THE MEDIATING INFUENCE OF ENTREPRENEURIAL EMPOWERMENT ON

THE LINKAGE BETWEEN ISLAMIC MICROFINANCE SERVICES AND

CLIENTS’ WELL-BEING IN MALAYSIA: PERCEIVED ASSESMENT OF

SERVICE PROVIDER

ABUBAKAR SADIQ USMAN

UNIVERSITI TUN HUSSEIN ONN MALAYSIA

iii

THE MEDIATING INFUENCE OF ENTREPRENEURIAL EMPOWERMENT ON

THE LINKAGE BETWEEN ISLAMIC MICROFINANCE SERVICES AND

CLIENTS’ WELL-BEING IN MALAYSIA: PERCEIVED ASSESMENT OF

SERVICE PROVIDER

ABUBAKAR SADIQ USMAN

A thesis submitted in

fulfilment of the requirement for the award of the

Doctor of Philosophy in Technology Management

Faculty of Technology Management and Business

Universiti Tun Hussein Onn Malaysia

MAY, 2017

v

DEDICATION

I dedicate this thesis to the members of my family:

Aishatu Adamu Usman

Jamila Abdulhamid

Muhammad Kabiru Salihu

Sulaiman Musa Kabo

Abdurrahman Abubakar Usman

Muhammad Abubakar Usman

Maryam Abubakar Usman

This is in recognition of their myriad perseverance during my long absence. I love you

all and my Allah bless our lives.

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vi

ACKNOWLEDGEMENT

All thanks and gratitude are undoubtedly due to Allah the most exalted for all His

favours. Alhamdulillah rabbil aalamin.

I am greatly indebted to my supervisor Professor Madya Dr. Rosmaini Bin Haj

Tasmin for his guidance throughout this journey. I appreciate him sincerely for his

patience and understanding my peculiar case of jumping in to the world of research with

industry background. I also owe special thanks to my Co-supervisor in person of

Professor Madya Dr. Zatul Karamah from University Malaysia Kelantan (UMK). Her

support was equally instrumental towards the success of my research. I would like to

thank the Universiti Tun Hussein Onn Malaysia (UTHM) for providing me with

research grant without which this research would have been very difficult. I equally

appreciate the support of Amanah Ikhtiar Malaysia (AIM), especially Mr Roslan Abas

who facilitated my contact with the branches.

To my parents, brothers, sisters and friends, I appreciate your strong faith in

me. Thank you so much for your prayers and support. My friends Professor Abubakar

Sadiq Bappah and Dr Abubakar Alhaji Aliyu are worth mentioning for their guidance

in to the world of research and financial support.

My Allah reward everyone in the best of ways.

iv

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ABSTRACT

Understanding clients’ well-being from the perspective of service provider is

important in Islamic microfinance services. The objective of the study was to examine

the relationship between Islamic microfinance services with entrepreneurial

empowerment and clients’ well-being. Three research questions and seven hypotheses

were formulated to guide the study. The study covered within peninsular Malaysia.

The sample was chosen from east coast states of Malaysia (Pahang, Terengganu and

Kelantan states) because these states attracted more than 50% of funds disbursement

by Amanah Ikhtiar Malaysia (AIM). The study population was 400, defined as a group

of employees of Amanah Ikhtiar Malaysia (AIM) who are directly involved in the

delivery of Islamic microfinance services. This comprised of branch manager and nine

(9) members of staff from operations department in each of the 40 branches in the

region. The sample for the study was 291 survey respondents from these staff of

Amanah Ikhtiar Malaysia (AIM). A structured questionnaire consisting of closed-

ended multiple choice questions was presented to the respondents, selected by a

stratified and simple random sampling. Exploratory factor analysis (EFA),

confirmatory factor analysis (CFA) and Analysis of Moment Structures (AMOS) were

used to test the validity and reliability of the conceptual research model. The survey

results supported four hypotheses, confirming that Islamic microfinance services have

positive relationship with entrepreneurial empowerment. The results rejected three

hypotheses on the relationship between Islamic microfinance services and clients’

well-being. The unique finding of the study is that, it has espoused the importance of

entrepreneurial empowerment as a full mediator towards achieving clients’ well-being.

The researcher concludes that Islamic microfinance services can improve clients’

empowerment and well-being by emphasising human, physical and social capital

development.

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ABSTRAK

Memahami kesejahteraan pelanggan daripada perspektif pembekal perkhidmatan

adalah penting dalam meyampaikan pembiayaan mikro Islam. Objektif kajian ini

adalah untuk menilai hubungan di antara perkhidmatan pembiayaan mikro Islam

dengan pemerkasaan keusahawanan dan kesejahteraan pengguna. Tiga persoalan

kajian dan tujuh hipotesis telah dirangka bagi membantu kajian. Kajian ini

merangkumi Semenanjung Malaysia. Sampel ini telah dipilih daripada negeri-negeri

Pantai Timur Malaysia (Pahang, Terengganu dan Kelantan) kerana negeri-negeri ini

telah menarik lebih daripada 50% dana pembiayaan oleh Amanah Ikhtiar Malaysia

(AIM). Populasi kajian ini adalah 400, terdiri daripada kumpulan kakitangan Amanah

Ikhtiar Malaysia (AIM) yang terlibat secara langsung dalam penyampaian

perkhidmatan pembiayaan mikro Islam. Ia terdiri daripada pengurus cawangan dan

sembilan (9) kakitangan daripada jabatan operasi dalam setiap satu jabatan daripada

40 cawangan di rantau ini. Sampel kajian ini adalah 291 responden kajian yang terdiri

daripada kakitangan Amanah Ikhtiar Malaysia (AIM). Satu soal selidik berstruktur

yang terdiri daripada beberapa soalan bersama beberapa pilihan jawapan (closed-

ended multiple choice questions) telah diberikan kepada responden di mana

persampelan dipilih secara rawak. Analisis Faktor Penerokaan (Exploratory Factor

Analysis), Analisis Faktor Pengesahan (Confirmatory Factor Analysis) dan Analisis

Kepentingan Struktur (Analysis of Moment Structures) telah digunakan untuk menguji

kesasihan dan kebolehpercayaan model konsep bagi penyelidikan ini. Hasil dapatan

kaji selidik ini telah menyokong empat (4) hipotesis membuktikan bahawa hubungan

antara pembiyaan mikro Islam dan pemerkasaan keusahawanan menunjukkan kesan

positif. Hasil kajian mendapati bahawa tiga (3) hipotesis hubungan antara

perkhidmatan pembiyaan mikro Islam dan kesejahteraan pelanggan tidak diterima.

Hasil penemuan yang unik telah diperolehi melalui kajian ini iaitu memperakui

kepentingan memperkasakan keusahawanan ke arah mencapai kesejahteraan

pelanggan. Pengkaji merumuskan bahawa perkhidmatan pembiayaan mikro Islam

boleh meningkatkan pemerkasaan pelanggan dan kesejahteraan dengan menekankan

aspek manusia, fizikal dan pembangunan modal sosial.

vi

ix

CONTENTS

TITLE i

DECLARATION ii

DEDICATION iii

ACKNOWLEDGEMENT iv

ABSTRACT v

ABSTRAK vi

CONTENTS vii

LIST OF TABLES xiii

LIST OF FIGURES xvi

LIST OF APPENDICES xviii

LIST OF ABBREVIATIONS xix

1 CHAPTER 1 1

1.1 Background 1

1.2 Statement of research problem 4

1.3 Significance of the study 9

1.4 Objectives of the study 10

1.5 Research questions 10

1.6 Scope of the research 11

1.7 Research structure 12

1.8 Organization of the thesis 12

1.9 Operational definition of terms 13

1.10 Summary of the chapter 14

2 CHAPTER 2 15

2.1 Introduction 15

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x

2.1.1 Poverty causes 16

2.1.2 Poverty in Malaysia 18

2.1.3 Social inclusion 20

2.1.4 Financial inclusion 22

2.2 Islamic microfinance 24

2.2.1 Introduction 24

2.2.2 Islamic microfinance services 31

2.2.3 Islamic microfinance service providers 34

2.2.4 Justification for using Amanah Ikhtiar

Malaysia (AIM) in this study 37

2.2.5 Impact of Islamic microfinance services in

improving living conditions 38

2.2.6 Basis for human development in Islamic 41

2.2.7 Islamic microfinance services and sustainable

development 48

2.2.8 Gap identified in literature reviewed 58

2.3 Theoretical framework 63

2.3.1 Description of capability approach 63

2.4 Entrepreneurial empowerment 69

2.4.1 Human capital 70

2.4.2 Physical capital 71

2.4.3 Social capital 72

2.4.4 Entrepreneurial empowerment as a mediator 74

2.5 Clients well-being 77

2.5.1 Career growth 80

2.5.2 Financial growth 80

2.5.3 Social growth 81

2.6 Relationships between clients’ well-being,

entrepreneurial empowerment and the capability

approach 83

2.6.1 Resources 84

2.6.2 Capability set 85

2.6.3 Functionings 85

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xi

2.6.4 Utility 86

2.6.5 Personal utilisation function 86

2.6.6 Justification for using capability

approach in this study 87

2.7 The proposed conceptual model overview 89

2.7.1 Proposed constructs in this thesis 91

2.8 Summary 97

3 CHAPTER 3 99

3.1 Introduction 99

3.2 Research paradigms 100

3.3 Research approach 105

3.4 Research strategy 107

3.4.1 Why survey-based research? 108

3.5 Research design 109

3.6 Scale development 111

3.6.1 Questionnaire structure 112

3.6.2 Pre-testing the questionnaire 115

3.6.3 Pilot study 115

3.7 Population of the study 117

3.7.1 Sample size 118

3.7.2 Sample size calculation 119

3.7.3 Sampling frame 120

3.7.4 Sampling procedure 121

3.8 Data collection procedure 122

3.8.1 Response rate 123

3.8.2 Techniques of questionnaire 123

3.8.3 Data preparation 123

3.9 Statistical analysis 124

3.9.1 Statistical package for social sciences 124

3.9.2 Analysis of Moment Structures (AMOS) 124

3.9.3 Structural Equation Modelling (SEM) 126

3.10 Data screening 128

3.11 Refinement and validation of instruments 129

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xii

3.12 Reliability 129

3.13 Uni-dimensionality analysis 130

3.14 Validity 131

3.14.1 Content validity 131

3.14.2 Construct validity 132

3.14.3 Criterion validity 133

3.14.4 External validity 133

3.15 Multi-collinearity 133

3.17 Exploratory Factor Analysis (EFA) 134

3.18 Confirmatory Factor Analysis (CFA) 137

3.19 Model specification 137

3.20 Model identification 138

3.21 Estimation of parameter 138

3.22 Interpretation of parameter estimates 138

3.23 Measurement development 139

3.24 Measures of goodness-of-fit 139

3.25 Goodness-of-fit indices 140

3.25 Fitness reporting 142

3.26 Assumptions made in this research 142

3.27 Ethical considerations 143

3.28 Summary of the chapter 144

4 CHAPTER 4 145

4.1 Introduction 145

4.2 Data editing and coding 145

4.3 Scale development and validation 146

4.3.1 Data screening 146

4.3.2 Missing data 146

4.3.3 Outliers 146

4.4 Questionnaire returned and useable rate 147

4.5 Assessment of normality 147

4.6 Respondents’ profiles 148

4.7 Descriptive analysis 151

4.7.1 Micro-credit 151

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xiii

4.7.2 Micro-saving 154

4.7.3 Charity and welfare fund 158

4.7.4 Entrepreneurial empowerment 163

4.7.5 Clients’ well-being 167

4.8 Summary of the chapter 171

5 CHAPTER 5 172

5.1 Introduction 172

5.2 Justification for using Confirmatory Factor

Analysis (CFA) 172

5.3 Confirmatory Factor Analysis (CFA) 173

5.3.1 Measurement model specification for

micro-credit construct. 175

5.3.2 Measurement model for the

micro-saving construct 176

5.3.3 Measurement model for charity and

welfare fund construct. 178

5.3.4 Measurement model for entrepreneurial

empowerment construct. 180

5.3.5 Measurement model for clients’

well-being construct. 183

5.4 Data refinement and validation 185

5.4.1 Micro-credit 185

5.4.2 Micro-saving 186

5.4.3 Charity and welfare fund 187

5.4.4 Entrepreneurial empowerment 187

5.4.5 Clients’ well-being 188

5.5 Reliability analysis 189

5.6 Content validity 189

5.7 Convergent validity 190

5.8 Discriminant validity 192

5.9 Multicollinearity 194

5.10 Test of mediating effects 194

5.10.1 The first mediating effect model 195

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xiv

5.10.2 The second mediating effect model 199

5.10.3 The third mediating effect model 203

5.11 Structural Equation Modelling (SEM) 207

5.12 Structural model evaluation 208

5.13 Hypothesis testing 210

5.13.1 Conclusions on hypotheses testing 211

5.14 Summary of the research objectives 212

5.15 Summary of the research questions 213

5.16 Summary of the chapter 214

6 CHAPTER 6 216

6.1 Introduction 216

6.2 Summary of the research 217

6.3 Contributions of the study 222

6.3.1 Theoretical contributions 222

6.3.2 Managerial contributions 224

6.3.3 Policy implications 226

6.4 Limitations of the study 226

6.4.1 Generalizability of findings 227

6.4.2 Scales validation 227

6.5 Directions for future research 227

6.5.1 Longitudinal study 227

6.5.2 Inclusion of other countries 228

6.5.3 Comparative study 228

6.5.4 Research consistency 228

6.6 Conclusions 229

REFERENCES 230

APPENDICES 258

PUBLICATIONS 286

VITA 288

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LIST OF TABLES

1.1 Incidence of poverty 2

1.2: Incidence of rural and urban poverty 5

1.3: Amanah Ikhtiar Malaysia: Funds/Membership/Branches 11

2.1: Summary of empirical studies 60

2.1: Summary of empirical studies (continuation) 61

3.1: Questionnaire structure 113

3.2: Number of questionnaire items used in this study 114

3.3: Questionnaire structure 116

3.4: Cronbach’s alpha for all research constructs 117

3.5: Sampling frame 121

3.6: Stratified sampling of respondents 122

3.7: Exploratory Factor Analysis (EFA) 135

3.8: Retained Exploratory Factor Analysis (EFA) 136

4.1: Questionnaire administration respondents 147

4.2: Respondents’ profiles 149

4.3: Normality assessment for micro-credit 151

4.4: Reliability statistics for micro-credit construct 153

4.5: Inter-Item correlation matrix for micro-credit 153

4.6: Item-total correlation for micro-credit 154

4.7: Normality assessment for micro-credit 155

4.8: Reliability statistics for micro-saving 157

4.9: Inter-item correlation matrix for micro-saving 157

4.10: Item- total correlation for micro-saving 158

4.11: Charity and welfare fund service 159

4.12: Reliability statistics for charity and welfare fund 160

4.13: Inter-item correlation matrix for charity and welfare fund 161

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xvi

4.14 Item-total correlation values for the charity and welfare fund 162

4.15: Descriptive statistics for entrepreneurial empowerment 163

4.16: Reliability statistics 165

4.17: Inter- item correlation matrix for entrepr empower 166

4.18: Item-total correlation for the entrepreneurial empowerment 167

4.19: Descriptive statistics for clients’ well-being 168

4.20: Reliability of the total scale of clients’ well-being 169

4.21: Inter-item correlation matrix for clients’ well-being 170

4.22: Item-total correlation statistics for clients’ well-being 171

5.1: The Literature support for the respective fitness index 174

5.2: Index category and the level of acceptance 174

5.3: Assessment of fitness for mcredit 186

5.4: Assessment of fitness for msave 186

5.5: Assessment of fitness for wfund 187

5.6: Assessment of fitness for empower 188

5.7: Assessment of fitness for cwell-being 188

5.8: Reliability and unidimensionality result 189

5.9: Parameter estimate for mcredit 191

5.10: Parameter estimate for msave 191

5.11: Parameter estimate for wfund 191

5.12: Parameter estimate for empower 191

5.13: Parameter estimate for cwell-being 192

5.14: NFI values (for convergent validity) 192

5.15: Correlations result for all the research constructs 194

5.16: Goodness-of-fit indices for the mediating models 1-3 195

5.17: Parameter estimate for the independent to mediator 196

5.18: Parameter estimate for the independent to dependent 196

5.19: Parameter estimate for the mediator to dependent variables 197

5.20: Parameter estimate for the first mediating model 198

5.21: Parameter estimate for the independent to mediator 199

5.22: Parameter estimate for the independent to dependent 200

5.23: Parameter estimate for the mediator to dependent 201

5.24: Parameter estimate for the second mediating model 202

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xvii

5.25: Parameter estimate for the independent to mediator 203

5.26: Parameter estimate for the independent to dependent 204

5.27: Parameter estimate for the mediator to dependent 205

5.28: Parameter estimate for the third mediating model 206

5.29: Index category and the level of acceptance 207

5.30: Parameter estimates for the finalized structural model 210

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xviii

LIST OF FIGURES

1.1: Distribution of household income 6

2.1: Theoretical causes of poverty 17

2.2: Malaysia financial inclusion 23

2.3: Islamic microfinance services 32

2.4: Islamic microfinance and human development 45

2.5: Islamic microfinance and sustainable development 56

2.6: The human development approach 64

2.7: The components of Human Development Index 68

2.8: Islamic microfinance and entrepreneurial empowerment 75

2.9: Capability approach 84

2.10: Research framework and conceptual model 90

3.1 Research paradigm flow chat 100

3.2 Philosophical assumptions verses schools of thought 104

3.3: Characteristics of qualitative and quantitative research 107

3.4: The research process 110

4.1: Normality probability plot of mcredit scale 152

4.2: Normality probability plot for the msave scale 156

4.3: Normality probability plot for wfund 160

4.4: Normality probability plot for the empower scale 164

4.5: Normality probability plot of cwellbeing scale 169

5.1: First iteration for mcredit measurement model 175

5.2: Mcredit model re-specification 176

5.3: First iteration msave measurement model 177

5.4: Msave model re-specification 177

5.5: First iteration wfund measurement model 178

5.6: Wfund model re-specification 179

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5.7: Wfund model re-specification 180

5.8: First iteration empower measurement model 181

5.9: Empower model re-specification 182

5.10: Empower model re-specification 183

5.11: First iteration cwellbeing measurement model 184

5.12: Cwellbeing model re-specification 185

5.13: Correlations for all the study constructs 193

5.14: Independent to mediator variables 195

5.15: Independent to dependent variables 196

5.16: Mediator to dependent variables 197

5.17: Mediating Model 1 198

5.18: Independent to mediator variables 199

5.19: Independent to dependent variables 200

5.20: Mediator to dependent variables 201

5.21: Mediating model 2 202

5.22: Independent to mediator variables 203

5.23: Independent to dependent variables 204

5.24: Mediator to dependent variables 205

5.25: Mediating model 3 206

5.26: Measurement model and goodness-of-fit indices. 208

5.27: Finalized structural model 209

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LIST OF APPENDICES

A: Pilot survey questionnaire (English) 259

B: Pilot survey questionnaire (Bahasa Melayu) 266

C: Approval for pilot survey 272

D: Field survey questionnaire (English) 273

E: Field survey questionnaire (Bahasa Melayu) 280

F: Approval for field survey 285

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LIST OF ABBREVIATIONS

AIM - Amanah Ikhtiar Malaysia

AMOS - Analysis of Moment Structures

CFA - Confirmatory Factor Analysis

EFA - Exploratory Factor Analysis

GDP - Gross Domestic product

GFDR - Global Financial Development Report

GIFR - Global Islamic Finance Report

FSBP - Financial Sector Blue Print

MDGs - Millennium Development Goals

MDGR - Millennium Development Goals Report

NDP - New Development Policy

NEM - New Economic Model

NEP - New Economic Policy

OECD - Organization for Economic Cooperation and Development

OIC - Organization for Islamic Conference

PCA - Principal Component Analysis (PCA)

SDGs - sustainable Development Goals

SEM - Structural Equation Modelling

SPSS - Statistical Package for Social Sciences

UNDP - United nation Development Program

xix

1 CHAPTER 1

INTRODUCTION

1.1 Background

There are glad tidings in the Millennium Development Goals Report (MDGR) in 2015

on the successes recorded in the fight against poverty. According to the MDGR (2015),

the number of people living in extreme poverty has declined from 1.9 billion in 1990

to 836 million in 2015. Similarly, the number of people in the working middle class

(living on more than $4 a day) has almost tripled between 1991 and 2015. This implies

that as the basic sustenance is achieved, more focus will be needed towards wider

dimensions of well-being. This is essential because yet still, a sizeable portion of

humanity are still languishing in poverty most especially the less privileged by virtue

of physical disability, gender and ethnic groups (Raimi et al., 2013). There are genuine

concerns that this vulnerable group lacks opportunities necessary to live a valuable

live. This has stimulated diverse interests from governments, donor agencies, private

investments and the academia to find a solution to this menace. With about a quarter

of world population and much of which lives in extreme economic conditions, Muslim

countries have a major task on achieving acceptable well-being (Rahman, 2013;

Mohieldin et al., 2011). Some of the difficult challenges facing these countries are how

to improve productivity and quality of life of its citizens.

Malaysia is a multi-ethnic country that comprises the Bumiputera (Malays and

other minority indigenous ethnic groups), Chinese and Indians. Successive

governments have embarked on a range of national development policies such as the

New Economic Policy (NEP) 1970-2000, the New Development Policy (NDP) 1991-

2000 and the New Economic Model (NEM) 2010. The policies aimed at increasing

income and productivity, with sustained rapid growth to attain the status of a fully

2

developed nation by 2020. Table 1.1 below presents the statistical results on the

incidence of poverty over a period of four (4) decades.

Table 1.1 Incidence of Poverty (% of pop): Malaysia 1970-2012

(Henderson et al., 2002 (1970-2000); Department of Statistics

Malaysia, 2013 (2004-2012)

1970 1980 1990 1995 2004 2009 2012

Incidence (%)

49.3

29.2

17.1

8.9

5.7

3.8

1.7

Table 1.1 represents poverty incidences in terms of percentage of the Malaysian

population. The steady economic growth enjoyed in the last four decades resulted in a

continuous decline trend in the incidence of poverty from 49.3% in 1970 to 1.7% in

2012.

The growing urgency for sustainable development globally has led to the idea

for inclusive strategies gaining ground. This suggest that, to promote a balanced and

equitable growth, the poorer section of the society has to partake meaningfully in the

economy (Mohieldin et al., 2011). Microfinance models are used in different countries

to achieve entrepreneurial empowerment of the poor people and improve their lives.

The Grameen bank founded by Muhammad Yunus is the famous model replicated in

many countries, including Malaysia. According to Global Islamic Finance Report

(GIFR) (2012), the providers of microfinance services in Malaysia are Microfinance

institutions, Cooperative societies, Development financial institutions and

Commercial banks with microfinance schemes. Among all the service providers,

Amanah Ikhtiar Malaysia (AIM) is seen as the most successful replication of the

Grameen model (Al Mamun, Adaikalam & Abdul Wahab, 2012; Omar, Noor &

Dahalan, 2012). Amanah Ikhtiar Malaysia (AIM) offers micro-credit, micro-saving

and welfare fund, and it has earned 99.2% loan repayment rate (Al-Shami et al., 2014).

The objective of microfinance intervention is to compliment government efforts in

empowering the poor people to take advantage of the opportunities in the society.

Several studies such as Noreen (2011); Nurzaman (2011); Md Saad (2010)

have indicated the role played by microfinance in enhancing entrepreneurial capacity

of its clients. Entrepreneurial empowerment is the development of assets and

capabilities of individuals and groups to engage, influence and participate in decision

3

making that shapes their lives (Bennett 2002). Narayan-Parker (2002) added that this

empowerment entails self-strength, self-power, self-reliance and life of dignity. The

aim of Islami microfinance services (micro-credit, micro-saving and charity and

welfare fund) is to enable its clients to have such assets and capabilities so as to

develop their micro enterprises. Putnam (2000) argued that for a proper development,

empowerment must have human, physical and social dimensions. This is necessary to

meet the requirement for entrepreneurial empowerment. Human capital refers to the

properties that an individual has (education, skills and knowledge), physical capital

entails ownership of physical or environmental resources (physical assets) and social

capital means social support and integration (networks and connections). Furthermore,

these components of entrepreneurial empowerment are similar to the three dimensions

of development in Islam. According to Mohieldin et al. (2011), individual self-

development, physical development, and development of the humans toward full

integration and unity are the scope of the Islamic concept of development.

Assets empowers people to withstand shocks and expand their choices, while

capabilities enables them to use their assets in different ways. Islamic microfinance

services are designed to offer opportunities to the clients in terms of training, financial

literacy, assets acquisition and mutual cooperation. This suggest that, entrepreneurial

empowerment and clients’ well-being are important ends because entrepreneurial

empowerment is necessary in building the clients’ capability, which is crucial for them

to achieve a worthwhile life.

Emerging trend in microfinance in Malaysia focuses on offering more services

to improve both financial and non-financial well-being of the clients. This concept on

wider dimension of well-being is in line with developmental objectives of nations and

was also adopted by the United Nations’ Sustainable Development Goals (SDGs)

(Sachs, 2012). The Capability Approach espoused the importance of functionings to

live a valuable life. This idea suggests that, the poorer sections of the society must be

helped to enhance their capabilities so that they can join mainstream society and have

a decent life (Mohieldin et al., 2011; Nair, 2010). This is essential because human

efforts, skills, talents, as well as need for income generation, asset acquisition and

protection against risk are necessary for promoting and sustaining economic growth

(Anand & Sen, 2000). In order for the vulnerable people to attain their full

potentialities, their conditions have to be improved towards freedom and

independence. According to Rath & Harter (2010) and McCarthy (2010), a thriving

4

life could be distinguished from one spent suffering based on career, social, financial,

physical, community dimensions. The Organisation for Economic Co-operation and

Development (OECD) has also proclaimed that, how people think about and

experience their lives is an important component of society’s progress.

There are indications from the literature review that, to understand the real

contribution of microfinance, evaluations must embrace range of services on a wider

well-being scale. To determine how microfinance can be used as a strategy for a critical

contribution to emerging challenges in Malaysia, it will require a careful research and

articulation. It is noteworthy that the impact of economic growth is essential in creating

opportunities and raising the standard of living and in fact one of many conditions for

poverty reduction (Ravallion & Chen, 2009; Foster & Székely, 2001; Ravallion &

Datt, 1999). However, the approach in this study does not believe that the gains from

increased growth automatically trickles down to the poorest. Rather, economic policy

instrument may be needed to distribute the growth to the benefit of people at all societal

levels. This means that there is need to prove that microfinance intervention results in

improvement of well-being in terms of career growth, financial and social growth for

its clients (Michaelson, 2012; Rath & Harter, 2010). According to Anand & Sen

(2000); Nussbaum & Sen (1993), welfare improvement is one of the objectives of

economic development and necessary for a balanced economic development. This

research seeks to study what phenomena maintains the gap, and what tools should be

used to close the gap.

Appraising such intervention is important to justify the huge investments in

them and also to assess whether they meet the requirements of the targeted

beneficiaries. Determining the impact of such interventions will answer the question

of whether microfinance has a role in its clients’ well-being in spite of the general

economic growth in Malaysia. This may help Malaysia to achieve a high income nation

by the year 2020.

1.2 Statement of research problem

The need for this study arises from the Malaysia Well-being Report (MWR) 2013

which analyses the effectiveness of the government’s various socio-economic

development policies in improving the well-being of the people. The MWR 2013

5

acknowledged the remarkable achievements in terms of economic growth, it has also

highlighted on the less impressive record in income distribution in rural-urban and

across ethnic groups. Table 1.2 presents the incidence of rural and urban poverty

statistics.

Table 1.2: Incidence of Rural and Urban Poverty (% of Pop): Malaysia

1970-2012 (Henderson et al., 2002 (1970-1999); Department of

statistics Malaysia, 2013 (2004-2012)

1970 1984 1995 1999 2004 2009 2012

Rural

Urban

58.7

21.9

24.7

8.2

15.6

4.1

13.2

3.8

11.9

2.5

8.4

1.7

3.4

1.0

Disparity 2.68 3.01 3.8 3.47 4.76 4.9 3.4

According to the results in Table 1.2, while incidence of poverty has drastically

declined from 58.7% in 1970 to 3.4% in 2012 for rural, and from 21.9% in 1970 to 1%

in 2012 for urban. However, disparity in terms of rural - urban has worsened. The

disparity between rural-urban was 2.68 in 1970 but increased to 3.4 in 2012. In other

words, the steady economic growth over the last four decades has the following

implications:

Decline in the incidence of poverty.

Galloping trend over a period of four decades.

Disparity in rural-urban economic development.

Depict poverty as a rural phenomenon.

This means that although high economic growth has been recorded in the last four

decades, it indicates an unbalanced proportion in rural-urban economic development

and has made the gap of inequality in incomes a reality. Similarly, besides the rural-

urban disparity, there is also an ethnic dimension of income inequality. Figure 1.1

presents distribution of household income across ethnic and strata lines.

6

Figure 1.1: Distribution of Household Income by Ethnic group/Strata 2004-2012

(Department of statistics Malaysia, 2013)

From Figure 1.1, the income distribution is shown for each segment of the population

from 2004 – 2012. It indicates that Bumiputera who are the largest ethnic group has

the lowest average household income at 4,454 in 2012, compared with Chinese and

Indians who have average household income of 6366 and nearly 5,533 in 2012

respectively. Similarly in 2012, the rural dwellers (3,080) have a half average

household income when compared with urban citizens who have 5,742. It is

noteworthy that extreme poverty has been reduced to 1.7% in 2012 (based on Table

1.1), yet the disparity in incomes between urban-rural and among the ethnic strata

persists. In 1999, Malaysia has had the highest income disparity in the Asia Pacific

region with an income disparity ratio of 11.7% between the richest 20% and the poorest

20% of the population (Nair, 2010).

According to Henderson et al. (2002), this disparity is attributed to the fact that

the Bumiputera has the majority population that lives in the rural areas and lacks

capacity-building. Another reason for this disparity may be the policies that supports

the development of infrastructure, mobility and communication for urban growth (Suri

et al., 2011; Ang, 2010; Fleisher, Li & Zhao, 2010; Shahbaz, 2010). Such policies

isolates rural areas and hinders their integration with urban society, established

markets and access to capital, and this could impede human progress and development

(Raimi et al., 2013; Foster & Székely, 2001; Gallup, Radelet & Warner, 1998).

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

MALAYSIA BUMIPUTERA CHINESE INDIANS OTHERS URBAN RURAL

2004 2007 2009 2012 2009 - 2012

7

Inequalities in socio-economic status and income heightens vulnerability of the poor

people despite successes in economic growth (Prabhakar et al., 2015).

The concerns of the MWR 2013 is that, understanding of well-being is

important in assessing development. To achieve a meaningful development in the

society, the economic gains must be seen to improve financial and non-financial

dimensions of well-being of all citizens especially the poor people. Welfarism which

is centred on resources assesses well-being only in terms of subjective utility (what a

person feels) but neglects information about physical health and social relationships.

This method is vulnerable to ‘adaptive preferences’ when people can become so

normalized to their poor conditions that they may claim to be entirely satisfied (Wells,

2012). Similarly, the perspective of the previous studies on assessing clients’ well-

being adopted the Welfarism approach, and was centred on the view of the clients

using impact assessments. This reduced many of such studies with partial or contested

impacts because of the difficulty to proof that causality is a direct consequence of the

microfinance intervention (Epstein & Crane, 2005; Hulme, 2000; Mosley, 1997). The

predicaments of the clients have affected their standing and ability to offer relevant

information about their conditions. Low levels of education and sophistication are

deterrents for them to appreciate key issues with respect to their socio-economic

circumstances.

In order to avoid such dilemma, a quantitative approach that seek responses

from the service provider is needed so as have a general view on clients’ well-being.

While a client will only tell about his or her subjective well-being, a service provider

can give a general over-view of clients served. For service providers to achieve long

term growth and sustainability, they must have visibility and a bird’s eye view of the

condition of their clients in order to have a better analyses to improve on offering

strategic services. This is expected to address clients’ needs and improve service

quality which eventually would serve the well-being of the clients.

The emerging challenges in Malaysia has made it necessary to investigate the

impact of microfinance on its clients’ well-being. Most previous studies are

characterized with making emphasis on social and financial exclusions of the poor.

They argue that wider access to micro-credit could bring improvements in human

capital development, education and skills development, better provision of physical

capital (Syed Ali, Shirazi & Nabi, 2013; Mohieldin et al., 2011; Obaidullah & Latiff,

2008). Some of the studies indicates that, such entrepreneurial empowerment leads to

8

improvement in the well-being of the poor people (Al Mamun, Adaikalam & Abdul

Wahab, 2012; Omar, Noor & Dahalan, 2012; Bhuiyan et al., 2011; Md Saad & Duasa,

2010; Nawai & Bashir 2009). The argument based on the Amartya Sen’s Capability

Approach suggests that, understanding the socio-economic conditions of the poor goes

beyond resources, income or utility. It includes other abilities, functionings and

freedom of choice, to appreciate a valuable life.

To achieve entrepreneurial empowerment for the clients, there is need to

develop their human, physical and social capacity (Newman, Schwarz & Borgia, 2014;

Roomi, 2013; Putnam, 2000). Some studies such as Usman & Tasmin (2016b); Shirazi

(2012); Noreen (2011); Nurzaman (2011) Md Saad (2010) have confirmed the

significance of Islamic microfinance services in enhancing the entrepreneurial

capacity of the clients.

A critical review of the literature shows that, despite the diverse entrepreneurial

needs of the clients, a vast proportion of the literature ignores other entrepreneurial

deficiencies that also affect the capacity and well-being of the clients. More so, the

studies are not tailored in a way that may broaden our conception of wider dimensions

of well-being such as career growth, financial and social growth of the clients. This

may affect the nature and content of well-being service delivery to the clients

(Bebbington, 1999). Human needs are diverse whereby when one is satisfied another

set of need is yearned for (Deci & Ryan, 2008). This implies that, the freedom to live

a valuable life depends on a variety of factors, including personal characteristics and

social goals. Being well-fed, literate, skills and assets development, self-reliance and

communal services constitute an important part of individual freedom (Gough, 2014;

Sen, 1993).

The concerns highlighted above have necessitated a study to address the

diverse needs of the clients towards entrepreneurial empowerment and well-being in a

comprehensive way. While it is important for microfinance services to empower the

entrepreneurial capacity of the clients, it is equally essential to see how such

entrepreneurial empowerment can translate to well-being improvement. In order to

address the well-being measurement gap, this study examined the mediating influence

of entrepreneurial empowerment in the linkage between Islamic microfinance services

and clients’ well-being from the perspective of Amanah Ikhtiar Malaysia (AIM).

9

1.3 Significance of the study

This study is based on theoretical as well as empirical observations, and is distinctive

because of the following reasons:

1) It investigated the diverse deprivations of the poor in a comprehensive way, for

instance the need to generate income, the need to save for expansion and assets

building, and the need for protection against future risks.

2) The study used a wider measurement of well-being that involved both

economic and noneconomic dimensions, for instance career growth, financial

growth and social growth.

3) The study investigated the importance of entrepreneurial empowerment in

Islamic microfinance service delivery.

4) This study used a service provider perspective based on their experiences over

the years.

This investigation is essential because it would ensure that research and

development efforts are aligned to the accomplishment of national growth objectives

(Xavier & Ahmad, 2012). Similarly, providers of microfinance services will want to

know the services that influence their clients’ well-being so as to tailor service delivery

and encourage the general development of their offering (Saad, 2012). This is expected

to generate improvements, and both policy makers and finance managers require

information about the impact of their programs on the target beneficiaries so as to build

stronger relationships with them. Furthermore, undertaking investigation on the effect

of Islamic microfinance services on empowerment and well-being could enrich

research centres, improve the standard of research, and earn Malaysia a wider

recognition in the area of Islamic microfinance globally. This will also have a great

significance on customer service delivery since the providers would strive for quality

in their services. It can also be considered essential for success in today’s highly

competitive world of business, as it has a direct effect on performance and changing

the well-being of the target beneficiaries.

10

1.4 Objectives of the study

Specifically, the objectives of this study are:

1. To examine the relationship between Islamic microfinance services and

entrepreneurial empowerment in Malaysia.

2. To examine the relationship between Islamic microfinance services and

clients’ well-being in Malaysia.

3. To examine the mediating effect of entrepreneurial empowerment in the

relationship of Islamic microfinance services and clients well-being.

1.5 Research questions

The central research question guiding this study is:

What is the linkage between Islamic microfinance services and clients’ well-being in

Malaysia?

To address the above general question, data will be collected to answer the following

specific research questions:

1. What is the relationship between Islamic microfinance services and

entrepreneurial empowerment in Malaysia?

2. What is the relationship between Islamic microfinance services and clients’

well-being in Malaysia?

3. What is the mediating effect of entrepreneurial empowerment in the

relationship between Islamic microfinance services and clients well-being in

Malaysia?

11

1.6 Scope of the research

To achieve a meaningful coverage, this study covers peninsular Malaysia. The sample

is limited to east coast region (Kelantan, Pahang and Terengganu states) owing to the

fact that the region is less industrialized when compared with the west coast region

(Henderson et al., 2002). According to the East Coast Economic Region (ECER, 2012)

official estimates, the region covers an area of about 66,000 sq. km, (51% of the land

area of Peninsular Malaysia) with a population of almost 3.9 million (14% of the total

population of Malaysia), and is expected to grow to over 4.9 million by 2020. Part of

the ECER Master plan over the next 12 years is to have a strong educational system

towards a large pool of educated and skilled workforce who can drive technology and

knowledge-based industries; with measures to eradicate poverty and improve incomes

and distribution in a sustainable manner.

The sample was drawn from operational staff of Amanah Ikhtiar Malaysia

(AIM), a pioneer and dominant microfinance service provider in Malaysia.

Operational staff are selected based on the fact that they are in close contact with the

clients and the strategies they adopt over the years. The east coast region, with an

overall 14% of the population of Malaysia, but attracted more than 50% of funds from

Amanah Ikhtiar Malaysia (AIM).

Table 1.3: Amanah Ikhtiar Malaysia: Funds/Membership/Branches (AIM,

2015)

Region Fund disbursement

(%)

Clients’ membership

(%)

Branches

Northern

Central

East-coast

Southern

Sabah & Sarawak

16

3

51

6

24

15.6

8.4

18.3

18.3

39.4

33

14

40

17

47

Total 100 100 151

The study is limited to Amanah Ikhtiar Malaysia (AIM) and do not extend to other

microfinance institutions or other lending institutions who do not offer Islamic

microfinance.

12

1.7 Research structure

Research structure is an outline of how the study was planned such as the procedures,

data collection techniques, statistical tools for analysis and reporting of data. The

reporting covers contents discussed in various chapters of the research report. The

research structure served as a useful guide to the researcher in the process of generating

data for the study. For the purpose of this research, data regarding Islamic

microfinance service and clients’ well-being was sought. Equally important is

entrepreneurial empowerment which also influences the capacity of the clients. Data

was collected using questionnaire. The data was analysed using a series of exploratory

and confirmatory analysis presented in tabular form and descriptively discussed.

Summary of findings, recommendations and conclusion are presented with

suggestions for future studies.

1.8 Organization of the thesis

This thesis is organised in to six (6) chapters. The general introductory aspects of this

study were discussed in chapter 1. The chapter comprises of background of study,

statement of research problem, research questions, and objectives, scope of study and

significance of the study. Relevant literature on conceptual framework and previous

studies on the topic were reviewed and presented in chapter 2. Research framework

development was also discussed in Chapter 2. These include theoretical framework

development, human development theories, entrepreneurial empowerment

measurement, and clients’ well-being measurement. Methodology of the study was

discussed in chapter 3. It comprised of detailed explanation on population of study,

sample and sampling technique, instruments of data collection, method of data

presentation and analysis as well as justifications for using each method mentioned

above. Descriptive data analyses on Islamic microfinance services, entrepreneurial

empowerment and clients’ well-being were presented in chapter 4. Data analyses were

conducted in three phases. The first phase examined respondents’ characteristics and

descriptive statistics of study variables. The primary statistical assumptions were also

tested. The second phase of data analyses involved a series of exploratory and

confirmatory factor analyses to specify, test and revise the measurement models of the

13

study variables. The final phase of data analyses examined the simultaneous

estimations of the measurement and structural models using structural equation

modelling (SEM). Chapter 5 presented the results for modelling. SEM was used to

evaluate effects of Islamic microfinance services on entrepreneurial empowerment and

clients’ well-being. Discussion of results of findings, conclusion and recommendations

appeared in chapter 6. The assessment of measurement and structural models and the

analysis of the test results for the hypothesized relationships were also discussed in

chapter 6. Furthermore, the chapter provided a summary of the research and concluded

by discussing the contributions of the study, the theoretical and practical implications

of the study, the limitations of the study and suggestions for future research.

1.9 Operational definition of terms

For the purpose of this research, the following terms are operationally defined in the

context of the study as follows:

1. Service provider: An institution that specializes in providing microfinance

services. In the context of this study, service provider refers to Amanah Ikhtiar

Malaysia (AIM).

2. Clients: It is defined as persons that receives microfinance services as offered

by the service provider to run their micro businesses.

3. Operational staff: These are members of staff of the service provider who are

directly involve in the delivery of microfinance services and are in close

contact with the clients.

4. Islamic microfinance services: These are interest-free micro-credit, micro-

saving and charity and welfare fund that are offered to the clients with the aim

of improving their living conditions.

5. Micro-credit: This is an interest-free micro loan given to the clients for the

purpose of setting up a micro enterprise.

6. Micro-saving: This is a micro saving by the clients as a requirement by

microfinance service provider.

7. Micro-insurance: This is a form of protection for the clients that requires them

to pay a premium against unforeseen future risk

14

8. Charity and welfare fund: This is a form of protection for clients which is

donated voluntarily as a mutual cooperation among the clients.

9. Entrepreneurial empowerment: This comprises of components of human,

physical and social capital needed to build the capability set of the

microfinance clients.

10. Clients’ well-being: An acceptable living condition for the clients of

microfinance that comprises of career growth, financial and social growth.

1.10 Summary of the chapter

This chapter provides an overview of the thesis. The chapter begins by introducing the

background and research problems of this study. This led to the development of

research objectives. The contribution and significance of the study were subsequently

discussed. Finally, a summary of the research structure, organisation of the thesis and

operational definitions are provided.

15

2 CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

This chapter discusses the basic concepts and relevant literature on the study. It is

organised in a way that simplifies the information flow on the study variables. The

foundational issues about the subject matter were discussed first. This includes causes

of poverty, poverty in Malaysia, social and financial inclusions. The chapter then

explained the first and second dependent variables. Closely related to the concept of

well-being is empowerment that helps to build entrepreneurial capital, was also

examined. Literature on well-being and empowerment were reviewed including

elements, measurements and relationships with Capability Approach. Justification for

using such measures were explained. The foundation of Islamic microfinance, service

providers, and the role of Islamic microfinance towards human and sustainable

development were analysed. Relevant literature used in developing the constructs for

Islamic microfinance towards clients’ well-being were discussed. There was an

examination of the conceptual framework that guided this thesis and provided useful

constructs from which to assess and evaluate the linkage of microfinance services and

well-being of clients. The theoretical underpinnings of the study, giving justification

on the relevance of Capability Approach to this study was also discussed. The

Capability Approach was employed to understand the welfare measures and how it

affects the microfinance clients. This theoretical perspective provided the structure

within which this research was conceptualised and within which the various

microfinance services were examined. A summary of relevant literature was outlined

and a brief conclusion at the end of the chapter.

16

2.1.1 Poverty causes

The effects of poverty can be felt at every level of society, from the individual living

in poverty to the political leader and donor agencies attempting to provide solutions.

Whether it is health conditions, illiteracy or increased crime rates, it spreads to every

aspect of life with physical, social and financial repercussions. The psychological

consequences are devastating when the victims feel they have no response that can

reduce the menace, and this results in unimagined outcomes that are detrimental to the

society. While some researchers (the conservatives) blame the poor for their personal

traits, others (the liberals) see this menace in the light of key social and economic

failings. Bradshaw (2006) has summarised what causes poverty as follows:

Individual deficiencies. This theory is based on the premise that opportunities

are open for everyone to excel through hard work and determination.

Socio-economic subculture. This theory suggests that the poor are kept in

poverty as a result of maintaining certain attitudes, beliefs and perspectives.

Structural explanation of poverty. Persistent inequity in the society in terms of

distribution of power, wealth and other resources forces some to remain in

poverty.

Geographical disparities. Localization of industries in one area makes

concentration of poverty in other areas for its inability to compete

economically.

Cyclical theory. Combining both individual and system causes to explain why

some groups remain in poverty.

A summary of theoretical causes is presented in Figure 2.1.

17

Figure 2.1: Theoretical causes of poverty (Bradshaw, 2006)

Figure 2.1 above indicates that, causes of poverty are diverse, ranging from individual,

systemic and cultural causes. However, these theoretical causes of poverty have been

criticized for analysing the issues without the perspective of the poor. They have not

allowed those who are experiencing poverty themselves to define what constitutes

their basic necessities in life (Nair, 2010). According to Anand & Sen (2000), the

individual deficiencies theory fails to recognize the abilities of people who are born

with disabilities and unable to do something that can push them out of poverty. In

reality, disabilities will only result in poverty when the individual concerned is not

willing to do something to improve upon his or her condition. The socio-economic

subculture explains how culture influences development because culture constitutes

part of development. This indicates that people are poor because their values are

embedded in personality traits which were acquired through the process of

socialization. In order to tackle poverty in such an environment, there is need for value

reorientation to enable them take the opportunities in the society (Akers, 2014). The

structural theory focuses on the chances of people as determined by the social forces

18

and circumstances such as economic growth, labour market opportunities and

educational facilities. The structures that are in the society including the organisation

of social relations such as race, gender, class and power determines the fate of people

especially the vulnerable groups (Farrigan & Parker, 2012). However, in Islamic

economics, poverty is not caused by scarcity of natural resources or production-

distribution relation, but by waste, extravagance and unequal distribution in the society

(Mohieldin et al., 2011).

Therefore, looking at poverty from diverse causes ensures a more effective

poverty solution when compared to programs that addresses a single cause (Bradshaw,

2006). The idea of the Capability Approach remains relevant in understanding poverty

because it is built on the basis that humans are basic ends and principal means of

development. This approach strikes a balance between the blaming the victim and the

structural inefficiencies theories. It sees development as a mutual relationship between

the capabilities of citizens and the requirement of the system. The Capability Approach

is adopted in this study to espouse the contribution of individuals as means and ends

of development especially in the developing countries. One of the strategies used by

governments and other donor agencies to give opportunities to individuals, especially

the low income segment, is through microfinance. It is essential to review such

intervention in the light of the Capability Approach.

2.1.2 Poverty in Malaysia

In all the development plans in Malaysia, the objective was economic prosperity

through opportunities such as foreign direct investment, education and training, rural

and infrastructural development. The goal was to generate income and productivity to

raise the standard of living. It is pertinent to note that the export oriented economic

model had provided Malaysia with unprecedented economic growth that is pivotal for

national development. Under the New Economic Plan (NEP) 1970-1990 the economy

grew at the rate of 6.7% per annum, while annual growth averaged 8.7%. During the

National Development Plan (NDP) 1990-1995, real GDP expanded at an average rate

of 8.7% per annum but later declining to 7.4% in 1998 (Nair, 2010). The resultant

effect was that it has increased productivity and opportunities for citizens to gain

employment in high paying jobs, enjoy quality products and improve living standard.

19

In all the developmental policies, education is held in high esteem especially to the

Bumiputera that live in the rural areas. The employment opportunities created quality

workforce and enhanced capacity building (Abhayaratne, 2004). Incentives were

introduced to encourage citizens, for instance welfare for students, pre-school

education, literacy and numeracy, improving the quality of schools. All these resulted

in a steady decline trend of the incidence of poverty from 49.3% in 1970 to 1.7% in

2012 as indicated in Table 1.1.

However, in the NDP dispensation, the economic indicators displayed a mixed

result. While GDP grew at the expected average annual growth of 7%, export of goods

and non-factor services was at average annual growth of 12.4% against the targeted

6.3%, unemployment was down to 3.1% against the targeted 4%, but private

investments were 3% average annual growth against the targeted 8%, public

investment increased at an average annual growth of 10.5% against the targeted

negative growth rate (Henderson et al., 2002).

The effect of these policies are the achievement of a steady economic growth, huge

employment opportunities, world class infrastructural facilities and improved living

condition (Hatta & Ali, 2013; Nair, 2010).

2.1.2.1 Ethnic Profile of Poverty

Despite an impressive decrease in the incidence of overall poverty from 49.3% in 1970

to 1.7% in 2012, the ethnic dimensions of poverty were still significant. The

Bumiputera had a poverty incidence of 8.3% in 2004 compared to 0.6% and 2.9% for

the Chinese and Indians respectively. Yet still in 2012 the Bumiputera had the highest

incidence of poverty at 2.2% while Chinese and Indians had 0.3% and 1.8%

respectively. The data continued to depict the same trend with the Bumiputera having

the highest incidence of poverty.

According to Henderson et al. (2002), the persistence of poverty amongst

Bumiputera households has been attributed to the fact that the bulk of them live in

rural areas, dependent on agriculture and lacks productive assets. These issues are

connected with low income/earning and that perpetuates poverty. The various

strategies adopted by government in subsequent policies and plans were informed by

these underlined problems.

20

2.1.2.2 Poverty and Income Distribution

Another dimension of poverty in Malaysia is the disparity in rural-urban poverty. The

incidence of poverty in rural households was 58.7% in 1970 and 3.4% in 2012

compared to the urban 21.9% and 1% for the respective years. Although the incidence

of poverty has been on the dwindling trend, it has widen the disparity between the two

groups. This means that the rapid economic growth has more positive impact in urban

than in rural regions. According to Roemer & Gugerty (1997); Kanbur & Venables

(2003), some macro-level economic policies have been associated with increase in

spatial inequalities and higher incidence of rural poverty despite overall economic

growth. While the export-oriented agriculture has been linked to the decreased food

security for rural populations, much emphasis for urban growth is often at the expense

of rural areas. As mentioned earlier in section 2.1.1, localization of industries in one

area facilitates the development of infrastructure, mobility and communication.

Without a careful prioritization of these amenities, it makes poverty to concentrate in

other areas for its inability to compete economically. This may hinder the isolated areas

to integrate with urban society, access to capital and established markets, and could

impede human progress and development (Gallup et al., 1998; Foster & Székely,

2001). In addition, it may trigger a rural-urban migration to take advantage of the new

opportunities in terms of higher income, education and social amenities (Siwar &

Kasim, 1997). This causes other urbanization challenges such as unplanned growth,

pollution and higher crime rates (Dahlquist, 2014). On the other hand, it compounds

the rural problems in terms of social services, infrastructure as well as the required

labour for the fledging rural opportunities. To face this inequality question, it will

require the development of poverty profiles that will expose a more detailed

characteristics of the poor so that a target-specific approach is implemented.

2.1.3 Social inclusion

According to the World Bank Group (2013), social inclusion is a process of improving

the condition of individuals and groups to enable them to take advantage of the

opportunities in their society. It is essential to empower the poor people so that they

have freedom and access to the opportunities in the society. There are suggestions from

21

the literature that, the vulnerable people are systematically blocked from various

aspects of their rights, opportunities and resources (Raimi et al., 2013; Zin, 2013;

Farrigan & Parker, 2012). This alienates a section of the society from participating

fully in the economic, social, and political life of the society in which they live. It may

be as a result of their social status, low education and health condition. As reported by

Bennet (2002), the European concept of social exclusion encompasses the failure of

people’s social, economic and political relationships that includes social isolation and

lack of legal rights. This may result to reducing solidarity, increasing social tensions

and holding back social development.

Development will only be achieved when the economic gains improve the

well-being of the poor in a direct way and are socially and environmentally friendly.

This is because unequal distribution of economic gains makes the isolated segments to

remain in poverty (Prabhakar et al., 2015; Bradshaw, 2006). More so, structural

difficulties does not allow the poor people to excel regardless of how competent they

may be. Proponents of economic growth as a measure of development argue that

economic growth will automatically trickle-down and spread its benefits across

society, and where it fails and causes income disparities, governments will step in to

remedy the situation. However, there is no universal tendency for growth to spread nor

did governments always show signs of correcting gross inequalities (Fleisher et al.,

2010; Stanton, 2007). The New Economic Model (NEM) in Malaysia promotes a new

approach to development, which it defines as inclusive growth, to raise productivity

and incomes of the poor and enable them contribute meaningfully to national

development (Hatta & Ali, 2013; Xavier & Ahmad, 2012). This re-strategizing was in

response to the challenges of social inclusion using direct approaches (Nair, 2010).

The NEM seeks to address issues of relative poverty and inequality and the

emerging urban poverty so as to balance the rural biased strategies and rapid rates of

urbanization. The new policy direction seeks to unite all Malaysians so as to face the

challenge of becoming a developed nation through a vibrant private sector, knowledge-

based economy, human resource development, competitive domestic economy and

reengineered public sector. Although Malaysia graduated from poor to middle income

nation, vulnerable groups exist for geographical and societal reasons (Hatta & Ali,

2013). To reduce income disparity across race and regions, NEM focuses on enhancing

the incomes of the bottom 40 per cent of households whose average monthly

household income is RM1, 500. It incorporates a new approach to development which

22

it defines as inclusive growth, so as to raise productivity and incomes of the poor and

enable them contribute meaningfully to national development. NEM is to respond to

the urgent need to arrest the declining inflows and the outflows of foreign direct

investments (FDI), narrowing income disparity and develop requisite talent that are

lacking across the country. According to Xavier & Ahmad (2012), NEM has three

primary goals: (1) high per capita income target of USD 15,000-20,000 per year by

2020 premised on a 6.5 per cent annual growth; (2) inclusiveness (all racial

communities to benefit from increased national wealth); and (3) sustainable growth

that does not compromise the quality of life of future generations. This policy is

essential because it recognises that all citizens are the primary ends and principal

means of development.

2.1.4 Financial inclusion

The Global Financial Development Report 2014 (World Bank Group, 2013) defined

financial inclusion as the proportion of individuals and firms that use financial services

in a particular society or country. To improve financial opportunities to all members

of society, the poor people, especially the rural residents must have access to formal

financial system. Financial exclusion occurs when people do not have access to fair,

safe and affordable banking products and services (Burkett & Sheehan 2009; Chant

Link & Associates, 2004). Lack of access to appropriate financial services to run their

lives and businesses has been identified as one of the predicaments of the poor people

(Mohieldin et al., 2011). One of the main aims of microfinance programs in Malaysia

is to achieve financial inclusion. The 2006 Microfinance framework was conceived

for the development of a viable financial inclusion. This is a strategic move to identify

the boundaries of an appropriate micro financing services. Essentially, it was to raise

awareness on micro financing, and to attract the participation of financial institutions

in providing micro financing solutions (Muridan & Ibrahim, 2015). Similarly, the

Financial Sector Blueprint (FSBP) 2011–2020 in Malaysia was formulated to increase

productivity, diversify sources of income and improve the quality of life of the poor.

This is a strategic plan that charts the future direction of the financial system as

Malaysia transitions towards becoming a high value-added, high-income economy.

One of the agenda for this 10-year blueprint is to pursue a financial inclusion that will

23

enable all citizens undertake financial transactions, generate income, accumulate

assets and protect themselves financially against unexpected adverse events (FSBP,

2011). This commitment to financial inclusion is embedded in the Central Bank of

Malaysia Act 2009. This Act made the promotion of a sound, progressive and inclusive

financial system as one of the functions of the Bank. Figure 2.2 below presents the

financial inclusion position of Malaysia among some selected nations.

Figure 2.2: Malaysia Financial Inclusion (Consultative Group to Assist the Poor

(CGAP) and Bank Negara Malaysia cited in FSBP, 2011)

Figure 2.2 indicates that the financial inclusion reforms in Malaysia are yielding

positive results. Deposits have increased from 1,975 accounts per 1,000 adults in 2000

to 2,954 deposit accounts per 1,000 adults in 2010. Meanwhile, the take-up of

financing has increased from 310 financing accounts per 1,000 adults in 2000 to 858

financing accounts per 1,000 adults in 2010. This result has placed Malaysia above

major ASEAN countries on financial inclusion. It has equally elevated Malaysia’s

position in various global financial inclusion rankings. According to FSBP (2011), it

gained the number one ranking since 2007 for “Getting Credit” in the “Ease of Doing

Business” index by the World Bank. Also, number eight out of 142 countries in 2011

for “Ease of Access to Loans” by the World Economic Forum. This may be seen as a

reflection of the new drive for an inclusive growth in Malaysia.

80 197 272

1085 915 858

178357 505

14491766

2236

2954

7172

0

1000

2000

3000

4000

5000

6000

7000

8000

Bangladesh Indonesia Thailand Netherland Singapore Malaysia Japan

Number of Accounts Per 1,000 Adults As At 2010

Financial Accounts Deposit Accounts

24

From the foregoing discussion, causes of poverty has been outlined as well as

what kept some people in poverty in the Malaysian context. The government policy

and plans towards social and financial inclusion were discussed. This has made the

basis for this research work because the focus of Malaysia is towards an inclusive

growth, and it is in line with the approach of sustainable development goals (SDGs)

2.2 Islamic microfinance

2.2.1 Introduction

Islam is a complete way of life. It defines the political and socio-economic endeavours

of Muslim faithful in accordance with the teachings of the Quran and Sunnah. Islamic

finance is based on the principles of Islamic economics that stems from the Muslim

world view. This view entails the purpose of human creation, social and material well-

being of individuals in this world and Hereafter (Dusuki, 2006). While the

conventional economics is based on human reasoning, Islamic economics is based on

reason and divine guidance that encompasses spiritual, moral and social needs of

human beings as vicegerents of Allah on earth. Aydin (2013) defines Islamic

economics as an “economic system based on the Islamic view aiming to realize

spiritual, moral, intellectual, social and material well-being of individuals in this life

and the Hereafter through allocation and distribution of scarce resources in a morally

guided market system”. This goes to affirm that in Muslim society, human existence

as well as its socio-economic transactions is geared towards the well-being of

individuals and the society at large to attain success in this world and Hereafter. The

major socio-economic goal of Islam is economic prosperity characterized with justice

and equitable distribution of income and wealth. Therefore the conduct of business and

commerce is influenced by teachings of Islam just as other spheres of life so as to

ensure justice and fairness (Brown, Hassan & Skully, 2007). Islamic finance is a

system that provides a variety of financial services capable of achieving economic

prosperity and equitable income distribution in line with teachings of Islam (Aydin,

2013). Islamic finance, whose foundations are embedded in the Quran and Sunnah

(teachings of Prophet Muhammad, peace be upon him), aims to promote trade based

on profit and loss sharing; and prohibition of riba (interest) and gharar (speculation).

230

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