of SMEs is
also expanding and allow for competition among the SMEs which subsequently
lead to further innovation and enhancement in terms of product offerings.
iv) Finally, the growth of SMEs in urban areas is comparatively faster than in rural
areas. This perhaps due to the fact wherein the urban areas, the population density
is higher that lead to greater demand for the product offered compared to those
who are in the rural areas. In terms of business accessibility, the SMEs in urban
are dominant because of rapid development that takes place in urban areas.
Based on a report published by Marsh and McLennan (2015) reported that
Indonesia has abnormally higher microenterprise segment compared other emerging
markets but smaller in terms of SMEs. The finding by Marsh and McLennan disclosed
that in Indonesia there are 358 microenterprises but only 4.4 SMEs per 1000 adults.
In comparison with Malaysia, which has less microenterprise but more SMEs than
Indonesia. It means only 1 percent of Indonesia microenterprises able to grow
consistently to maintain the SME size at any stage. More than 90 percent of these
enterprises have limited capacity for accessing financial support. In one of research
conducted by Marsh and McLennan postulate that 44 percent of microenterprise is
located in rural Indonesia, do not have full loan accessibility. From those unable to get
financing, 35 percent indicated that they need fund but no accessibility while another
30 percent said will borrow the fund in nearest future.
Figure 3. Comparison of No. of Micro and SMEs Per 1,000 Adult Population
Across Emerging Asian Countries in 2014
Notes: This figure shows the statistics on the No. of Micro and SMEs Per 1,000 Adult Population
Across Emerging Asian Countries in 2014. The data were obtained from the World Bank website for
the year 2014.
324 Vol. 11 (2), July 2019
As common in many developing countries, Indonesian is in trouble as

well when it comes to SMEs development. The problem of “missing middle”
has haunted the progression of SMEs as majority of banks in Indonesian need
to focused and fulfill the need from smallest and largest businesses. The financial
institutions tend to help the well-established and larger firms compared to those
who are newly entering into the market. In other words, the banks become
too selective when providing financing to the businesses. Due to this issue, the
SMEs are far behind in terms of its development and productivity. With this
issue, apparently, the SMEs in Indonesia are continuing to grow at faster pace,
and there is always a positive outlook where the SMEs will be a significant
contributor to the economic progress in the coming years. Not only that, the
Indonesian government also has implemented various strategies for making sure
the SMEs able to access finance easily. Such policy like low tax rate (12 percent)
for the SMEs that achieve gross income less than IDR4.8billion. This tax rate
seems to be comparatively less with other ASEAN countries (on average 15
percent).
Furthermore, the Indonesian government was also providing funding to
SMEs with low-interest rate for low-risk profiles of SME to further accelerate the
development of SME. Most recently, the government introduced few measures to
soften the financial burden such the annual interest rates for subsidized people’s
business credit (KUR) minimized to 9 percent from 22 percent before. The President
of Indonesia, Jokowi Widodo has promised to lower down to 7 percent by end of
2017. Together with this, banks are on track as well in helping the progression of
SMEs, for instance, Bank Rakyat Indonesia (BRI) has allocated largest fund for
microentrepreneur, IDR202.58 trillion and this fund will grow 15 percent from
2015 onwards. Case in hold, UOB Indonesia, has shown interest to launched five
new SMEs in Jakarta, Semarang, Central Jawa, Surabaya and East Java by the end
of 2017.
Although various policies are implemented, the growth of SMEs not up
to standard. The report published by the Price Water Cooper House (PwC)
in 2017 revealed that expected lending growth for SMEs is just 12 percent
compared with other lending and it is relatively less. See the figure below for
more information.
Figure 4. Estimated Growth for Focus Lending in 2017
Notes: This figure shows the expected growth in the various lending offer by banks in Indonesia for
the year 2017.
The lower growth in microfinancing lending is due to the fact where the credit
risk and Non-Performing Loan (NPL) have become one of the big challenges to the
growth of lending in 2017. As per the report, majority of banks in Indonesia have
viewed that the credit risk and NPL is one of the major obstacles why they cannot
give financing to SMEs in Indonesia. Due to higher rate for these two elements,
banks have to tighten their credit requirements especially to the mortgage financing
and SMEs which usually required higher level of collateral. As reported in Figure 5,
the credit risk influences the loan growth by 94 percent followed by margin pressure
(75 percent), weak demand (30 percent), liquidity (24 percent), regulations (10
percent) and sales (8 percent).
Based on the survey conducted by Ministry of Cooperative and Small Medium
Enterprises 2013, only 18 percent of SMEs have access to the financing offered
by financial institutions and remaining 82 percent are depending on the internal
financing such as their own saving, family members and many others. The banks
have make sure the parties requested for funding need to 65 percent of collateral
to support the lending and higher lending rates. From the bank perspective, the
issue of asymmetric information haunted them since many SMEs are not disclosing
accurate information. Thus banks treat the SMEs still under riskiest financing
category. Therefore, the bank imposed higher rate and strict rules and regulations.
This view is also consistent with the Amianti and Wirayani (2016), they argued
that the lack of financing has led to reduction in young entrepreneur to involve in
326 Vol. 11 (2), July 2019
business because they find difficulties in start-ups their business. Moreover, given
this issue, although there are some entrepreneurs in the line of SMEs, they involve
in consumer industry as it required less capital for a start-up the business instead of
involving in heavy industry like manufacturing and metal.
Figure 5. Factor influencing the loan growth in 2017 in Indonesia
Notes: This figure reveals the information on the challenges facing loan growth in the year 2017 in
Indonesia
As per Urata (2000) argument, the problems facing the Indonesian SMEs
are consisting of two categories, namely (i) financial problem and (ii) non-financial
problem. More emphasis is given to the financial problem as it is the biggest challenges
to Indonesian SMEs, whereas the non-financial problems are very common and
rarely occurs in SMEs such as organizational management. According to the author,
the financial problem is consists of (1) lack of agreement between fund provider
and SMEs, and it is not really transparent, (2) there is no efficient way in managing
SMEs funding, (iii) involve high transaction costs subsequently caused the use of
longer time period in approving funding, (iv) inaccessible to fund as unawareness
about the existence of funding, and obviously the high-interest rate which have
burdened the poor entrepreneurs as they are in pioneering stage in SMEs business
and uncertain about the business success.
On the other hand, Mac Eachern and Suyudi (2014) argued that the
problem of financial accessibility by Indonesian SMEs seem to follow the Pecking
Order Hypothesis. In other words, the majority of Indonesian SMEs are utilizing
and giving priority to the usage of internal funds rather than external funds.
This is because, by utilizing the internal, the cost would be lower compared with
external funds where need to fulfil many formalities. In addition, the author also
argued that the terms and conditions, size of the loan, and duration also cause the
problem for SMEs’ in accessing the financial facility. This issue is very common
and used to face by smaller firms, for example, duration factor where the smaller
firm expose to higher rejection on financial assistance because unable to fulfil
banker requirements in terms of duration of loan. In addition, smaller firms have
also needed to pay higher interest rate charges and expose them into the possibility
of default risk.
Indeed, the macroeconomic policies implemented by the Indonesian
government also have influenced the availability of loanable funds in financial
market. Since the government is running with budget deficit, it means that the
withdrawal from domestic saving to support the operational costs and investment
costs have led the market with limited number of loanable fund which subsequently
causes financial institutions to limits their borrowing and lending activities. In
2014, Indonesia attained 2.25 percent budget deficit of gross domestic product
(GDP), comparatively higher than the government target of 1.4 percent. This
problem will cause a barrier to the SMEs in accessing the financial assistance
Shinozaki (2012).
Apart from financial constraints, the Indonesian SMEs is also facing the
problem of such: (i) too much of procedures in applying for funding, (ii) high
collateral requirement, (iii) lack of information, (iv) not extra business to support,
(v) network, (vi) lack of knowledge, (vii) do not fit with business and (viii) others.
Although the existing literature has highlighted this issue of financial accessibility,
they pay less attention to offer other viable alternative solution in solving the financial
accessibility problem rather than just relying on government policies. Hence, with
this gap and motivation, the present study has taken a step ahead in exploring the
potential of Islamic finance to support the financial accessibility of SMEs in the
context of Indonesia.
Islamic banking (IB) and its involvement in SMEs of Indonesia

The development of Islamic banking (IB) in Indonesia mainly driven
society factor or bottom-up in order to meet the needs of society with main
priority is focus on the real sector. In contrast compared with Malaysia, the
development of IB is more zoom in into financial sector and obtained full
support from the government thus, it is called as a government-driven which
lead the successful of IB. The number of players involved in Islamic financial
industry is also slowly grown since year 2011. Figure 6 below reveals the statistics
328 Vol. 11 (2), July 2019
on number of players involved in the Islamic finance industry. It is based on

non – bank financial institutions. Basically looking the figures given by Otoritas
Jasa Keuangan, OJK (2016), it can noted that the Takaful and Islamic financial
industries shows increasing pattern in terms of number of players. The other
elements such as Sharia Venture Capital industry, Sharia Specialized industry
and Sharia Microfinance (where SMEs involved as well) recorded lower number
of players. In Figure 6, the number of players involved in Islamic banking
financial institutions are showing increasing pattern, comprises of Islamic
commercial banks, Islamic banking unit and Islamic rural banks.
In term total assets, Islamic banking recorded positive CAGR (24.9
percent) from year 2011 until 2016 as compared with conventional banks (14.9
percent). In terms of financing, the growth in Islamic banks is 25.6 percent
whereas the conventional banks’ percentage is just 17.8 percent (OJK Report,
2016). Based on these two statistics, it can be concluded the acceptance for
Islamic banking in Indonesia is slowly in –line with conventional counterparts.
Majority of financing in IB, are taking place at commercial businesses instead
of SMEs (Huda, 2012).
Figure 6. Islamic Non - Financials Institutions in Indonesia
Notes: This figure shows the statistics on the number of the player involved in the Islamic Non-
Financial Institutions in Indonesia. The statistics are obtained from the OJK data terminals, and it is
from year 2011 till 2016Q1.
Figure 7. Islamic Banks Financial Institutions
Notes: This figure shows the statistics on the number of players involved in the Islamic Financial
Institutions in Indonesia. The statistics are obtained from the OJK data terminals, and it is from year
2011 till 2016Q1.
As evidenced in Figure 6, the microfinancing is not popularly demanded, and

the number of players involved is also relatively less in the context of Islamic financial
institutions. According to Huda (2012), the less demand for the microfinance and
SMEs are due to charges imposed by the IB such as the margin charges and IB focuses
to financing working capital for maximum one year only (short term financing).
This issues had created big hassle to the development of SMEs in Indonesia as it is
not easy not get credit facility form the IB as they tighten the rules and regulations.
In addition, the IB in Indonesia provides financing to SMEs mainly in the forms of
Murabahah and Musharakah financing. The other financing methods are relatively
less in terms of its consumption.
Given this, it has led to difficulties for the young entrepreneur involved in
business and subsequently harms the development of SMEs in Indonesian market.
The potential of Islamic finance is not fully explored in the context of Indonesian
even though there is some Islamic financial product that has been used to support
the SMEs. The obstacles such as asymmetric information and moral hazard seem
to block the potential of Islamic finance in accelerating social finance via helping
the growth of SMEs. Furthermore, those with potential also will be affected due to
credit availability. The impact of limited credit and difficulties in accessing to credit
facility expected to reduce Indonesian GDP by approximately $130 billion which is
equal to 14% of total Indonesian GDP (Bank Indonesia Report, 2015).
Therefore, apart from other issues that haunted the progression of SMEs,
it is notable that the issue of financial accessibility is getting critical and need
to addressed carefully to maintain the sustainability of SMEs in Indonesia. The
330 Vol. 11 (2), July 2019
challenge of financial issue can be overcome by innovative product offerings and

policies implementation. In the next section of discussion, the research will share
some fruitful lessons or recommendations that the Indonesian can learn from
Malaysia who successfully uses and implemented Islamic finance and capital market
to support the development of SMEs in general.
What is the recommendation to the Indonesian authority based on Malaysian

SMEs successfulness and the potential of Islamic finance?
Looking at the successfulness of SMEs in Malaysia based on conventional and
Islamic financing in terms of financial accessibility. There are some recommendations
that can flourish the development and progression of Indonesian SMEs which are
having a problem in accessing to get financing. The recommendations are as follows:
i) Diversify the Islamic finance product offerings especially linked to the SMEs
financing.
As mentioned in the earlier section, in Malaysia, there are various product
offerings in Islamic banking that can help to increase the growth of SMEs.
Among the products are Murabahah, Ijarah, Salam, Musharakah, Diminishing
Musharakah and Mudharabah. Majority of IBs in Malaysia have already
introduced all these instruments to SMEs to support financing accessibility
from coverings short-term and long – term requirement of working capital
and businesses, which can fit for the SMEs environment. From Indonesian
perspectives, the popular Islamic financial instruments that help the SMEs
are Murabahah and Musharakah. Other financing tools are limited due to
risk-profiles of SMEs and the issues of asymmetric information. Thus, it is
recommended to the Indonesia authority, before expanding the Islamic financial
tools, the blueprint and strategies need to be developed properly which can
allow the introduction of innovative Islamic finance tools. Better monitoring
and auditing needed in introducing the tools in the market.
ii) Alternative financing strategies:
Leading Entrepreneur Accelerator Platform (LEAP) Market
Bursa Malaysia recently has launched a new market specifically for SMEs to raise
fund to support its business operation. It is known as the Leading Entrepreneur
Accelerator Platform (LEAP). With this new market establishment, the SMEs
can raise fund directly from the capital market without going through the
financial institutions. The Malaysian SMEs is also facing the issue of financial
constraint due to strict rules and regulations from banks side. About 96 percent
of financing by SMEs are driven by banking sector, and the remaining 4 percent
is coming from capital market. Therefore, there is need for innovative financing.
Looking at the statistics given by MIDF report (2015), the SME contribution
to the business establishment is account for 97 percent and the contribution to
the economic development is 37 percent. Thus, with the introduction of LEAP,
it will become an alternative financing platform for SMEs. Not only that, with
such platform, it would enhance the growth of SMEs in Malaysia. And support
broader economic activities.
The trading in LEAP is limited to sophisticated investors (either high-net-
worth individuals whose total assets or annual income exceed RM3 million
or RM300,000 respectively or corporates with net assets exceeding RM10
million), (Bursa Malaysia Report, 2017). The listing procedure in LEAP
market will be guided by framework issued to Bursa Malaysia and approved by
the Securities Commission. Only selected SMEs will participate with assigned
approved advisers. SMEs with approved advisers selected: Cloudaron Pte
Ltd, Agrofresh International Group Sdn Bhd, Red Ideas Holdings Sdn Bhd,
Polymer Link Sdn Bhd, Trustgate Bhd, Accent Wellness Global Sdn Bhd, East-
West One Group Sdn Bhd, Macfeam Sdn Bhd, Upstream Downstream Process
& Services Sdn Bhd, ProEight Sdn Bhd and Safetyware Sdn Bhd. With LEAP,
the injection of financing to the SMEs via capital market is expected about
20 percent compared to heavy reliance to of SMEs’ financing needs from the
present 96 percent by financial institutions. This LEAP applies for both non-
Sharia and Sharia-compliant SMEs.
Peer to Peer Financing (P2P)
Another innovative financing that taking place in Malaysia would in the
form of Peer to Peer (P2P) financing. This platform specifically for businesses
and SMEs for raising capital purpose and it has been recently approved by
Securities Commission (SC) of Malaysia to be implemented. By definition,
P2P platform is process of obtaining fund where an individual lends and
borrows fund directly from other by using online platform. It means that the
role of financial intermediaries is not needed as it is done one to one basis like
e-Bay. The P2P financing has successfully implemented in the field of mortgage
loan, real estate, education and businesses worldwide. However, in the context
of Malaysia, P2P financing is only available for businesses and SMEs. The SC,
for the initial stage, had approved six P2P financings in November 2016 and it
will fully under operation by the end of December 2017, namely, (i) Funding
Societies, (ii) B2B FinPal, (iii) ManagePay, (iv)Fundaztic.com, (v)EthicKapital.
332 Vol. 11 (2), July 2019
com, and (vi) FundedByMe Malaysia. With such establishment of innovative

financing, Malaysia becomes the first Southeast Asia country the full regulatory
control introduced P2P financing. The P2P financing is also applicable for both
side Sharia-compliant and Non-Sharia complaint of businesses or SMEs who
are looking for financial support (Thaker and Thaker, 2017).
Crowdfunding
Crowdfunding is a collection of funds (small amount) from many investors or
donors through a web-based platform for a specific project, business venture or
for the social cause. Crowdfunding can be divided into four categories namely
donation crowdfunding, reward crowdfunding, peer-to-peer lending and equity
crowdfunding (Thaker and Thaker, 2015). Crowdfunding gained popularity as
a creative way to raise fund for various business category namely, philanthropic,
social endeavours, entrepreneurial ventures followed by films and performing
arts and music and recording arts, and finally energy and environment. The
category of crowdfunding that is suitable for SMEs financing would be in the
forms of lending, and equity-based crowdfunding as both of these services
for raising capital purpose. For example, under equity-based crowdfunding,
the fund raised through online by a business, particularly early-stage funding,
by offering equity interests in the business to investors. Businesses that are
looking to raise capital through this mode typically advertise online through
a crowdfunding platform website, which serves as an intermediary between
investors and the start-up companies. In Malaysia, the crowdfunding has been
successfully implemented in various field, particularly focuses on social-based
businesses’ such as SMEs. PitchIN is the example of Malaysian crowdfunding
platform which based on reward-based has shown rapid progression in South
East Asia. PitchIN platform has executed various projects but not limited to
Arts & Design, Photography, Games, Music and businesses. PitchIN also hosts
community and social projects, which make up about a third of the projects on
site.
In Indonesia, the Crowdfunding is slowly taking its place but with a lot of
challenges. One example in Indonesia that successfully used the crowdfunding
to raise fund is Kesetkibee program is one of the successful entrepreneurship
programs that employing crowdfunding to raise the fund. Kesetkibee is
a program that involves only women who are members of the Cooperative
Women Unggaran Melati in Central Java. Under this program, the waste
material from cloth garment factory is converted into a material with a certain
economic value, such as a doormat. Kesetkibee program received funding of Rp
5.02 million of the total funding needs as much as Rp 5,000,000. This fund
was collected from 33 donors who donate through a crowdfunding platform
namely patungan.net. Other examples include Craft Programme for Change
and GandengTangan which are specifically for small businesses and skills
development.
As mentioned earlier, the Crowdfunding platform in Indonesia has potential
to utilize properly for SMEs and small businesses, but the challenges such as
fraud, failure, anti-money laundering, lack of experiences, regulatory issue and
market rejection seem to be continued to harm the progress of Crowdfunding.
Again, this platform also can be suited for Sharia and non- Sharia businesses
and SMEs.
Investment Account Platform (IAP)
The IAP is called an online platform that facilitates channeling funds from
investors to finance ventures and SMEs and enables them to get access
financing effectively and comfortable. Selected Islamic banks in Malaysia
such as Affin Islamic Bank, Bank Muamalat Malaysia, Bank Islam Malaysia,
Maybank Islamic, Bank Kerjasama Rakyat and Bank Simpanan Nasional have
introduced Investment Account Platform (IAP). IAP was launched officially
by ex-governor of Malaysian central bank, Dr Zeti Akhtar Aziz on 17th
February 2016. The IAP is considered as an online platform that facilitates in
channelling funds from investors to finance viable ventures and SMEs. It is a
technology-enabled financial marketplace for SMEs to raise funding from a
large pool of investors for their businesses via the internet. The IAP is a newly
fintech innovative product that offered in Malaysian Islamic banks. In terms of
comparison, the IAP, crowdfunding and P2P financings have some similarities,
but IAP involved direct financing executed by investors for the project that
they like to invest in. With IAP, Islamic banks play a role of intermediation in
operationalising the investment account while performs the credit assessments
and screening procedure for the projects. However, the IAP requires assistance
form rating agencies to rate and screening the ventures and SMEs to make sure
it is complying with certain standards. Therefore, the IAP tend to benefits more
to the SMEs who needs financial support.
As a concluding remark for alternative financing strategies, the Indonesian
authority should consider in implementing the financing strategies applied in
Malaysia in boosting up the performance of SMEs in Indonesia. The improvement
needed in making sure the existing financing such as crowdfunding in terms
334 Vol. 11 (2), July 2019
of monitoring, improvised the rules and regulations related to crowdfunding,

develop better framework in accessing the standard such credit agency to
evaluate the project or SMEs before approved the financing. In terms of LEAP
and IAP, perhaps the Indonesian government can discuss and collaborate with
the Malaysia government and financial authority to implementing the LEAP,
P2P and IAP in Indonesian context. There is need for platform for discussion
or forum and exchange views or insights on the possibilities to implement these
financing strategies in Indonesia with the motive of helping the SMEs. To
sum up, the Indonesia authority should realize the potential of FinTechs in
lending practices especially in the context of Islamic Banking and finance. The
authority is also needed to raise the awareness to the customers and adding
value to businesses beyond lending will be vital for long-term growth of banking
industry Indonesia.
iii) Information accessibility to enhance the transparency
In Malaysia, the element of asymmetric information is less as there are many
sources of information engines where the entrepreneur who looking for
financing can gather all the information related to sources of funding. The
informations are available in majority of banks website especially the SMEs
banks. However, in the context of Indonesia, as per evidence in many literatures,
one of main reasons why banks in Indonesia prevent from giving lending SMEs
is because of higher asymmetric information. Banks including Islamic banks
in Malaysia only give financing to selected ventures by looking at their risk-
profiles of the respective ventures. This further adds to the disparity of gaps in
terms of financial accessibility of SMEs in Indonesia. As for recommendation,
the Indonesian authority should consider providing more data either published
or non-published materials on financial assistantship. This will subsequently
help to get access to the information easily. If possible, the Indonesian authority
should have their own database by working with Islamic financial institutions
where the entrepreneur who looks assistance to start-up their business, can
easily visit the database to see what are the benefits and assistance available
to the entrepreneurs. With this type of arrangement, it is expected to reduce
asymmetric information.
iv) Expand the number of “Angel Bank” (AB) for financing alternatives
By definition, AB has known as a process of collects angel investments into a
centralized fund, where the bank then vets potential companies and channels
the financing to the entrepreneurs and SMEs at lower interest or profit
charges. Although the AB is already in the Indonesia market, number of AB

availability is limited. The most of AB in Indonesia is called Angel Investment
Network Indonesia. They have successfully provided early-stage capital to
entrepreneurs covering various aspects of industries such as technology,
consumer, social enterprise and many others. Even in Malaysia, the Angel banks
slowly taking its pace of development in helping many young entrepreneurs
who are looking for start-up capital for running the businesses. For example,
Malaysian Business Angel Network (MBAN), is one of an organization
of angel investors and angel clubs in Malaysia which have more than 134
registered angel investors and having net worth of RM123 million in 2016
and supporting various small businesses. When it comes to Islamic finance
and AB, the exploration is limited as it involved some profit or interest charges
for the service offered. The role of Indonesian authority would be in term of
considering the AB from Islamic finance perspective which means offered the
service without the element of riba. This can be done via performing academic
research, organizing conference in order to get feedback and reviews from
practitioners and academician in introducing AB which is compliant with
Sharia rules. In addition, the Indonesian authority also can consider expanding
further the existing AB in all over state while waiting for Islamic finance AB
taking place in future.
v) Create more Credit Bureau (CB) for SMEs in Indonesia
The research workshop that carried out in Hangzhou (2010), APEC workshop,
shows a discussion on the Credit Bureau (CB) availability in Indonesia. Under
the Indonesian market framework, at the national level, there were two important
CB, namely, (i) Askrindo and (ii) Jamkrindo and at regional level there was only
one called as Jamkrida Jatim. If compared with Malaysia, there was one agency
called Credit Guarantee Corporation of Malaysia in all over states that provide
credit information and credit assessments to the financial providers. However, in
the context of Indonesia, such a large market for SMEs, the regional credit bureau
is only limited to Jamkrida Jatim at Jawa Timur. This itself will become issue in
processing the application for funding from other states. In order to smoothen
up the processes involved in credit assessments, the Indonesian authority need to
develop more credit bureau in all over state, if possible the Indonesian authority
consider to provide licensing for Independent Credit Bureau (ICB) where it could
be self-funded where it sells the information about customer creditworthiness or
their ability to meet debt obligations. This can apply for evaluation for both,
Sharia or non-Sharia compliant businesses or SMEs.
336 Vol. 11 (2), July 2019
Conclusion
The role of government and its policies implementation has resulted in a
better progression of SMEs in Malaysia. With effective involvement of government
in strategized the policies lead the SMEs to records such high achievement and active
contribution to the economic growth of Malaysia. As noted, the Malaysia SMEs
continued to offer diversified sources of financing to mitigate the need for SMEs in
various stages. There is plenty of social financing introduced by conventional and
Islamic financing at various stages of SMEs. Moving forward, the SMEs source of
financing is slowly become more innovative and take a new turn with innovative
platforms such as LEAP, P2P, Crowdfunding and IAP. Together with this, the arrival
of FinTech seems to be slowly transforming the financial landscape of Malaysia in
Islamic finance and conventional financing. Not only that, apart from FinTech, the
product offerings of Islamic banking in Malaysia has resulted SMEs to have more
option in selecting the best financing for their ventures. Islamic social financing
that offered in Malaysian Islamic banking that widely used by SMEs in Malaysia
includes Murabahah, Ijarah, Salam, Musharakah, Diminishing Musharakah and
Mudharabah. There are many other as well such as Bay al Dayn, ay al-Innah and
Tawarruq.
As far as Indonesian SMEs is a concern, the role of Islamic finance needs
to be further enhanced from existing one. The issue of financial accessibility has
haunted the progression of SMEs in Indonesia although this industry contributed
positively to the growth of Indonesian GDP. There is need for innovative financing
strategy to assist the SMEs in accessing the financial assistance. As recommended,
the Indonesian government may incorporate some of the ways implemented by
Malaysia government in boosting up their SMEs using Islamic finance. Moreover,
the findings from this study can be used to develop specific framework in which
to increase its capacity in assisting SMEs to access internal and external finances in
Indonesia.
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Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics)

Volume 11 (2), July 2019

Discussion on Islamic Finance and Small Medium

Hassanudin Mohd Thas Thaker1* & K Chandra Sakaran2

Abstract. This study attempts to provide some understanding of SMEs’ access to

Department of Economics and Finance, Sunway University, Malaysia.

Faculty of Business, Economics and Accounting, HELP University, Malaysia.

financial accessibility as the Malaysian authority give high emphasis on Fintech in

Malaysia’s Definition of SME

Table 1. Definitions of SME in Manufacturing sector

Table 2. Definitions of SME in Services and other sectors

SMEs Development In Malaysia

Impact Programmes. The six High Impact Programmes is summarized in the

Table 3. HIPs of SME Masterplan

HIP 1: Integration of HIP 2: Technology HIP3: ME Investment

In this budget, the government also announced a reduction in the corporate

such as, Mobileprenuer Programme by GIATMARA (RM30 million), Agropreneur

SMEs Socio-Economic Contributions

In 2010, the Malaysian Prime Minister Najib Razak introduced a new

Malaysian SMEs. It is often too expensive for SMEs to employ a professional

Sample and Data Collection

Analysis and Results

The successfulness of SMEs financing schemes implementation in Malaysia

entrepreneurship as well as involvement in the green technology and enterprise

Islamic Banking System (IBS), Practices and contribution towards SMEs in

Basically, the philosophical basement of Islamic finance is purely depending

Figure 1. Financing Availability for SMEs under Islamic Financing

Table 4. Summary of Islamic SMEs Financing in Malaysia

Bai- Salam This is a forward sale  Provide working  SME Bank

Islamic Practiced by Islamic

Muḍārabah The partnership  Based on profit  CIMB Islamic

Indonesian SMEs and its challenges

Table 5. Categories of SMEs in Indonesia

According to the statistics shown by Ministry of Cooperatives and SMEs in

of agriculture, mining, livestock, electricity, construction trading, hoteling, real estate

Figure 2. Enterprises, Employees and GDP of Indonesia

The development and growth of SMEs in Indonesia can be classified into

As common in many developing countries, Indonesian is in trouble as

Figure 4. Estimated Growth for Focus Lending in 2017

Figure 5. Factor influencing the loan growth in 2017 in Indonesia

Islamic banking (IB) and its involvement in SMEs of Indonesia

on number of players involved in the Islamic finance industry. It is based on

Figure 6. Islamic Non - Financials Institutions in Indonesia

Figure 7. Islamic Banks Financial Institutions

As evidenced in Figure 6, the microfinancing is not popularly demanded, and

challenge of financial issue can be overcome by innovative product offerings and

What is the recommendation to the Indonesian authority based on Malaysian

com, and (vi) FundedByMe Malaysia. With such establishment of innovative

of monitoring, improvised the rules and regulations related to crowdfunding,

charges. Although the AB is already in the Indonesia market, number of AB

Ministry of Finance Malaysia. 2017. Economic Report 2013/14. Economic Performance

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