2014

MICROFINANCE PROGRAMME, ENTREPRENEURIAL

QUALITIES AND SMALL BUSINESS PERFORMANCE:

EMPIRICAL EVIDENCE IN KELANTAN AND

TERENGGANU

SYAMSURIANA BINTI SIDEK

MASTER OF ENTREPRENEURSHIP

2014

Microfinance Programme, Entrepreneurial Qualities and Small

Business Performance: Empirical Evidence in Kelantan and

Terengganu

by

Syamsuriana Binti Sidek

A thesis submitted in fulfillment of the requirements for the degree of

Master of Entrepreneurship

Faculty of Entrepreneurship and Business

UNIVERSITI MALAYSIA KELANTAN

THESIS DECLARATION

I hereby certify that the work embodied in this thesis is the result of the original research and has

not been submitted for a higher degree to any other University or Institution.

OPEN ACCESS I agree that my thesis is to be made immediately available as

hardcopy or on-line open access (full text).

EMBARGOES I agree that my thesis is to be made available as hardcopy or on-

line (full text) for a period approved by the Post Graduate

Committee.

Dated from until .

CONFIDENTIAL (Contain confidential information under the Official Secret Act

1972)*

RESTRICTED (Contains restricted information as specified by the organization

where research was done)*

I acknowledge that Universiti Malaysia Kelantan reserves the right as follows:

1. The thesis is the property of Universiti Malaysia Kelantan.

2. The library of Universiti Malaysia Kelantan has the right to make copies for the purpose of

research only.

3. The library has the right to make copies of the thesis for academic exchange.

SIGNATURE SIGNATURE OF SUPERVISOR

880917-03-5730

IC NO. NAME OF SUPERVISOR

Date: Date:

i

ACKNOWLEDGEMENTS

In the name of Allah S.W.T, the Most Gracious and the Most Merciful

Foremost, I would like to express my sincere gratitude to my supervisor Professor Dr.

Mohd Rosli Bin Mohamad for the continuous support of my study and research, for his

patience, motivation, enthusiasm and immense knowledge. His invaluable guidance,

constructive comments and suggestions helped of me in all the time of research and writing of

this thesis.

Millions thanks to Universiti Malaysia Kelantan (UMK) for given me opportunity to

be a postgraduate student and giving monthly allowance as a Graduate Research Assistant for

supporting my study expenses. Next, many thanks to Dr. Wee Yu Ghee and Dr. Mohd Nazri

Muhaiyiddin for helping me in part of running data through Structural Equation Modeling

(SEM) techniques. Without them guidance, I did not know how to run the data correctly.

I also would like to express my appreciation to the former Dean and Deputy Dean,

Faculty of Entrepreneurship and Business, Professor Dr. Mohamed Dahlan Bin Ibrahim and

Associate Professor Dr. Mohd Rafi Bin Yaacob for their support and help towards

postgraduate affairs. My acknowledgement also goes to all the academic and administration

staffs of Faculty of Entrepreneurship and Business and Centre of Postgraduate Studies for

their co-operations during my study.

Furthermore, I would like to thanks my family especially my beloved parents Mr.

Sidek Bin Dollah and Mrs. Che Sepiah Binti Omar and also to all my siblings, Syamsidar,

Syamsulaini, Syamsuhaida, Syairol Azli and Syamsuziati for their prayers and encouragement

during my study.

Last but not least, I am grateful to a few friends, namely Nur Syuhada Idris for her

assistance in period of data collection and Noormariana Mohd Din for her valuable assistance

in networking with my study respondents. Not forget to my close friends namely; Ahmad

Mukhlis Mahd Mayedi, Nor Atma Shahida, Elsa Hana, Nor Hafizah, Wan Afiqah, Nooraini,

Che Nur Fatin and Siti Syarmimi for their encouragement and support to me. I am so lucky

have them as my friend. To those who indirectly contributed in this research, your kindness

means a lot to me. Thank you very much.

ii

iii

TABLE OF CONTENTS

PAGE

THESIS DECLARATION i

ACKNOWLEDGEMENTS ii

TABLE OF CONTENTS iii

LIST OF TABLES viii

LIST OF FIGURES ix

LIST OF FORMULAS x

LIST OF ABBREVIATIONS xi

LIST OF SYMBOLS xiii

ABSTRAK xiv

ABSTRACT xv

CHAPTER 1: INTRODUCTION

1.1 Research Backdrop 1

1.2 Problem Statement 13

1.3 Objectives of the Study 15

1.4 Scope of the Study 16

1.5 Significance of the Study 17

1.6 Organization of the Study 18

CHAPTER 2: SMALL AND MEDIUM ENTERPRISES AND

MICROFINANCE PROGRAMME

2.1 Introduction 19

2.2 Small Medium Enterprises (SMEs) Background 20

2.2.1 SMEs Definitions in Worldwide 20

2.2.2 SMEs Definitions in Malaysia 24

2.2.3 SMEs Development in Elsewhere 26

2.2.4 SMEs Development in Malaysia 29

iv

2.2.5 Profile SMEs in Malaysia 31

2.3 Financial Intermediaries 36

2.4 Important of Access to Finance 38

2.5 Microfinance Programme Background 39

2.5.1 Microfinance Programme in Retrospect and Development 39

2.5.2 The Role of Microfinance Programme as Poverty Alleviation 43

2.5.3 The Development of Microfinance Programme in Malaysia 46

2.6 Chapter Conclusion 51

CHAPTER 3: LITERATURE REVIEW

3.1 Introduction 52

3.2 Business Performance 53

3.3 Microfinance Programme 59

3.4 Entrepreneurial Qualities 61

3.5 Conceptual Framework and Hypotheses Development 64

3.5.1 Microfinance Programme and Business Performance 64

3.5.2 Microfinance Programme and Entrepreneurial Qualities 67

3.5.3 Entrepreneurial Qualities and Business Performance 68

3.5.4 Microfinance Programme, Entrepreneurial Qualities and 70

Business Performance

3.6 Hypotheses Statement 72

3.6.1 Hypothesis 1 72

3.6.2 Hypothesis 2 73

3.6.3 Hypothesis 3 74

3.6.4 Hypothesis 4 75

3.7 Chapter Conclusion 77

v

CHAPTER 4: RESEARCH METHODS

4.1 Introduction 78

4.2 Research Design 78

4.3 Data Collection Method 79

4.4 Study Population 80

4.4.1 Sampling Techniques 81

4.4.2 Sample Size 83

4.5 Research Instrument 85

4.6 Measurement of the Variables 86

4.7 Pilot Survey 94

4.8 Procedure for Data Analysis 98

4.8.1 Data Screening and Cleaning 101

4.8.2 Frequency Analysis and Descriptive Analysis 101

4.8.3 Exploratory Factor Analysis (EFA), Inter-item Correlation 102

(ITC) and Corrected Item-Total Correlation (CITC)

4.8.4 Confirmatory Factor Analysis: Measurement Model 103

4.8.5 Validity and Reliability 105

4.8.6 Structural Equation Model (SEM) 106

4.9 Chapter Conclusion 108

CHAPTER 5: DATA ANALYSIS AND DISCUSSION

5.1 Introduction 109

5.2 Response Rate 110

5.3 Procedure for Data Analysis 111

5.3.1 Data Screening and Cleaning 111

5.3.2 Frequency Analysis and Descriptive Analysis 112

5.2.2.1 Frequency Analysis 112

5.2.2.2 Descriptive Analysis 113

5.3.3 Exploratory Factor Analysis (EFA), Inter-item Correlation 117

(ITC) and Corrected Item-Total Correlation (CITC)

vi

5.3.4 Confirmatory Factor Analysis: Measurement Model 118

5.3.5 Validity and Reliability 123

5.3.6 Structural Equation Model and Hypotheses Testing 126

5.4 Discussions 132

5.5 Chapter Conclusion 141

CHAPTER 6: CONCLUSION

6.1 Introduction 141

6.2 Key Findings 141

6.3 Implications of the Study 142

6.4 Limitations of the Study 143

6.5 Recommendations for Future Research 145

6.6 Overall Conclusion of the Study 148

REFERENCES 149

APPENDIX A 175

APPENDIX B 181

APPENDIX C 189

APPENDIX D 191

APPENDIX E 195

APPENDIX F 198

APPENDIX G 200

APPENDIX H 201

APPENDIX I 203

APPENDIX J 205

APPENDIX K 207

APPENDIX L 209

APPENDIX M 210

APPENDIX N 215

APPENDIX O 217

APPENDIX P 218

vii

APPENDIX Q 220

APPENDIX R 221

APPENDIX S 222

APPENDIX T 223

viii

LIST OF TABLES

NO. PAGE

2.1 SME Definition criteria in APEC countries 21

2.2 Summarises the approved SME definitions based on the number of full-time 25

employees and annual sales turnover

2.3 Number of establishments by economic sector 32

2.4 Number of SME establishments by state 33

2.5 Value-added growth of SMEs by key economic activity, annual change in % 34

(constant 2005 prices)

2.6 Contribution of SME to GDP by Key Economic Activity (%) 35

2.7 Development of microfinance programs since 2000 42

2.8 Main Microfinance programmes offered in Malaysia 50

4.1 Estimated sample size 84

4.2 Measurement of small business growth 87

4.3 Measurement of microfinance programme 89

4.4 Measurement of entrepreneurial qualities 92

4.5 Cronbach’s Alpha value 95

4.6 Factors and weights for all items 96

4.7 Index category and the level of acceptance for every index 104

5.1 Demographic profile 112

5.2 Small business profile 113

5.3 Profile of the microfinance programmes 115

5.4 Means and standard deviation 116

5.5 Factor loading, Cronbach’s Alpha, Construct Reliability and Average

Variance Extracted

124

5.6 Discriminant validity 125

5.7 SEM results of the structural paths 128

5.8 Mediation test 131

ix

LIST OF FIGURES

NO. PAGE

2.1 A summary of financial intermediation levels 37

3.1 The conceptual framework 76

4.1 Data analytical steps 100

5.1 Measurement model 119

5.2 Measurement model fit 122

5.3 Structural model 127

5.4 Direct effect between microfinance program and small business

performance

5.5 Effect between microfinance program, entrepreneurial qualities and

small business performance

130

131

x

LIST OF FORMULAS

NO. PAGE

4.1 Mahalanobis D2 101

4.2 Formula of AVE 106

4.3 Formula of CR 106

xi

LIST OF ABBREVIATIONS

AGFI Adjusted Goodness of Fit Index

AIM Amanah Ikhtiar Malaysia

APEC Asia-Pacific Economic Cooperation

ASRI Association for Sustainable & Responsible Investment in Asia

AVE Average Variance Extracted

BIS Business Information System

BPM Bank Pertanian Malaysia

BSN Bank Simpanan Nasional

CFA Confirmatory Factor Analysis

CFI Comparative Fit Index

CITC Corrected Item-Total Correlation

CR Composite Reliability

DOS Department of Statistic

EFA Exploratory Factor Analysis

EU European Union

GDP Gross Domestic Product

GEM Global Entrepreneurship Monitor

GFI Goodness of Fit Index

ICA Investment Climate Assessment

ICT Information and Communications Technology

ITC Inter-item Correlation

KKP Kooperasi Kredit Pekerja

KKR Koperasi Kredit Rakyat

MARA Majlis Amanah Rakyat

MFIs Microfinance Institutions

MLE Maximum Likelihood Estimation

xii

MRS Manufacturing-Related Services

MSMEs Micro, Small and Medium Enterprise

NDP National Development Policy

NEP New Economic Policy

NFI Normed Fit Index

NGOs Non-government Organisations

NSDC National SME Development Council

OECD Organisation for Economic Co-operation and Development

OSMEP Office of Small and Medium Sized Enterprises Promotion

PIE Partners in Enterprise Malaysia

RBV Resource based-view

RMSEA Root Mean Square Error of Approximation

SEM Structural Equation Modeling

SMEs Small and Medium Enterprises

SMIDEC Small and Medium Industries Development Corporation

SPSS Statistic Package Social Science

TEKUN Nasional Tabung Ekonomi Kumpulan Usahawan Nasional

TLI Tucker Lewis Index

UK United Kingdom

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Programme

US United States

YUM Yayasan Usaha Maju

xiii

LIST OF SYMBOLS

N Sample size

X2

Chi-square

df Degree of freedom

X2/df Chi-square/ Degree of freedom

r2

squared correlation estimates

¥ Japanese Yen

$ US Dollar

Rp. Indonesian Rupiah

RM Malaysian Ringgit

k Factor loading of every item

n Number of item in a model

xiv

Program Pembiayaan Mikro, Kualiti Keusahawanan dan Prestasi Peniagaan Kecil: Bukti

Empirikal di Kelantan dan Terengganu

ABSTRAK

Perusahaan Kecil dan Sederhana (PKS) memainkan peranan penting dalam pembangunan

ekonomi di negara-negara maju dan juga membangun. Walau bagaimanapun, sehingga sekarang,

kekangan kewangan masih lagi menjadi masalah yang paling kritikal yang dihadapi oleh sektor

ini. Jadi, skim pembiayaan mikro ditawarkan kepada usahawan kecil sebagai alternatif kepada

pembiayaan pasaran terbuka. Oleh itu, kajian ini menekankan hubungan di antara program

pembiayaan mikro dan prestasi perniagaan kecil serta peranan kualiti keusahawanan sebagai

pengantara dalam hubungan di antara program pembiayaan mikro dan prestasi perniagaan kecil

kerana kekurangan kajian mengenai topik ini. Kajian ini menggunakan set data yang diambil

daripada 238 peserta program pembiayaan mikro khususnya di Kelantan dan Terengganu. Kajian

ini menggunakan teknik Structural Equation Modeling untuk menganalisis hubungan bagi semua

pemboleh ubah. Dapatan kajian menunjukkan bahawa program pembiayaan mikro adalah

signifikan secara positif kepada prestasi perniagaan kecil dan pada masa yang sama menyumbang

kepada peningkatan yang positif kepada kualiti keusahawanan. Walau bagaimanapun hanya

sebahagian daripada kualiti keusahawanan berperanan sebagai pengantaraan yang mempengaruhi

kesan program pembiayaan mikro kepada prestasi perniagaan kecil. Saiz sampel yang kecil iaitu

hanya disertai oleh perniaga kecil adalah kelemahan utama bagi kajian ini. Saiz sampel juga

menghalang perbandingan keputusan antara industri-industri lain dalam sektor ini. Hasil kajian

ini boleh digunakan dalam kajian mengenai pembiayaan mikro, kualiti keusahawanan dan

prestasi perniagaan kecil pada masa hadapan. Kajian ini mendahului kajian-kajian yang

sebelumnya dengan mengkaji kesan interaksi hubungan antara program pembiayaan mikro dan

kualiti keusahawanan kepada prestasi perniagaan kecil secara serentak. Selain mengukuhkan teori

yang sedia ada tentang kepentingan program pembiayaan mikro dan ciri-ciri keusahawanan

kepada prestasi perniagaan kecil, dapatan kajian juga memberitahu PKS dan pembuat dasar

bahawa program pembiayaan mikro adalah salah satu faktor kritikal menyumbang kepada

prestasi perniagaan kecil. Kajian masa hadapan harus melanjutkan kajian ini dengan memeriksa

dan menambah lebih komponen yang berkaitan dengan perubahan prestasi perniagaan kecil.

xv

Microfinance Programme, Entrepreneurial Qualities and Small Business Performance:

Empirical Evidence in Kelantan and Terengganu

ABSTRACT

Small and Medium Enterprises (SMEs) play a crucial role in economic development of

developed and developing countries. However, until recently, financial constraint is still the most

critical problem faced by the sector. As an alternative to the open market financing, small

entrepreneurs are offered by microfinance schemes. This study highlighted the relationship

between microfinance programme and small business performance and the mediating role of

entrepreneurial qualities in the association between microfinance programme and small business

performance due to the lack of study regarding this topic. This study employed a data set drawn

from 238 microfinance participants particularly from Kelantan and Terengganu. Structural

Equation Modeling technique with mediating effect of entrepreneurial qualities was used for

analysing the relationship between the microfinance programme and small business performance.

The findings indicated that microfinance programme is positively significant to the small

business performance and at the same time contributed to the positive improvement of

entrepreneurial qualities. However, the effect of microfinance programme on small business

performance was partially mediated by entrepreneurial qualities. The small sample size which

was dominated by small business was the major limitation of this study. The sample size and

distribution also inhibited the comparison of the results between industry sectors. This result can

be used in the study on microfinance programme, entrepreneurial qualities and small business

performance in the future. By testing the interaction effect of microfinance programme and

entrepreneurial qualities in small business performance, this study advances the previous works

on this area which looked at the relationship between microfinance programme and

entrepreneurial qualities on small business performance simultaneously. Besides consolidating

the existing theory on the importance of microfinance programme and entrepreneurial qualities

on small business performance, the findings also inform SMEs and policy makers that

microfinance programme is a one of critical factor in small business performance. Further studies

should extend this study by examining and adding more components that relevant to a variation

of small business performance.

1

CHAPTER 1

INTRODUCTION

1.1 Research Backdrop

In the competitive business world of today, in which flexibility, speed and

adaptability are essential for survival and progress, small and medium sized

enterprises (SMEs) play an extremely important role in any country’s economic

development. SMEs are considered as the backbone of economic growth in all

countries because they account for 80 percent of global economic growth (Jutla,

Bodorik, & Dhaliwal, 2002).

SMEs are proved as contributor to employment creation, Gross Domestic

Product (GDP), poverty alleviation, equal distribution of income, export performance,

domestic savings and entrepreneurial development of an economy (SME Corporation

Malaysia, 2011; Tambunan, 2011; UNDP, 2007). Ahmad Fida (2008) added that

SMEs have significant impact on the income distribution, tax revenues and

employment. Since they enjoy a wider geographical presence than big companies,

SMEs also contribute to better income distribution and become the sources of

innovation, entrepreneurial spirit and diffusion of skills (Panitchpakdi, 2006). SMEs

also contribute a substantial share of the manufactured exports of East Asia; for

examples, 56 percent in Taiwan, over 40 percent in China and the Republic of Korea

(Singh, Garg, & Deshmukh, 2010).

Equally important, this sector also provides incomes for small entrepreneurs

who normally come from low income group and underprivileged (Rahman & Ahmad,

2

2010; Ahmed, 2009; Mawa, 2008). Moreover, UNCTAD (2001) affirmed that having

a high rate of small industrial enterprises has succeeded in generating the income

contribution.

Acknowledging the importance of various contributions of SMEs performance

to an economy (Jutla et al., 2002), various support programmes in terms of loans,

grants (Jones & Parry, 2011; Redzuan & Aref, 2010; Amin, 2006; Faoite, Henry,

Johnston, & Sijde, 2004), fiscal incentives (Faoite et al., 2004), advisory services

(Jones & Parry, 2011; Redzuan & Aref, 2010; Amin, 2006; Boter & Lundstrom,

2005), marketing (Irwin, 2011; Jones & Parry, 2011; Redzuan & Aref, 2010; Amin,

2006; Sparrow, 1999), training (Jones & Parry, 2011; Redzuan & Aref, 2010; Lewis,

Massey, Ashby, Coetzer, & Harris, 2007; Faoite et al., 2004) and technical services

(Redzuan & Aref, 2011; Amin, 2006; Faoite et al., 2004) have been provided by

governments all over the world.

However, despite substantial support by governments, access to finance is a

major challenge faced by the sector including small business. The ability of SMEs for

accessing finance is more difficult than larger firms (Schiffer, Mirijam, & Weder,

2001). In their study, they ranked all the constraints that firms face in doing business

and found that finance is a top problem for SMEs instead of infrastructure, policy and

regulation.

Similarly, World Bank Investment Climate Assessment (ICA) in 2008

identified the three top constraints of SMEs are low access to finance, electricity

shortage and poor transportation network (Isern et al., 2009). Besides that, in a survey

by Aldaba, Madalla, Prado, and Yasay (2010), it was indicated that financial

3

constraints have remained one of the most critical barriers affecting SME

performance. The surveyed firms cited the following financing problems; shortage of

working capital to finance new business plan, difficulties in obtaining credit from

suppliers and financial institutions, insufficient equity and expensive credit cost.

Access to finance is a crucial source needed by SMEs in particular, as well as

small businesses. Finance is important to help SMEs set up and expand their

operations, develop new products and invest in new staff or production facilities.

Many small businesses start out as an idea from one or two people, who invest their

own money and probably turn to family and friends for financial help in return for a

share in the business (OECD, 2006). Empirical evidence such as a study by Aghion,

Fally, and Scarpetta (2007) affirmed that higher finance development increases new

firm entry in sectors which are heavily dependent upon external finance. The

researchers found that not only finance is most important for smaller businesses, but it

also enhances post entry growth of firms in sectors which are most dependent on

external finance.

There is good evidence to suggest that access to finance does have a beneficial

impact on business start-ups and growth, which contributed to economic growth. For

instance, a review of Stam and Garnsey (2008) study exploring business growth and

examining the impact of start-up capital on the growth performance of businesses. The

study showed a positive correlation between start-up capital and growth after

controlling the characteristics of the founder. Besides that, Butler and Cornaggia

(2009) indicated that access to finance has a positive impact on productivity as

4

measured in agricultural crop yields in different US states. They found that

production increases the most in states with relatively strong access to finance.

As proved by empirical evidence regarding the importance of finance to

entrepreneurs, commercial bank roles as a financial conduit for SMEs are also

questionable. According to Son (2007), more than one billion poor people in the

world are still excluded from the formal financial systems because they are

considered to have a high default rate and because the transaction costs higher than

the return. Most of formal intermediaries like commercial banks consider low

income household as individuals who are incapable of saving which exposed

credits risk to them (Sinclair, 1998; Adams & Vogel, 1986).