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How Microfinancing Is Essential To Malaysia’s Economic Recovery – The Shariah Way

Nisa Ismail, CEO of Sedania As Salam Capital Sdn Bhd (Part of Sedania Innovator Berhad)

According to Bloomberg, Malaysia’s economy suffered its worst year since the 1998 Asian crisis 2020, which has turned into a full blown economic contraction as of Q3 this year.

Among the areas that took the heaviest hit throughout all of this is the SMEs. In 2020, Malaysian SME GDP growth took a huge tumble into negative 7.3%—lower than Malaysia’s overall GDP for the first time in 17 years.

Globally SMEs are seen as the engine of economic growth. With experts predicting a financial crisis looming just around the corner, we need to take important, realistic steps to help Malaysia’s vulnerable segments get back on their feet.

An economic crisis requires an economic solution, and microfinance might just be the answer.

Innovation in Microfinancing

One of SMEs’ biggest barriers to rapid development is a shortage of both debt and equity financing. Thus, access to financing has been identified as a key element for SMEs to succeed in a developing country.

Microfinancing, unlike traditional lending, is usually backed by technology which makes it financially feasible to lend smaller amounts suitable for SMEs as the technology allows financing disbursement at lower costs. Microfinancing institutions aren’t usually tied to the archaic credit scoring models invented in the late 80’s. They have more leeway to incorporate AI and other technology to find more up-to-date data to determine a customer’s ability to pay back.

For example, many microfinancing institutions have created a user-friendly and intuitive UI that simplifies the process and helps users gain their credit much faster than existing models, and without headache. This allows customers—usually needing financing to keep their business afloat or seeking to expand their business—to maintain some sense of dignity as they seek financing.

However, that’s not enough to turn the tide on Malaysia’s economy. True innovation in my opinion, must be backed by wisdom and compassion. Microfinancing institutions must be flexible in the face of changing times, and the terms offered should be fairer to the customers.

Short-sighted microlenders might look at the amount of credit disbursed and assume that these lines of credit have helped to address an SME’s needs. Meanwhile, a customer-minded organisation might bundle financial and non-financial services to provide a greater impact on SMEs, such as partnering with certified business mentors to offer training and counselling. The three-year PROMISE IMPACT project conducted in Indonesia did this, which helped clients maintain better business records and microfinancing institutions understand their clients better.

Islamic Finance Can Change The Game

Islamic finance, which is uniquely durable against bubbles, might provide some of the wisdom necessary to help Malaysia’s economy.

Islamic law states that making money from money is wrong. It requires financial transactions to be supported by genuine trade (murabahah concept). The benefit here is two-fold. In the shariah way, risk is shared between more than one party, helping to reduce the negative effects on the financing receiver if something goes wrong. Meanwhile, the trade involved in the financing disbursement system also provides a boost on economic activity.

Murabahah is just one of the many Islamic finance concepts that might create a more resilient microfinancing ecosystem. With equality at the forefront, all the different guidelines provide a great deal of flexibility for creativity which can produce a win-win for all parties involved.

Turbulent times are coming ahead. It’s not enough to reinvent the wheel and call it a success. True innovation comes from actually thinking about the pain points a user might have, and working to solve their real problems—which is why we have launched GoHalal.

GoHalal is curated by Sedania’s As-Sidq Tawarruq Platform, backed by the Shariah Advisory and automates the “buying and selling” of commodities to back financing disbursement. We have a full-suite ecosystem for our partners that covers takaful insurance and e-mandate services, which offers a great deal of flexibility to create unique microfinancing solutions to suit unique markets.

With Islamic banking, microfinancing institutions can help to change the misconception that microfinancing is just “Ah Longs” in a trench coat by mitigating high-interest rates and compounding interests that have devastated many Malaysians before.

I believe that a combination of Islamic finance principles as well as creative problem solving is the key to microfinancing’s future.

Nisa Ismail, CEO of Sedania As Salam Capital Sdn Bhd

The views expressed are those of the writer and do not necessarily reflect those of Bank Negara Malaysia, the organiser of MyFintech Week 2022.

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