Seminar Keusahawanan Islam II Peringkat Kebangsaan

Exploring Muslim Entrepreneurs’ knowledge and usage of

Islamic Financing1

Dr Muhamad Rahimi Osman2 Dan Husniyati Ali3

Abstract

T he growth of Islamic banking and finance is very rapid, and it has

been recognized as one of the most fastest growing industries which has
gained universal acceptance by the people across the world. By both
Muslims and non Muslims. A well-established of Islamic financial system
has encouraged the Muslim and the non Muslim to use the products and
services offer to them, which also include financing. They are attracted to
obtain their financing from Islamic banks which the operations are based
on Syari’ah, that differs in its spirit and motivation. Therefore, this paper
investigates the perception of entrepreneurs towards Islamic financing to
the SME sector provided by Islamic banks. Specifically, this study attempts
to provide answers : What is the level of understanding among
entrepreneurs towards Islamic financing to the SMEs?; What are the
factors that would encourage entrepreneurs to seek financing from the
banks offering Islamic mode of financing as an alternative to the
conventional financing? The paper would also highlight the effort of
Malaysian government in promoting the development of SMEs, particularly
on the aspects of financing.

Keywords: knowledge, Islamic financing, small and medium enterprises,

entrepreneur

1
This paper is presented at Seminar Keusahawan Islam II Peringkat Kebangsaan,
organised by Jabatan Syariah dan Pengurusan, Akademi Pengajian Islam, Universiti
Malaya, 15 Oktober 2008
2
Assoc. Professor and Director of Centre for Islamic Thought and Understanding (CITU),
Universiti Teknologi MARA, Shah Alam, Email: [email protected]
3
Senior Lecturer, Faculty of Business Management, Universiti Teknologi MARA, Shah
Alam , Email :[email protected], [email protected]

1
Seminar Keusahawanan Islam II Peringkat Kebangsaan

1.0 Introduction
The small medium enterprises (SMEs) plays an important role in any of the
economies in this world. SMEs have indeed contributed a lot to the
development of a country, particularly towards income generation,
employment creation and most importantly, poverty alleviation. Although
the SMEs require small capital, yet the main constraint faced by SMEs is
the difficulties in obtaining financing from the banking institution (Census
of Establishment and Enterprises 2005, Department of Statistics Malaysia).
The Census also revealed that lack of collateral (55.2%) as the main
obstacle faced by SMEs when seeking financing from banking institutions.
Then, it was followed by insufficient loan documentation (13.1%), lack of
financial track record (10.7%), longer time taken for loan processing
(9.8%), as well as business viability (5.3%).

The issue of collateral is nothing new for SMEs. Collateral or security for
loans has been a pre- requisite by credit institutions before issuing loans to
SMEs entrepreneurs. To some credit institutions, however, the outlook on
collateral vis-à-vis the small entrepreneur has been changing over time with
more emphasis given to credit worthiness in place of common collateral
(Rweyemamu, 2003). The new emphasis involves such factors as the
history of loan repayment, trustworthiness and the capacity to repay
(Kashuliza and Kydd, 1996). The other criteria added by the World Bank
(2005) for assessing credit worthiness is the reputation of the individual
within the area, the technical feasibility of the proposed enterprise, and
expected cash flow generation. The collateral requirement and credit
rationing have in fact affects most of the micro and small enterprises, thus
has lead them to the exclusion from business activities. For the Muslim
entrepreneurs, they can obtain fund either through conventional loan,
which requires collateral or through Islamic financial institution. Though,
Islamic banks offer similar kind of services as the conventional banks,

2
Seminar Keusahawanan Islam II Peringkat Kebangsaan

they must adhere to the Islamic principles such as observing strictly on

free-interest transactions and other entities that are against Islamic law. On
top of that Islamic financing does not require collateral to obtain fund.
Against this backdrop, the present study investigates the perception of
Muslim entrepreneurs towards Islamic financing to the SME sector
provided by Islamic banks. Specifically, this study attempts to provide
answers to the following research questions:

• What is the level of understanding among Muslim entrepreneurs

towards Islamic financing ?;
• What are the factors that would encourage entrepreneurs to seek
financing from the banks offering Islamic mode of financing as an
alternative to the conventional financing?
• What are the efforts taken by Malaysian government in promoting the
development of SMEs, particularly on the aspects of financing?

This paper is structured as follows. The next section focuses on a brief

outlook at SMEs in Malaysia, which include accessibility of Islamic
financing to SMEs, then followed with literature review, methodology and
data used in the study. The last section presents the findings and discussion
and lastly a conclusion.

2.0 SMEs in Malaysia: a brief outlook

The importance of SMEs development has been recognized by Malaysian

government since early 1960s. At the beginning, the main reason of SMEs
policies development was to establish business opportunities to the Malays.
That is, government is very concerned to increase employment
opportunities and participation in the economic activities of the Malays.
However, until the later half of 1980s, the focus of SME development
policy has shifted to the development of SMEs in supporting industries,

3
Seminar Keusahawanan Islam II Peringkat Kebangsaan

particularly the pre-established of the medium-sized. In Malaysia, SMEs

are being categorized under three categories, where the groupings are based
on the number of people employed or on the total sales or revenues
generated by a business in a year (refer to Table 1). Based on the Census of
Establishment and Enterprises (Census) which was conducted in 2005,
550,704 business enterprises was involved in the agriculture,
manufacturing and service sectors, 54,621 or 99.2% of the business
establishments were SMEs, of which 433,517 or about 80% are micro
enterprises (Bank Negara Malaysia Annual Report 2006). In addition, the
Census also indicated that SMEs was the major source of employment.
This sector has provided more than 5.6 million workers which accounted
for 56% of total employment.

Furthermore, the SMEs in Malaysia can be grouped under three broad

sectors, namely the general business sector, the manufacturing sector and
lastly the agricultural sector (Hashim, 2005). Those SMEs operating under
general business sector include construction, wholesale and retail trade,
transport and storage, business services and activities, and providing
services such as hotel and restaurant. Meanwhile, the manufacturing sector
concentrates on the activities such as processing and production of raw
materials such as food, textile, wood, chemicals, petroleum, rubber, plastic,
metallic and non metallic materials, supplying electrical and electronics
appliances and components and transport equipment. The agricultural
sector on the other hand, is the sector which has contributed a lot to the
national economy such as the production of rubber, rice, oil palm, coconut
cocoa, pepper, tobacco, livestock, timber, fish, fruits and vegetables.

4
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Table 1: Definition of SMEs by Small and Medium Industries

Development Corporation (SMIDEC) by size

Category Micro-enterprise Small enterprise Medium

enterprise
Manufacturing, Sales turnover of Sales turnover Sales turnover
Manufacturing- less than between between RM10
Related Services RM250,000 OR RM250,000 and million and
and Agro-based full time less than RM10 RM25 million
industries employees less million OR full OR full time
than 5 time employees employees
between 5 and between 51 and
50 150
Services, Primary Sales turnover of Sales turnover Sales turnover
Agriculture and less than between between RM1
Information & RM200,000 OR RM200,000 and million and
Communication full time less than RM1 RM5 million
Technology (ICT) employees less million OR full OR full time
than 5 time employees employees
between 5 and between20 and
19 50
(Source: Small and Medium Industries Development Corporation
(SMIDEC)

The contributions made by the Small and medium sized enterprises (SMEs)
as a catalyst to the social and economic development have gained
recognition from government. This can be verified when the government
established the National SME Development Council (NSDC) in June 2004,
which was chaired by the Prime Minister. The NSDC also comprises of
representatives from Ministers and Heads of 18 Key Ministries and

5
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Agencies involved in SME development. The NSDC coordinates and

ensures that inter-Ministry and Agency efforts are undertaken in order to
support the key strategic thrusts of strengthening and enabling
infrastructure for SME development, building SMEs’ capacity and
capabilities, and improving the access to financing by SMEs (MGCC
Quarterly-http://www.smeinfo.com). Three approaches have been adopted
to develop resilient and competitive SMEs in a more effective and efficient
manner, namely by strengthening the enabling infrastructure for SME
development, building the SMEs capacity and capability, and improving
their access to financing.

The main providers of SMEs financing are banking institutions,

development financial institutions (DFIs), leasing and factoring companies,
as well as venture capital companies, which provide equity financing. The
SMEs can even make use of various specific funds set up by the
government. The trend of financing to SMEs have apparently shown an
improvement. Recently, in 2006, the banking institutions has approved
RM39.6 billion of financing to more than 84 000 SME accounts, an
increase of 10.7% from 2005 ( that is in 2005 only RM35.8 billion of fund
being disbursed). Loan disbursements increased by 19.9% to RM132.6
billion (2005:RM110.7 billion), while loans outstanding to SMEs expanded
by 4.2% to RM104.6 billion as at end-2006 (end 2005:RM100.3 billion).
For year 2007, these financial institutions are expected to approve a total of
RM51 billion in loans to about 110 000 SME accounts in 2007. On a
sectored basis, lending to SMEs was diversified, with almost two-thirds
being channeled to the wholesale and retail trade, hotels and restaurants,
manufacturing and construction sectors.

6
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Census of Establishment and Enterprise 2005 also revealed that the main
purpose of financing by SMEs in Malaysia is the need for working capital
(29.9%), followed by the requirements to purchase/lease of
equipments/machinery (28.5%). The Census also revealed that working
capital requirements are greater the smaller the size of the establishment.
Hence in order to meet the demand for the funds, Bank Negara Malaysia
has taken and adopted various measures in strengthening the existing
infrastructure as to ensure a more effective channeling of funds to SMEs.

3.0 Literature review

It is acknowledged that the small and medium sized businesses (SMEs) are
the basis of the economic growth of many countries. Even, SMEs’
development is very crucial particularly for emerging economies as it
boosts economic growth and innovation, as well as to compete in the
global market. Birch et.al (1993) stated that SMEs are the key players in
motivating, facilitating industrial restructuring in developed economies and
most importantly is in the creation of employment, wealth and economic
growth. The SMEs industries are usually associated with the usage of
relatively labor-intensive production techniques, where they may employ
more labor in their production. Despite their contribution to the economy,
the SMEs do face some problems and challenges. Hashim (2005) has
highlighted some weaknesses of SMEs. These drawbacks may be due to
internal and external forces such as lack of capital and credit facilities,
shortage of raw materials, inadequate infrastructure, lack of managerial and
technical expertise, marketing constraints and knowledge, and limited
application of new technology. Meanwhile the study conducted by Timberg
(2000) and Beyene(2004) disclosed that rules and collateral were among
the biggest problems faced by SMEs, as the entrepreneurs were unable to
fulfill minimum requirements as set by financial institutions (Winter,
1995). Several factors were also affecting SMEs which include lack of

7
Seminar Keusahawanan Islam II Peringkat Kebangsaan

credit available at a reasonable cost as well as lack of working capital, poor

infrastructure and competition from larger foreign firms (Cook, 2001). In
addition, Rodriguez et. al (2002) concluded that there are three main
constraints faced by SMEs, namely, constraint in policy and regulatory
framework; constraint in managerial capacity and lastly, constraints in
access to financial markets.

While literatures relating to SMEs’ financing have also been discussed

thoroughly by many writers. Deakins and Hussain (1994), and Graham
(2004) have acknowledged the importance of and financing issues for
SMEs for economic well being. Eventually, SMEs in general have
encountered problems when assessing finance to support fixed capital
investment and working capital (Tucker and Lean 2001). Khandker (1998)
revealed that financing to small-scale and cottage industries in Bangladesh
were obtained from suppliers in the form of raw materials or from the
buyers of the firm’s output. The study further stated that about 70 per cent
of the start-up cost in respect of small grocery stores was financed from the
owner’s savings and sales of other assets. Friends and relatives provided
loans to the extent of 20 per cent on average and the suppliers provide
financing almost 10 per cent of the start-up cost. Meanwhile, Deakins and
Hussain (1994) stated that banks tend to provide short term financing that
restrict the SMEs’ capacity to plan and undertake long term decisions.

Accordingly, due to the inability to meet the requirement set by financial

institution, some entrepreneurs of SMEs has sought fund from other
sources. Studies conducted by Scherr et al (1990), Mayers (1984), Cosh
and Hughes (1994) suggested that under such circumstances the owner will
choose first a personal source; second short term borrowings; third, longer-
term debt and finally, least preferred, equity finance which will affect
owners’ control of the business. In addition, informal sources of finance

8
Seminar Keusahawanan Islam II Peringkat Kebangsaan

overcomes the finance gap but the evidence at large suggests bank finance
remains an important for start up businesses in the UK (Mason and
Harrison,1993). In addition, imperfections in financial markets limit the
scope of a small business to raise finance such that it is likely to rely on
banks to finance (Walker, 1989). Meanwhile Wesselink (1995) has
identifies six areas of business monitoring, as far financing of SMEs is
concerned. Among them are loan performance monitoring and business
performance monitoring. Loan performance monitoring involves
establishing contract to safeguard the interest of lenders. While business
performance monitoring involves assisting clients address difficulties
within the business environment.

Policy and regulatory framework from the authority are seen as another
factor which can support the development of the SMEs. Policies to
promote the development of SMEs are common both in developed and
developing countries (Storey, 1994; Levitsky, 1996 and Hallberg, 2000). In
the case of developed countries, it is very important that the government
implement policies or programs designed to promote aspects of SMEs
(Harvie and Chye Lee, 2005). Consequently, it has contributed towards
employment opportunities and GDP growth in most of the developed
economies (Storey, 1994). In the OECD countries, SMEs currently account
for more than 95 percent of firms and 60-70 percent of employment
(OECD, 2000). It happened as a result of an ongoing process of industrial
restructuring that began in the late 1970’s which saw large firms
substantially reduce their output and labor, creating large pools of
unemployed workers, a proportion of whom were motivated to start their
own business (Storey, 1982). In the case of the developing economies,
policies which are designed to assist SMEs have been an important aspect
of industrial policy and multilateral aid programs such as those of the
United Nations since the 1950’s (Levitsky, 1996). Micro and small

9
Seminar Keusahawanan Islam II Peringkat Kebangsaan

businesses are also playing an important social role, in terms of the

alleviation of poverty and empowering certain groups including women.

Many policies relating to SMEs are based on the perceived weaknesses that
they suffer relative to the larger firms. Studies of the problems faced by
SMEs in the developing countries are similar to the developed countries
(Levitsky, 1996). However, a problem with government policies with
respect to SMEs is that they have tended to be characterized by a lack of
coherence as Storey (1994) observed in the context of European countries.
Policies in support of SMEs can be generally categorized according to their
objectives such as the creation of jobs or the reduction of unemployment,
social or equity objectives such as the redistribution of income, market
failure or efficiency arguments which relate essentially to considerations of
static efficiency and dynamic efficiency arguments in particular the
promotion of innovative activities. It is apparent that there are broad areas
where these policies overlap with those in other areas of concern, in
particular with competition policy (Harvie and Chye Lee, 2005).

Essentially, Islamic banking has evolved and it also plays a significant role
in the development of the SMEs. It has emerged to be one of the fastest
growing services that have been acknowledged by both the Muslims and
non Muslims (Iqbal and Molyneux, 2005). The operation of Islamic banks
derives from Syari’ah and thus differs in its spirit and motivation compared
to the conventional banking practices. Consequently, Islamic banks offer
similar kind of services to their customers as the conventional banks but
they must adhere to the Islamic principles which include the prohibition of
interest (usury), gharar (uncertainty), maisir (alcohol), gambling and other
entities that are against Islamic law.

10
Seminar Keusahawanan Islam II Peringkat Kebangsaan

In Malaysia, the Islamic banks such as Bank Islam Malaysia Berhad

(BIMB) and Bank Muamalat, has created funds for entrepreneurs. This
scheme is created in order to provide financial assistance for the
entrepreneurs in developing their businesses. The importance of business
can never be over-emphasized as it has always plays a role in the economic
and social life of people especially in this present world. Millions of people
today engage in some kind of business activities or in other words become
entrepreneurs. Thus, entrepreneurs would be one of the potential customers
of Islamic banks as they need financing to expand their businesses and thus
they have to cater to these needs within the principles of Islamic law.
According to Bank Negara, the financing for the SMEs by the Islamic
banks continue to increase from RM3.5 billion in 2002 to RM6.2 billion in
2003 to RM8 billion in 2004 (Bank Negara Report, 2005). More
encouragingly, the market share of Islamic banking in terms of providing
fund for financing to the SMEs in Malaysia almost doubled from 7.5
percent in 2003 to 13.9 percent in 2004. However, the Islamic SMEs
financing in Malaysia in 2004 is merely RM8 billion out of a total
financing by the Islamic financial sector of RM57.882 billion, which
suggests that there is a huge challenge and business opportunity for Islamic
banks in Malaysia in respect of financing SMEs

Few studies have been conducted in terms of the Islamic mode of financing
to the SMEs. Though there are many products which is offered in the
market, yet the most popular Islamic modes of financing used to facilitate
the loans to SMEs are Murabahah, Ijarah, Bai’ Bithaman Ajil and
Mudarabah (Yakcop, 1996). In addition, Karim (2002), who investigated
the practice of PLS in Bank Muamalat Indonesia, BMI, shows that
mudarabah and musharakah financing are viable modes of financing for
small and medium enterprises.

11
Seminar Keusahawanan Islam II Peringkat Kebangsaan

4.0 Methodology
In view of the research issue and objectives, this study was conducted as a
descriptive research. It utilizes the primary and secondary data to describe
the perception of entrepreneurs towards Islamic financing to the SME
sector provided by Islamic banks. The method of obtaining the primary
data was mainly through structured questionnaire where convenient
sampling of 100 Muslim entrepreneurs of SMEs in Shah Alam were
selected in this study. In designing the questionnaire effort was made to
ask as simple as possible questions, considering the background of the
respondents. The questionnaire was divided into several sections which
include demographic profiles, sources and type of financing, and
perceptions on the Islamic financing. The data was analyzed using The
Statistical Package for Social Science (SPSS) software.

5.0 Findings and discussion

Table 2: The Respondents’ Profile

Frequency Percentage
Gender
Male 42 42
Female 58 58
Age
Below 20 5 5
21 - 30 30 30
31 - 40 31 31
41 - 50 11 11
Above 50 23 23

12
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Marital Status
Single 40 40
Married 44 44
Others 16 16
Education Level
Primary 30 30
Secondary 34 34
Graduate 19 19
Others 17 17
Household Income per
Month
< RM1500 25 25
RM1501 - RM 2500 40 40
RM2501 – RM3500 17 17
RM3501 – RM4500 18 18
Experience/Years in
business
1 – 5 years 40 40
6 – 10 years 23 23
11 – 15 years 27 27
16 years and above 10 10
Funds/capital size
Below RM10,000 15 15
RM10,001 - RM50,000 45 45
RM50,001- RM100,000 30 30
Above RM100,000 10 10

13
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Table 2 summarizes the profile of the respondents. Generally, the

respondents are female (58%) with the remaining being females. Among
the respondents, the majority (31%) are in the age range of 31 – 40 and 21-
30 (30%) year age group. In terms of their level of education, majority of
them were only high school leavers. Based on their age and their academic
qualification, it is only expected that the majority earn incomes between the
range of RM1501 - RM 2500 (Table 4). 40% of the respondents had 1 – 5
years experience, 23% of the respondents had 6 – 10 years experience, 27%
of the respondents had 11 – 15 years experience and the other 10% of the
respondents had an experience of 16 years and above. It can be concluded
that most of the respondents were still new in the business world. The
findings also shows that 15% of the respondents have a capital of less than
RM10,000; 45% of the respondents have a capital between RM10,001 to
RM50,000, 30% of the respondents have a capital between RM50,001 to
RM100,000 and the other 10% of the respondents have a capital of
RM100,000 and above.

Table 3 shows the result that majority of majority of the Muslim

entrepreneurs rely upon their own sources of income and savings to start
the business, instead of acquiring it from any financial institutions. The
results shows 41% go for their own sources, 34% took financing from the
bank, while the other 10% acquired the fund through borrowing from
friends/relatives and also through partnership(see Table 4) This implies
that majority of the respondents were fortunate enough to have access to
financial resources to start their businesses either from their own savings,
family or friends.

14
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Table 3: Source of financing

Type of source Percentage

Personal funds 41
Borrow from family 8
Borrow from friends/relatives 10
Borrow from the commercial 34
banks
Borrow from Development 5
financial Intermediaries (e.g.
SME Banks, Bank
Pembangunan)
Others(through partnership) 2

On the question pertaining to their knowledge on the existence of Islamic

financing for SMEs, majority of the respondents (64%) agreed on the
availability of SMEs Islamic financing (see Table 4). Only a small
percentage (5%) who has no knowledge on the existence of SMEs Islamic
financing. The knowledge factor, is basically being associated with the
Muslim entrepreneurs’ understanding on the subject, that Islamic
financing. The findings reveal that the Muslim entrepreneurs understanding
towards Islamic SMEs financing are considerably good. They do
understand the importance of applying Islamic financing in their business.
Islamic financing for the SMEs is not only for their own benefits in the
future life but also to their life in hereafter. In terms of the procedures,
operations and concepts applied to Islamic financing, only 40% of the
respondents have knowledge on it while majority of them were indifferent.
Thus the Islamic banks as well as the other non financial institutions

15
 Seminar Keusahawanan Islam II Peringkat Kebangsaan

which offer Islamic financing for SMEs should play an active role to
provide them with adequate information about Islamic financing.

Table 4: Knowledge and understanding of Islamic financing of SMEs

Items Strongly disagree neutral agree Strongly

disagree agree
1. knowing the existence of Islamic 5% 31% 64%
financing of SMEs
2.knowing and understand the differences 15% 40% 45%
between Islamic and conventional
financing
3. knowing the concepts applied to Islamic 15% 45% 40%
financing
4. knowing that Islamic financial products 5% 40% 45% 10%
and services are offered to both Muslim
and non Muslim

Table 5: Factors choosing Islamic financing SMEs

Items Strongly disagree neutral agree Strongly

disagree agree
1. It is based on Islamic principles 5% 85% 10%
2. Certainty of capital and return 13% 25% 62%
3. I benefited a lot from PLS 10% 75% 15%
4. New alternative of financing 15% 85%
5. Quality products and services as offer by the 35% 35% 30%
Islamic financial institutions
6. Effective and efficient products 30% 35% 35
7. any acts of transaction does not involve 5% 15% 80%

16
 Seminar Keusahawanan Islam II Peringkat Kebangsaan

gambling or gharar , riba

8. Islamic financing is able to fulfill my need 10% 25% 60% 5%
9. Recommended by friends/family 15% 45% 40%

Furthermore, the results presented in Table 5 shows that nearly 85 per cent
of the entrepreneurs would choose Islamic financing as it is based on
Islamic principles In particular, they perceived that all transactions must be
based upon Shariah and must not constitute of negative elements, such as
gharar, riba etc (80%). It is most likely that they based their perception on
religious belief rather than on thorough understanding of the financial
principle involved. Accordingly, this finding supported Jabnoun and
Khalifa (2005) study where the values pertaining to religious aspects tend
to be the most significant facet among the Islamic banking customers in the
UAE. In other words, religious factor tends to be perceived as one of the
important attributes to be considered pertaining to Islamic banking
patronage. The findings also verified the study done by Naser et. al
(1999), Mettawa and Mossawi, 1998; Haron et. al., 1994; Erol et. al.,1990
and Osman and Ali (2007) where the reason for patronizing an Islamic
bank is due to religious factor. However, 85% of the respondents do agreed
that the Islamic financing is other alternative for them to get source of fund.

Nevertheless, it is interesting to note that though the majority of

respondents knew about the availability of Islamic finance and its
advantages, the findings also show that the majority of entrepreneurs have a
mixed response on the questions of efficiency and product quality as
offered by Islamic bank. They perceived that in general conventional
banks offer better services such as the ability to perform the promised
service dependably and accurately, the willingness to help customers and to
provide prompt service, the knowledge and courtesy of employees and their
ability to convey trust and confidence and the provision of caring,

17
Seminar Keusahawanan Islam II Peringkat Kebangsaan

individualized attention to customers (Owen et. al.(2001). This may due to

the fact that to some customers the conventional banks are always
perceived as rendering good quality services in ensuring customer
satisfaction, retention and loyalty.

Table 6: Choosing Islamic financing

Yes No
Using Islamic financing 58% 42%

Though the findings show different mixed of response pertaining to the

quality of service and products as offered by the Islamic financial
institutions, yet the response showed an encouraging figures where 58% of
the respondents use the Islamic mode of financing while the other 42% of
the respondents didn’t have any experience in using the products(see Table
6). This implies that they have a positive attitudes and perception towards
Islamic financing. When asked about the reason on why they did not opt
for Islamic financing: out of 42%, 21% were having a perception that the
product is just the same as what conventional had offered, 10% of the
respondents mentioned that the product is more expensive that the
conventional one, 6% of the respondents mentioned that in Islamic
financing product, there are many hidden things and are not properly
explained and the other 5% of the respondents mentioned other reasons
such as Islamic financing product mislead their customers, still charging
interest even though they promise that no interest will be charged.

However, for those who have chosen the Islamic mode of financing, they
too have their own reasons. Out of 58% of the respondents, 19% of the
respondents believed that Islamic financing brings justice to the people,
21% of the respondents believed that it is more profitable compared to
conventional financing, 17% of the respondents believed that since Islamic

18
Seminar Keusahawanan Islam II Peringkat Kebangsaan

banking has existed in Malaysia, Muslim has no choice but to use the
Islamic financing in their business activities, as stated in the Qur’an that
Muslim need to forego all interest-based transactions (Surah al-Baqarah(2):
275-279), while a small percentage of the respondents believed that they
don’t have other alternative to finance their business.

Further, the respondents were asked on the type of Islamic mode of

financing acquired. 31% goes for Bai Bithaman Ajil, 9% goes for Bay
Istisna’a, 11% for Ijarah while 3% on Mudarabah and 4% goes for
Musharakah (see Table 7). This findings showed that financing through
Bai Bithaman Ajil is the most popular mode of financing among the SMEs
entrepreneurs. This even in accordance with data gathered from Bank
Negara Malaysia which indicates that Bai Bithaman Ajil represents the
highest mode of financing. (2003: 47.7%; 2004:49.9%; 2005:40.7%).

Table 7: Types of financing

Type of financing Percentage
Bai Bithaman Ajil 31
Bay Istisna’a 9
Ijarah 11
Mudarabah 3
Musharakah 4

The respondents were asked on the question whether the Islamic financial
institutions should develop or innovating new products as to be competitive
as the conventional banks. 65% of the respondents were strongly agreed on
the issue, at least these institutions are able to gain favorable images from
the public and more market share, and 20% agreed while the rest is neutral
(15%).

19
 Seminar Keusahawanan Islam II Peringkat Kebangsaan

Among the criteria needed by traditional banks are need of collateral,

appraisal based on business plan and financial records (cash flow,
experience), repayment enforced by legal action (collateral, guarantee),
asset based lending and difficult procedures lead to high transaction costs
for small loans. In this respect, the respondents were asked to give their
general opinion pertaining to the issues of guarantor and documentation.
The results of the finding is shown in Table 8.

Table 8: general view on documentation and guarantor

Items Strongly Disagree Neutral Agree Strongly
disagree agree

Guarantor
Banks requirement for the applicant 9% 39% 32% 13% 7%
to get a guarantor is not a burden.

It is easy to get a guarantor 5% 29% 35% 24% 7%

nowadays.

The requirements should be 6% 29% 35% 24% 6%

maintained by the banks.

Applicants can change from a 6% 30% 40% 14% 10%

guarantor to a pledge in the form of
land or any valuable assets if they
can’t manage to get a guarantor.

Documentation
The requirement of the bank for the 6% 28% 34% 24% 8%

20
 Seminar Keusahawanan Islam II Peringkat Kebangsaan

applicant to prepare various

documents for the approval process
is not a burden.
Loan application form is easy to fill 7% 21% 38% 23% 11%
in.
Words used in the form are easy to 6% 24% 37% 21% 12%
understand.
Paperwork requested by the bank is 8% 28% 41% 10% 13%
easy to be prepared.

What would be the measures taken by the government in order to enhance

Islamic financing among the SMEs entrepreneurs? Among the suggestions
given by the respondents were the respective parties should hire officers
who can be trusted and responsible (25%); the respective parties should
increase the promotion up to the remote area (21%); that the officers in
charge of financing particularly marketing officers, should go to each of the
SMEs company to promote the funds (34%), and lastly the bureaucracy
problems should be minimized among the officers who process and
approve the loan application(20%).

5.0 Conclusion
Though the size of SMEs in each country may differ, either for developed
or less developed, depending upon the size of the economy but yet, their
contributions to the employment, GDP growth, poverty alleviation and to
innovation have make them as a backbone of the economy, and has gained
high recognition from the government. Even SMEs help in creating and
promoting entrepreneurial culture that helps transform economies from low
to middle income levels. Despite the fact that the performance and
contribution of SMEs sector in Malaysia is quite encouraging, yet due to
some structural weaknesses and problems, its access to financing from the

21
Seminar Keusahawanan Islam II Peringkat Kebangsaan

formal sector, particularly from Islamic finance institutions has been

inadequate. Therefore, further efforts need to be made by various parties in
the economy as to ensure continuous contributions can be seen from this
industry. Factors like lack of information and documentations, reluctance to
disclose the financial position, lack of awareness programs for SMEs,
complexity of lending procedures and process, etc. are some of the
common reasons for the lack of access to finance on the demand side.
Thus, in order to promote and encourage greater involvement of SMEs to
Islamic finance then the Islamic banks in particular and other institutions
which offer Islamic financing, should simplify the documentation process,
improve delivery mechanisms, provide business development services to
those entrepreneurs etc. Another aspect that the Islamic financial
institution need to highlight is to train their staff well and adequate them
with the information about Islamic SMEs financing. This is because staff
will be the intermediaries between SMEs participants and Islamic banks.
They also carry reputations and image as a good Muslims to society as well
as Muslim entrepreneurs. In other words, to position effectively in terms of
providing better services of Islamic financing requires a comprehensive
understanding of consumers needs especially Muslim entrepreneurs and an
awareness of variations across market segments Thus, training programs is
seen to be a useful tool for improving the managerial capabilities between
Islamic bank staff and the clients.

22
Seminar Keusahawanan Islam II Peringkat Kebangsaan

References
Ahmad, N., & Haron, S. (2002). Perceptions of Malaysian corporate
customers towards Islamic banking products and services. International
Journal of Islamic Financial Services 3(4).
Bank Negara Malaysia Annual Report 2005
Bank Negara Malaysia Annual Report 2006
Beyene, Asmelash(2004), Enhancing the Competitiveness and Productivity
of Small and Medium Scale Enterprises (SMEs) in Africa: An Analysis of
Differential Roles of National Governments Through Improved Support
Services, Africa Development 27(3)
Birch, D.L, et al (1993), Who is Creating Jobs in Hussain, J et. al (2006),
Access to Entrepreneurial Finance:An International Perspective, a paper
presented at The International Conference on Finance of SMEs in
Developed Countries, April 2006, University of Warwick.
Cook, Ronald G., et al (2001), A case study of Micro enterprise training:
Beta test findings and suggestions for improvement, Journal of
Developmental Entrepreneurship 6.
Cosh, A.D And Hughes A. (1994), Size, Financial Structure and
Profitability in Hussain, J et. al (2006), Access to Entrepreneurial
Finance:An International Perspective, a paper presented at The
International Conference on Finance of SMEs in Developed Countries,
April 2006, University of Warwick
D.C. Rweyemamu, M.P. Kimaro and O.M. Urassa (2003), Assessing Micro
Finance Services In Agricultural Sector Development : A Case Study Of
Semi-Formal Financial Institutions In Tanzania

23
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Deakins, D. and Hussain, J.G. (1994), Financial Information, the Banker

and the Small Business: a Comment’, British Accounting Review, 26, pg
323-335.
Department of Statistics, Malaysia, 2005.
Dusuki, A. W., & Abdullah, N. I. (2007). Why do Malaysian customers
patronise Islamic banks? International Journal of Bank Marketing, 25(3)
Erol, C., & El-Bdour, R. (1989). Attitudes, behavior and patronage factors
of bank customers towards Islamic banks. International Journal of Bank
Marketing, 7(6).
Erol, C., Kaynak, E., & El-Bdour, R. (1990). Conventional and Islamic
banks : patronage behavior of Jordanian customers. International Journal
of Bank Marketing, 8(4).
Graham, T., (2004), Graham Review of the Small Firms Loan Guarantee:
Recommendations in Hussain, J et. al (2006), Access to Entrepreneurial
Finance: An International Perspective, a paper presented at The
International Conference on Finance of SMEs in Developed Countries,
April 2006, University of Warwick
Haron, S., Ahmad, N., & Planisek, S. L. (1994). Bank patronage factors of
Muslim and non-Muslim customers. International Journal of Bank
Marketing, 12(1)
Iqbal, M., & Molyneux, P. (2005). Thirty years of Islamic Banking :
History, Performance and Prospect. New York, NY: Palgrave Macmillan.
Jabnoun, N., & Khalifa, A. (2005). A customized measure of service
quality in the UAE. Managing Service Quality, 15(4), 374-388.
Kashuliza, A.K. and Kydd. J.D. (1996), Determinants of Bank Credit Access
for Smallholder farmers in Tanzania : A Discriminant analysis Application,
Savings and Development(3)
Khandker, Shahidur R et al, (1998), Fighting Poverty With Microcredit :
Experience in Bangladesh, New York: Oxford University Press.

24
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Levitsky, J.,(1996), Support Systems for SMEs in Developing Countries-A

review, Vienna: United Nations Industrial Development Organization.
Mason, C.C, and Harrison, R.T., (1993), Finance for Growing Businesses:
the Role of Informal Investment, National Westminister Bank Quaterly
Review, May.
Mayers, S.C (1994), The Capital Structure Puzzle, The Journal of Finance,
Vol.XXXIX, No. 3 (July)
Mettawa, S. A., & Almossawi, M. (1998). Banking behavior of Islamic
bank customers : perspectives and implications. International Journal of
Bank Marketing, 16(7)
Naser, K., Jamal, A., & al-Khatib, K. (1999). Islamic banking : a study of
customer satisfaction and behavior in Jordan. International Journal of Bank
Marketing, 17(3).
Nor, Mohamed Yaakop, (1996), Teori, Amalan dan Prospek system
Kewangan di Malaysia, Kuala Lumpur : Utusan Publications &
Distributors.
Norman Mohd Aris (2006) “SMEs Building Blocks to Economic Growth “,
paper presented at the National Statistical Conference, Kuala Lumpur.
Othman, A., & Owen, L. (2001). Adopting and measuring customer service
quality (SQ) in Islamic banks : a case study in Kuwait Finance House.
International Journal of Islamic Financial Services, 3(1).
Othman, A., & Owen, L. (2002). The multidimensionality of CARTER
model to measure customer service quality in Islamic banking industry : a
study in Kuwait Finance House. International Journal of Islamic Financial
Services, 3(1).
Osman, Ismah and Ali, Husniyati (2007), Understanding Retail Banking:
Service Quality Determinants And Customer Behaviour, a paper presented
at the International Conference on Marketing and Retailing (INCOMAR
2007), 29-31 May 2007, Shah Alam, Malaysia

25
Seminar Keusahawanan Islam II Peringkat Kebangsaan

Rodriquez , et al (2002), Report and recommendation of the President to

the Board of Directors on a Proposed Loan and Technical Assistance Grant
to the Republic of Indonesia for Small and Medium Enterprise Export
Development : Asian Development Bank.
Scherr, F et al (1990), Fiancing the Small Firm Startup: Determinants of
Debt Use, Proceedings Second Annual Small Firm Finance Research
Symposium.
Storey D. (1994), Understanding the small business sector, London:
Routledge.
Tahir, I. M., & Bakar, N. M. A. (2007, 12-13 June). Islamic banks :
analysis of customer perception and demographic factors. Paper presented
at the MFA 9th Conference, Kuala Lumpur.
Tahir, I. M., & Ismail, W. Z. W. (2005). Service quality in the financial
services industry in Malaysia : the case of Islamic banks and Insurance
International Review of Business Research Papers, 1(2).
Timberg, Thomas A (2000), Why Isn’t There More Small and Medium
Enterprise (SME) Credit from Commercial Banks in Indonesia.
Tucker, Michael (2001), Financial performance of selected microfinance
institutions: Benchmarking progress to sustainability, Journal of
Microfinance 3.
Walker, D. (1989), Financing the Small Firms, Small Business Economics,
Vol. 1
Wesselink, B (1995), Monitoring guidelines for semi formal financial
institutions active in small enterprise finance, ILO, Working Paper 9.
Winter, Sydney G (19950, Small and Medium-Size Enterprises in
Economic Development Possibilities for Research and Policy, Policy
Research Working Paper 1508, policy Research Department, World Bank.
World Bank (1975) Agriculture credit sector policy review. World bank,
Washington DC.
http://www.smeinfo.com

26