The determinants of Small Medium Enterprise (SME) financing by local commercial and Islamic banks in Malaysia / Muhammad Aiman Muhamad Zalaluddin

The research is conducted to study the irregularity in amount of financial supply by the local commercial and Islamic banks toward the small medium enterprise (SME) in Malaysia. The financing trends are uneven every year and differently from each bank to another. It gives problem towards the entrepreneurs to gain financial access in order to expand their business. This will inhibit the development of SME sectors and indirectly affecting the GDP growth in Malaysia. Panel data analysis was conducted from 110 observations throughout 10 local banks in Malaysia which comprised of Islamic and commercial banks. The time frames of observation are from 2006 until 2016. The study seeks the relationship of bank internal characteristics and macroeconomics factors towards SME financing in Malaysia. The findings show that bank internal characteristics which comprise of bank size, bank liquidity and bank credit risk has positive relationship with SME lending. While for macroeconomic factors, GDP and interest rate were both show negative coefficient result which indicate adverse relationship with SME financing. Yet the variables that yield significant result in this study are only bank size, credit risk and GDP. Thus in order to enhance the financial access among SME in Malaysia, the government should promote awareness on benefit of investing towards SME and its contributions for GDP. The banks performance also needs to be strengthen in order to have better small medium business lending. To reflect the situation of SME financing more accurately, future research can be done by including government owned bank and non-bank financial institutions into the scope of study. Multiple countries research also can be done to compare the result in order to evaluate the level of SME financing in Malaysia among other country.