Difficulties in Securing Funding from Banks: Success Factors for Small and Medium Enterprises (SMEs) Z. Zairani Department of Islamic Banking and Finance, Islamic Business School, Universiti Utara Malaysia, Malaysia Email: zairani@uum.edu.my Z. A. Zaimah Department of Accounting and Taxation, School of Accounting, Universiti Utara Malaysia, Malaysia Email: zaimah@uum.edu.my Abstract—Previous literature indicates that small and medium enterprises (SMEs) experience problems securing funds from banks to development their businesses. Although SMEs are the backbone of every country and play a significant role in economic development, banks still appear reluctant to approve loans, especially to micro businesses. This situation has resulted in some SMEs turning to illegal money lenders/loan sharks or “Ah Long”, because this is the fastest and easiest way of obtaining finance. Nevertheless, banks must consider several factors before they can approve a loan to SMEs because the credit risk associated with such a loan is high. The aims of this paper are to (i) explain the problems that banks face with loan applications by SMEs and (ii) examine the factors involved in obtaining loans from banks. The study employed a qualitative research approach, with officials from five banks in Malaysia interviewed about problems they faced with loan applications from SMEs. The paper attempts to contribute theoretically and practically to the literature on SMEs and provide information for SMEs on the factors that must be considered when dealing with banks. Index Terms—bank loans, funding, micro businesses, small and medium enterprises (SMEs) I. INTRODUCTION Small and medium enterprises (SMEs) play a significant role in economic development and are considered the backbone of industrial development. The contribution of SMEs to a nation’s economy can be seen in a number of ways, such as employment opportunities and economic output. The objectives of encouraging SMEs in developing countries are to combat unemployment, increase the rate of growth of real per capita income, balance income distribution and improve economic stability [1]. Almost all countries, including Malaysia, acknowledge the significant role that SMEs play in their economic development. In Malaysia, SMEs have contributed about 31 percent of the country’s gross domestic product (GDP), they employ 56 Manuscript received July 28, 2013; revised September 30, 2013. percent of the workforce and account for 19 percent of total exports. Moreover, SMEs account for 99 percent of total businesses in Malaysia. In view of the importance of SMEs to the economy, the Malaysian government has taken various steps to promote their growth. For example, the SME Master Plan 2011 to 2020 has been designed to align the roles of this sector and the New Economic Model (NEM). However, despite the acknowledged importance of SMEs, they continue to face difficulties securing funding. SMEs in Malaysia often face problem in obtaining funds from financial institutions and the government [2]. Usually, the interest rate charged by financial institutions on loans to SMEs is high. In addition, the financial institutions frequently require collateral before they will approve a loan. Although SMEs, specifically micro businesses, may be viable and have a promising future, arranging such collateral may be problematic. This situation has resulted in some SMEs turning to illegal money lenders/loan sharks or “Ah Long” 1 , because this is the fastest and easiest way of obtaining finance. Ah Long requires no collateral or proper documentation, but those who fail to pay on time face the threat of violence. The objectives of this paper are to (i) explain the problems that banks face with loan applications by SMEs and (ii) examine the factors involved in obtaining loans from banks. II. PROBLEMS THAT BANKS FACE WITH LOAN APPLICATIONS BY SMES The financing of SMEs has attracted much attention in recent years, driven in part by the fact that SMEs account for the majority of firms in most countries around the world and account for a significant share of employment [16]. Furthermore, most large companies usually start out as 1 Ah Long is a term for illegal loan sharks in Malaysia and Singapore. They lend money to people who are unable to obtain loans from banks or other legal sources. They charge a very high interest rate and frequently threaten violence (and administer it) if the loan is not repaid on time. 354 Journal of Advanced Management Science Vol. 1, No. 4, December 2013 ©2013 Engineering and Technology Publishing doi: 10.12720/joams.1.4.354-357