Micro-financing in Malaysia:

Helping the poor

Amanah Ikhtiar Malaysia

Imagine

Malaysia

Income Distribution by Ethnicity (1970)(as a percentage of total households)

Income range (mo.) Malay Chinese Indian Other

RM 1-100 22.9 2.6 1.3 .2

RM 100-199 19.1 7.8 4.4 .1

RM 200-399 10.4 11.9 3.5 .1

RM 400-699 3.0 5.3 1.2 .1

RM 700 and above 1.3 3.7 .8 .3

total 56.7 31.3 11.2 .8

Incidence of Poverty in Peninsular Malaysia1970 1980 1990 1995 2000

Households below poverty line

49.4 33.8 15.0 9.1 5.5

Agenda

• About Amanah Ikhtiar Malaysia (AIM)

• Why AIM is the best fit for Malaysia

• Critical evaluation of organization

• Recommendations going forward

AIM’s Objective AIM attempts to alleviate poverty by providing

micro-loans to poor households. These loans allow individuals to undertake activities in order to enhance their economic prosperity.

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

AIM’s Strategy

• Loan to 5 individuals of the same gender• Loans range in size from RM2,000 to

RM20,000 (about $500 to $5,000)• Repaid within 25 to 150 weeks• Range allows to tailored loan plans

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

AIM’s Strategy

•Target Market Rural areas Women Malay

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Operational Effectiveness of AIM

Government 60%

Malaysian Islamic Economics Founda-

tion30%

Other Foundations10%

AIM Funding Sources

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Operational Effectiveness of AIM

• Strict Screening of EligibilityGovernment Poverty LineTraining and Oral Exam

• Communications

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Communication Channels

Village gatherings

In schools

Volunteers

Newspapers

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Greater equality in wealth distribution

Appropriate for Malaysia’s middle-income classification, i.e. huge income gap

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Bumiputera Chinese Indians Others Non-citizens

62%

24%

7%1%

6%

Malaysia's ethnic composi-tion in 2003

Striving for national unity despite racial tensions

Rural Bumiputera entrepreneurs

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

1. Reduction/eradication of poverty

2. Accelerate the process of restructuring Malaysian society to correct economic imbalance

AIM can follow NEP 2-prong strategy

AIM fosters sustainability

•Provides the best possible option for each person by individualizing loan plans

•Identifies pool of individuals that benefit the most from AIM’s services through screening and training

•Instills commitment and work ethic

•Eliminates dependence on funds by setting a maximum tenure

•Distributes wealth among large rural populations which in turn become self-sufficient

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Rice Agriculture

Decreases agricultural dependence

Economic Trade

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Malaysia Successfully Decreases Agricultural Dependency

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

60% of AIM’s funding comes from the government

Corruption• Managing director jailed• Political leader charged for misleading Indians

Improvements to board:1. More knowledgeable board-members2. Politically neutral experts3. More involvement of women

Critical Issues

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

AIM lacks metrics to measure operational effectiveness

One Standard of Reporting

Cost-Efficiency

Social Return on

Investment

Financial Sustainability

Apply Acumen Fund Metrics Framework

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

III. Operational

II. Financial

I. Social Impact

SROI% change in poverty reductionComposition of borrower base (e.g. Bumiputera, women)

Portfolio-at-risk ratioPayback ratiosAverage loan sizeSolvency ratios

Cost savings measures Reducing time to process loan applications, streamline process

Metrics Guidelines

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

Can AIM forge a partnership or become an independent bank to add value?

Hurdles to overcome

Lack of metrics

Interest rate spread

“Mission drift”

Bureaucracy

What is AIM? Why is AIM best for Malaysia? Evaluation of AIM

1987At its inception, AIM model a good fit

for the contemporary environment

Demographic

EconomicTechnological

PoliticalSociocultural

•Hardcore poor mostly Bumiputera•Poverty concentrated in rural areas where Bumiputera reside

•Infrastructure still developing•Requires more tools to compete on a global scale in a variety of different industries

•New Economic Policy, government efforts to reduce poverty•Bureacracy and divided Northern and Eastern regions

•Pre-urban exodus, rural families•Power Distance Index on the rise as Malaysia becomes industrialized

•Economy heavily dependent on mining/agriculture•GDP – $31.6 billion

1949 1959 1969 1979 1989 1999 2009 2019 20290%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Malaysia: An Exodus to Urban Environments

Year

% U

prba

n Po

pula

tion

Two Decades of Malaysian Urban Evolution

+60%

2007AIM goes astray, overwhelmed by changing environment

Demographic

EconomicTechnological

PoliticalSociocultural

•Not-so-poor and non-poor individuals seeking loans•Men begin seeking loans•Poor gravitate toward urban regions

•Technological advances make it possible for Malaysia to export more goods and shed its dependence on agriculture

•Corruption, bureaucracy slows cash flows to AIM•Politically divided Eastern and Northern states

•Men control many government positions as well as board positions at AIM•Power Distance Index exceptionally high

•Economy shifts to trade, led by mass immigration to urban areas•Oil, rubber, electronics (manufacturing) become major exports•GDP - $138 billion

QUESTIONS?