Literature Review on Sources of Loans in Malaysia
According to 2010 CIA World Factbook estimates in 2009, Malaysia has population of 25,715,819. The unemployment rate has increased from 3.325% in year 2008 to 5% in year 2009. Malaysia has successfully eradicated poverty where it is evident from the sharp decline in the percentage of poverty, which decreased from 49.3% in 1970 to 6.1% in 1997 to 6.0% in 2002 and less than 5% in 2007.
2.2 Informal Source of loans
Pawnshop is one of the most popular sources of informal loans. Pawnshops operate by lending money to individuals while accepting their personal property as security or pledge. Pawnshops accept valuable items such as antiques, coins, gold, silver, used merchandise and so on as collateral. Pawnshops purchase these items at a price which is lower than market price so that they can sell at discount and still generate profit.
Another source of informal loans is money lenders who are also known as loans sharks or friends and families. These types of loan are usually small with short maturities. Due to the irregulated nature of this type of loan, interest rates could range from zero up to 100%. Some lenders charge high interest rate because they need risk premium to compensate the default risk. Loan sharks may charge high interests and violently punish customers who fail to repay.
These sources of loans are popular as loans can be obtained in a short period of time. Besides, they involve low transaction costs and less paperwork. However, loans obtained through these sources are small.
2.2 Microfinance in Malaysia
Microfinance in Malaysia had its roots in the Ikhtiar Project pioneered by Universiti Sains Malaysia in year 1985. This pilot project in north-west Selangor has the distinction of being the first Grameen replication in the world, and was conducted with an allocation of only RM2, 000. The success of the pilot project led to the establishment of Amanah Ikhtiar Malaysia (AIM) as an independent trust body in 1987 to promote microcredit throughout the country in order to help eradicate hardcore poverty. A very significant milestone was the decision, within AIM's first year of operation, to disburse loans only to female borrowers although women made up only a third of the Sahabat when the facility first started. The decision was based not so much on gender considerations as the very pragmatic one of much higher repayment rate on the part of female borrowers – 95 percent as opposed to 78 percent for all borrowers. It had also been found that the men were not able to meet the credit discipline of AIM in terms of being able to form the groups of five which were the basis for organizing the loan activities and also to fulfil the requirement of attending the weekly meetings, in keeping with the Grameen model. (http://www.undp.org.my/uploads/undp_malaysia_nurturingwomenentrepreneurs_publication.pdf
The development of a vibrant and sustainable microfinance industry is part of Bank Negara's strategic objective of achieving greater financial inclusion, ensuring that all economic sectors, regions and communities have access to full range of financial products and services .
According to Cahmhuri and Basri (2001), Microfinance was introduced in Malaysia since 1986 to replicate Grameen Bank's successful specialized in delivery system, emphasizing targeting, informality of delivery and delivering credit to the ‘doorstep of the poor. Microfinance has been part of the poverty alleviation strategies by reaching the poor who normally would be excluded from the formal credit sector .
According to Bank Negara Malaysia (2009), Malaysia is recognized because of the efforts of improving access to financing. Among 183 countries, Malaysia has been ranked by the World Bank as number one in terms of “getting credit”. As end of 2009, there were total of 449, 703 microfinance borrowers in Malaysia. RM2.4 billion was approved through government agencies and formal financial system.
Some of the pioneers like Credit Guarantee Corporation (CGC), Majlis Amanah Rakyat (MARA), and council of trust to the Bumiputera have introduced microfinance services. The rural credit institutions such as Farmers Organization Authority (LPP), Agro based Cooperative Societies, Federal Land Development Authority (FELDA), and Agriculture Bank of Malaysia (BPM) offer agriculture sectors micro credit. Non-government Organizations (NGOs) such as Yayasan Usaha Maju in Sabah, Koperasi Kredit Rakyat in Selangor and Amanah Ikhtiar Malaysia (AIM) have also engaged in microfinance programmes .
According to Yab Dato' Najib (2009), there are several microcredit programmes provided without collateral, including Amanah Ikhtiar Malaysia (AIM), Tabung Ekonomi Kumpulan Usahawan Nasional (TEKUN), Bank Simpanan Nasional (BSN) and AgroBank. Total microcredit funds provided under the various programmes exceed RM1.5 billion and are channelled to small business in urban and rural areas. An additional RM300 million is provided for the microcredit programme under AgroBank to assist farmers and agro-based business in rural areas as well as RM50 million for TEKUN .
2.3.1 Microfinance institutional Framework
Prior to 2006, the microfinance industry players comprised largely of government agencies serving the poor and the informal financing system. To enhance support for the growth of microenterprises through improved access to the formal financial system, the National SME Development Council approved a sustainable microfinance framework named Pembiayaan Mikro in 2006. The framework identified three strategies initiatives:
- To define the parameters of an appropriate micro financing product.
- To raise awareness on microfinancing.
Since its launched, the number of participating financial institutions in the Pembiayaan Mikro initiative has increased to nine (CIMB, Public Bank, Alliance Bank, AmBank, UOB, Eon Bank, Agrobank, Bank Simpanan Nasional, Bank Rakyat). The active participations of these institutions have expanded access to micro financing through over 1,800 contact points nationwide.
A number of financial institutions have adopted a mass market model whereby financial institution provides microfinance products through its existing branch network. Others, like Bank Rakyat, have adopted a cooperative model which provides microfinance to its members. Bank Simpanan Nasional has been mandated to provide microfinance while Bank Pertanian would continue to provide microfinance to micro enterprises in the agriculture and agro-based sector. Some have employed the distributor network model, which leverages on the distributive capabilities of strategic business partners. Another is the monoline models with a dedicated microfinance operation, formed with its own distinct branding and processes designed to uniquely appeal to micro enterprises.
In order to promote broader awareness of the availability and benefits of Pembiayaan Mikro, numerous initiatives were implemented including the creation and display of the Pembiayaan Mikro logos at premises that offer Pembiayaan Mikro, the direct distribution of flyers to more than 397,000 micro enterprises, features articles in the newspaper and advertisements on television and radio.
Under Pembiayaan Mikro, outstanding micro financing of the nine participating financial institutions stood at RM616.5 million involving 57,403 customers as at end 2009. This represented an annual growth of 29.1% and 27.1% respectively. A survey conducted to gauge the performance of micro enterprises after receiving micro financing, showed an increased capacity of micro enterprises to serve the markets and customers. Besides, the survey also found that micro enterprises that received micro financing were able to invest and expand their business capabilities, thereby contributing to an average increase in revenue and employment of about 18.5% p.a. and 10% p.a. respectively (http://www.bnm.gov.my/files/publication/fsps/en/2009/cp02_001_whitebox.pdf).
2.4 Literature review
Mahjabeen (2008) examined the welfare and distributional implications of MFIs in Bangladesh. He compared two Computable General Equilibrium (CGE) models: basic model with only traditional commercial banks as financial intermediary and extended model with commercial banks plus MFIs. He found that MFIs playing an important role in reducing income inequality, increasing income and consumption levels of households, as well as enchacing welfare.  The result was supported by study carried out by Hartarska and Nadolnyak (2008) who studied the impact of microfinance on access to credit for microenterprises in Bosnia and Herzegovina by using the financing constraints approach. Results indicated that MFIs alleviated microbusinesses' financing constraints. This in return led to poverty reduction. Both the studies proved that microfinance is an effective development strategy and has important policy implications on poverty reduction and income distribution. 
Barboza and Trejos (2009) have investigated the impact of Microcredit programs on poverty alleviation in Mexico. They examined the official transaction records of weekly payments of ALSOL Micro Credit Program in Chiapas, Mexico from July 2000 to July 2001 for a total of 2151 participants. The weekly repayment records data was used to compute individual and program specific repayment patterns. They also conducted interviews with randomly selected sample of 50 participants to learn about their business practices, economic activities and overall living conditions. They found that microcredit programs are viable alternative for those in the lowest income bracket because it helped the participants to migrate out of poverty . Sengsourivong (2006) studied the effects on household welfare or survey result from involvement in saving group. This survey was conducted with members and non-members in six villages in semi-urban area of Laos. As result, participation in saving group has significant and huge positive effects on all of the outcomes which include improvement in children education support, household income from self-employment activities, and increasing in household income. Sengsourivong also stated that the program of saving groups may be a effective strategy for the poverty eradication. http://www.scribd.com/doc/12770568/The-Impact-of-Micro-Finance-on-Household-Welfare-Case-Study-of-a-Savings-Group-in-Lao-PDR#
Chen and Snodgrass (2001) studied the impact of microfinance services on low income women in Indian city and Ranjula et al. (2008) have examined if microfinance contributes to the reduction of poverty in Mekong Delta region of Vietnam. The studies carried out household surveys and focus group discussions with members and non-members of microfinance programs. Chen and Snodgrass (2001) examined cross-section differences for statistical significance using analysis of variance (ANOVA). The studies found that participation in microfinance services increase household income and leads to poverty reduction.  The results were supported by studies conducted by Afrane (2002) in Ghana and South Africa where survey and interviews were conducted with individual SME operators. It was found that microfinance interventions have achieved significant improvements in terms of increased business incomes, improved access to life-enhancing facilities and empowerment of people. 
Suryani (2007) in Malaysia and Mogale (2007) in South Africa have investigated the effectiveness of microfinance in eradicating poverty. Suryani selected a sample respondent of 1218 recipients of AIM loans from Northern Region (Kedah, Perlis and Perak). Purposive random sampling strategy was adpoted and chi-square analysis, descriptive analysis, logit model, and factor analysis were applied in determination of AIM program effectiveness. Suryani concluded that AIM activities were effective and did contribute to poverty alleviation in Malaysia.  Mogale conducted survey, focus group discussions and in-depth interviews with Marang clients from five different provinces in South Africa. The result of Mogale's studies showed that overall the institution had made a positive difference to interviewees' ability to cater to household needs. Microfinance interventions had strengthened their income earnings and asset accumulation activities, thereby alleviated poverty .
Setboonsarng and Parpiev (2008) have studied the impact of Khuhhali Bank (KB), the leading microfinance bank in Pakistan. 1,416 KB borrowers and 1,465 non borrowers were surveyed. They found that microfinance is effective in contributing to income improvements and hunger reductions.  It was consistent with study done by Shirazi and Khan (2009) which studied the impact of PPAF microcredit on poverty status of the households in Pakistan by employing counter-factual ‘Combined approach'. The approach combines the ‘with-without approach' and the ‘before-after approach'. The formula below was used for the study:
Where is the net impact of microcredit on poverty status of borrower households; is the poverty status of the borrower households with current income level; is the poverty status of the borrower households with previous income level; is the poverty status of the non-borrower household with current income level; is the poverty status of the non-borrower household with previous income level. It was found that the PPAF microcredit has reduced the overall poverty level. 
Mosley (1999) has studied the impact of microfinance on poverty reduction in Bolivia by carrying out surveys on four MFIs. It was found that all MFIs examined have positive influence in terms of increasing income and reducing poverty. Mosley concluded that in comparison with other poverty reduction measures, microfinance appears to be successful and cheap at reducing poverty of those close to the poverty line. . Hulme and Mosley (1996) and Salehuddin (2009) have examined and analyzed the effectiveness, efficiency and success of MFIs in reaching the poor and in raising their incomes. 13 MFIs in 7 developing countries were studied by Hulme and Mosley. They found that in Indonesia, many of the MFIs do reach the poor, although the success rate varies considerably and loans to the poor mostly did raise the poor's incomes, with borrowers' incomes in the cases studied improving more than non-borrowers. The conclusion was further support by Marr (2002) who has developed a comprehensive analytical framework for the study of microfinance impacts on poverty reduction by placing significant stress on the study of group dynamics in order to capture changes in members' behavior and poverty reduction strategies. Marr stated that members of group dynamics develop poverty reduction strategies in relation to the usage of financial and non-financial services that the microfinance program offers. Mars concluded that microfinance has helped the members by reducing vulnerability to risks and shocks, resuming stability, initiating growth, strengthening social networks and enhancing empowerment . The studies is in line with findings found by Gulnoz and Malohat (2009) which analyzed the effectiveness of microfinance policies, institutions and tools in regional development and alleviation of rural poverty in Uzbekistan. It was concluded that microfinance makes an important contribution to alleviating poverty by helping people to help themselves .
Khandker (1998) has examined the experiences of the Grameen Bank and two other major microcredit programs in Bangladesh which are BRAC and RD-12 in order to quantify the potential and limitations of microcredit program as an instrument for reducing poverty. The study addressed whether microcredit alleviates poverty, whether microfinance is a cost-effective way of transferring resources to the poor. The analysis was based on household survey program-level data. Cross sectional household survey was carried out between program and non-program villages and between eligible and ineligible households. Quasi-experimental survey design was used to collect data with which to verify whether program participation in microfinance programs enhances household welfare. Quasi-experimental survey design was used because neither program organizers nor researchers can control who among the eligible groups will participate in a program. Khandker found that microfinance programs are cost effective when they attain a certain level of operation. Microfinance programs reduced poverty on a sustained basis and are well targeted, with more than 80 percent of borrowers owning less than half an acre of land. This is in contrast to other studies by Kondo et al. (2008) which studied the impact of microfinance on poverty in Bolivia. Surveys were carried out in the two studies on MFIs, borrowers, borrowers who had dropped out and qualified but non-participating households. Kondo et al. used difference-in-difference (DID) method to summarize the net effect of microfinance program. The model is express as:
- Type of households (HH)/area
- ‘Treatment'(existing) area
- ‘Comparison' (expansion) area
(A1) Existing clients
(A2) Former clients
(C) New clients
(B) Qualified non-participating
(D) Qualified non-participating
Kondo et al. found that the majority of the new clients, existing clients and non-participating households deemed qualified to fit the program are not poor according to the official definition. Khandker (1998) also concluded that microcredit program had significant positive effects on household per capita expenditure as it reduced poverty by increasing per capita consumption among the participants. From the result of participation in microfinance programs over the period of 7 years, moderate poverty among program participants dropped 8.5% while extreme poverty dropped about 18%. Thus, microfinance did reduce poverty among program participants and reduce aggregate poverty in program village . The conclusion is also in contrast to studies by Kondo et al. (2008) which indicated that the regressive result of the study found that the programme loans have negative impact or insignificant for poorer households and becomes only positive and increasing with richer households. This shows that among poorer borrowers, the cost of and availability of programme loans appear to be insufficient to stimulate them to select more productive activities that will not only cover the cost of borrowing but also earn them some profit. Kondo et al. have also argued that it was the result of MFIs not screening projects carefully enough to produce the desired results. .
Coleman (2002) studied the outreach and impact of two microfinance “village bank” programs in Northeast Thailand. A total of 445 households in 14 villages in Northeast Thailand were surveyed by exploiting a unique survey sample that included program participants from “treatment” villages that had already received program support, participants from control villages that had not yet received program support, and non-participants from both types of villages. Coleman found that microfinance loans positively affect many measures of household welfare for the wealthy committee members. The finding is in contrast to Coleman's previous study (1999) which investigated the impact of group lending in Northeast Thailand by using novel methodology. He found that the impact is insignificant on physical assets, savings, production, sales, productive expenses, labor time, and most measures of expenditure on health care and education. He even found negative effects on medical expenditures and increased borrowing from moneylenders.  . It was consistent with study conducted by Mosley (1999) in Philippines. Mosley found that there was no significant impact on household assets or on human capital investments such as health and education. It appeared that the slight impact on income and expenditures was insufficient to make a drastic improvement. 
Copestake et al. (2001) studied the impact of an urban credit program in Zambia. They found that the program was not directed towards the poorest because two-third of the clients was above poverty line.  Coleman's study in 2002 also suggested that the programs surveyed are not reaching the poor as much as the relatively wealthy as he found that the impact on poorer rank and file members is largely insignificant. . The results were supported by Cuong et al. (2007) who studied the impact of microcredit on poverty and inequality in Vietnam by using fixed-effect regression to estimate the average effect of the program on income and expenditures of participating households, and subsequently assess the impact of the program on poverty and inequality. Two indicators, Average Treatment Effect on the Treated (ATT) and Average Partial Effect on the Treated (APET) to measure impact of MFI programs were used. ATT was formalized as:
was denoted as a binary variable of participation in the program of a person
Y was denoted as the observed value of the participation variable.
APET was formalized as:
The study found that participation on average seemed to have increased household income and expenditures. However, it was found that only one-third of the loans reached households who are actually poor.  The studies above are in contrast to study carried out by Pitt and Khandker (1998) which studied the impact of group-based credit programs on poor households in Bangladesh. Quasi-experimental survey design was used and surveys were completed. It was found that the program had a larger effect on the poor households in Bangladesh. 
Hoque (2004) studied the relationship between microcredit and poverty reduction in Bangladesh by looking at a unique data set about BRAC. The analyses were based on data from the Matlab Health and Socioeconomic Survey (MHSS). The data was obtained by conducting surveys with members and non-members of BRAC. Hoque found that BRAC's microcredit program has had an insignificant impact on household consumption. He concluded that microcredit had minimal impact on poverty reduction.  The study was further supported by studies carried out by Thomas and Sinha (2009) and Gurses (2009) which have assessed the impact of existing microcredit services in combating poverty in India and Turkey by examining the effectiveness and sufficiency of the programs in terms of reaching the core poor and reducing poverty. Representatives from MFIs and clients of the services were interviewed. It was found that outreach capacity of currently existing microcredit programs in Turkey is too limited. Microcredit itself is not a substantial strategy to fight poverty as the poverty statistics of Turkey shows that self-employment is not a guarantee for individuals to get out of poverty. . The finding was consistent with argument by Thomas and Sinha (2009) which suggested that there seems to be an unexamined belief that through microfinance, individuals and small coorperatives can gradually scale up to having stable income without loans or can save or invest enough expendable income to utilize traditional finance services . The conclusion was supported by Hulme and Mosley (1996) who found that MFIs are less successful at reducing poverty in Bangladesh as the poverty in Bangladesh remains very high. The study showed that the schemes always failed to reach the very poor.  Besides that, studies carried out by Weiss and Montogomery (2005), Cuong and Thieu (2006) Kondo et al. (2008) also found that non-poor access the microfinance program more proportionally than the poor. However, the programs had positive impact on poverty reduction of the participants.  
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