Challenges for Sustainable Islamic Microfinance Institutions in Malaysia

This paper aims at investigating the operation of Islamic microfinance in Malaysia, analyses the challenges for their sustainability and the possible solutions. Among the notable institutions offering Islamic microfinance in Malaysia are Amanah Ikhtiyar Malaysia (AIM), Yayasan Usaha Maju (YUM) and Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN). Banking institutions and development financial institutions are also a major provider of financing to small- and medium-size enterprises in Malaysia. It was found out that most of the microfinance institutions in Malaysia depend on a single Islamic mode of financing, which is qard hasan and charge a fee for the service provided. A variety of Islamic modes of financing are suggested to overcome this issue. Moreover, Islamic microfinance institutions do not offer any other significant services other than the loans and there is no integration of zakat and waqf with the microfinance operation. On the other hand, commonly the risk management tools, training and marketing strategies have some shortcomings which might be a threat for their sustainability. Furthermore, the dominance of mainstream banking institutions and development financial institutions in providing microfinance may not always be right as they have some limitations. Similarly, operating under the government might not be a positive approach for the microfinance institutions concerning their efficiency and political influence.