Impact of Financial Accessibility on Smes Performance Finance Essay

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Department of Statistics, Malaysia and Bank Negara Malaysia stated that only 13.4% of SMEs sought for banking institutions loans. Although Government SMEs Annual Report 2009/10 declared that up to 78% of approval rate was achieved in SMEs financing through banking institutions in Year 2009, it doesn’t show a whole picture of SMEs financing accessibility in Malaysia. It is argued that various financing constraints imposed by banks limit the opportunities; hence, this research seeks to obtain insight into demand-side issues (e.g. firm size, business pervious performance) in financial inaccessibility faced by SMEs in Malaysia. Additionally, this research will further evaluate the impact of financial inaccessibility on SMEs performance. Government provides various financial supports in assisting SMEs as SMEs is the one of the main agent of national growth. Thus, this paper also aims to access the effectiveness of government financial support towards SMEs performance.

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Research Title:

The Impact of Financial Accessibility on SMEs Performance

Research Question:

How does Financial Inaccessibility affecting SMEs Performance?

Research Objectives:

To examine the indicators of business performance measurement of SMEs

To access the constraints faced by SMEs in accessing external sources of finance

To evaluate how financial constraints imposed by banks affect SMEs performance

To determine the successfulness of government programs in supporting SMEs financing accessibility and business performance

To recommend SMEs on possible ways to obtain financing support in order to improve business performance


SMEs have been recognized as the backbone of the economy as they are the core contributor of employment and growth. In Malaysia, approximate 99% of total business establishments are accounted by SMEs (NSDC, 2010). SMEs are defined based on two criteria: Total sales turnover per annum and Number of full-time employees employed by the company. It is further interpreted according to sectors, where in manufacturing sectors, the sales revenue of less than RM25million or full-time employee of less than 150; whilst in services and other sectors, sales revenue of less than RM5million or full-time employees of less than 50 will be classified as SMEs (NSDC, 2010).

Albeit there is a large segment of research literature contributed to the advancement of knowledge from the perspective of SMEs business performance (Jane & Beamish, 2001; Sousa et al., 2006) and financial accessibility (Beck & Demirguc-Kunt, 2006; Irwin & Scott, 2010), most of the findings are inconclusive. Besides that, only limited studies examined the relationship between financial accessibility and business performance in Malaysia, thus this paper aims to contribute to the existing pool of knowledge through demonstrating the impact of financial accessibility on SMEs performance in Malaysia.


In the 1980s and 1990s, the development of performance measurement had successfully migrated from a merely financial indicator towards more "integrative" dimensions (Ampuero et al., 1998). Despite of the evolution of non-financial performance measurement, financial performance measurement remains the fundamental tool, especially in SMEs (Kellen, 2003). Reviewing existing literature (Ahmed, 2004; Sousa et al., 2006; Chavan, 2009), it’s suggested that a combination use of financial and non-financial performance measures may assist the owners in collecting the whole picture throughout the organization (Azofra, Prieto & Alicia, 2003). Hence, Balanced Scorecard approach will be implemented in this study in measuring business performance. It measures both financial and non-financial performance derived from the organization’s vision and strategy (Chavan, 2009), including financial, customer, internal processes and, learning and growth needs. Kaplan & Norton (1996a) – the founder of Balanced Scorecard approach, asserted that this model is a "truly strategic control system that puts strategy and vision at the centre" (Atkinson, 2006).

Figure 1: The Balanced Scorecard approach

Source: "Using the balanced scorecard as a strategic management system" by Kaplan, R.S. and Norton, D.P. (1996a); cited in "Strategy implementation: a role for the balanced scorecard?" by Atkinson H., 2006.


According to Cosh & Hughes (2000), majority SMEs experienced rapid growth rates and funding shortages during their embryonic years (cited in Junjie et al., 2008). During this period, most of the entrepreneurs choose to adopt "pecking order" financing preferences, where they prefer to use internal rather than external finance and choose debt rather than equity (Junjie et al., 2008; Irwin & Scott, 2010). Therefore it is not a surprise when Beck & Demirguc-Kunt (2006) found that SMEs have smaller share of their investments with formal external sources of finance. Beck & Demirguc-Kunt (2006) further evaluated that this phenomenon is more significant in developing countries as a result of market failure and low involvement of banks. Moreover, an empirical evidence by Junjie et al. (2008) stressed that throughout the business cycle, over 65% of entrepreneurs relied on internal sources at the start-up phase; as business expand, about 80% keen on borrowing from the debt market, whilst less than 2% approach equity sources as first choice. In fact, majority of the SMEs concerned on paying higher interest rates or providing higher securities (Weiss, 2008), other than reluctant to give up their independence and control, therefore forced to bear higher agency costs due to the expropriate wealth from lenders (Berger & Udell, 1998; Jordan et al., 1998, cited in Junjie et al., 2008).


Figure 2: Sources of Financing for SMEs in Malaysia

Source: Department of Statistics, Malaysia and Bank Negara Malaysia [cited in Ooi, 2010].

Figure 3 showed that only 13.4% of Malaysia SMEs sought for loans from banking institutions. However, according to Holmes et al. (1994) [cited in Rozali et al., 2006] this phenomenon is because of the limited debt funding opportunities for SMEs, which further interpreted by Kotey (1999) stating that the financing constraints are mainly imposed by banks (cited in Irwin & Scott, 2010).


Junjie et al. (2008) indicated that most of the problems related to financing arise predominantly in SMEs. This statement is proved by other researchers whom reported that there is a direct relationship between firm size and financing accessibility (Berry et al., 2003; Beck, Asli & Maksimovic, 2005; Beck & Demirguc-Kunt, 2006; North et al., 2008; Torre et al., 2010). This behavior is criticized by Binks et al. (2006) as the finance gap leads to competitiveness disadvantage and failure in exploiting business opportunity. In contrast, Berry et al. (2003) interpreted from banks’ position that increases in firm size allows greater diversification of risks, which provide higher safeguards toward banks.


Today, SMEs face with various financing constraints from banks (Kotey, 1999; cited in Irwin & Scott, 2010), yet banks remain the prime source of external SMEs finance (Keasey & Watson, 1994, cited in Irwin & Scott, 2010; Cosh & Hughes, 2000, cited in Junjie et al., 2008; Fraser, 2006). Banks adopted different lending approaches, some banks tend to look forward to future earnings from the repayment of the loan and interests, known as "going-concern approach"; in contrast some banks preferred "gone-concern approach" which tend to have security-based lending approach (Berry et al., 2003). Generally, banks prefer security-based lending approach, where the decision standard is much depends on the collateral provided by the assets (Jordan et al., 1998; cited in Junjie et al., 2008). Hence, in general terms, industries with high tangible asset holdings (e.g. manufacturing-based industry) are expected to access to greater finance compare with sectors associated with intangible assets (e.g. service-based industry) (Joensen & McMahon, 2005; Junjie et al., 2008).


Van der Wijst & Thurik’s research (1993) showed that debt ratio is highly affected by the previous business performance (cited in Joensen & McMahon, 2005). This opinion is further supported by North et al. (2008) verifying that previous trading record and collateral evidence play more important roles than the presentation of business plans and financial projections. However nowadays, banks emphasized more on future economic conditions instead of previous performance and historical values (Weiss, 2008). This turning point has become more significant especially after the Economic Crisis, as according to Weiss (2008) a slowdown or shrinking in the economy not only deduce the number of profitable investments, but also increase the risks of borrowings.


In particular, several existing studies drew the relationship between banks and SMEs on information asymmetry problems (Lean & Tucker, 2000; cited in North et al., 2008). On the banks’ viewpoints, this perceived constraint is mainly caused by lack of historical performance data and the exacerbated judgments as entrepreneurs possess a considerable informational advantage about their businesses; besides the unwillingness to disclose full information of the business plans to avoid exploitation by others (North et al., 2008). This behavior may lead to the rejection of short-term and long-term loan application from banks, which might trouble SMEs future development and growth (Keasey & Watson, 1994; cited in Irwin & Scott, 2010). On the other hand, as SMEs are not required statutory on audited financial statements (Junjie et al., 2008), it is hard for them to convey quality and build up reputation in overcoming the information opacity surrounding their activities (Berger & Udell, 1998). This situation is particularly undermines lending from banks which always require transparent information (Torre et al. , 2010).




Cressy (1996)

The study demonstrated that the ‘true’ determinant of survival is human capital and the correlation between financial capital and survival is spurious.


Junjie, Jining & Catherine (2008)

The research showed that majority SMEs experienced rapid growth rates and funding shortages during their embryonic years.


Schiffer & Weder (2001)

The literature summarized that "Financing obstacle is the most important summary obstacle to growth".


Beck, Asli & Maksimovic (2005)

The study found that the failure in accessing long-term loans is not significantly correlated with business performance.


North, Baldock, Ekanem, Deakins, Whittam & Wyper (2008)

The survey indicated that almost one third of the respondents unable to go ahead with the proposed projects in any form as a result of financial inaccessibility.


Irwin & Scott (2010)

The research highlighted that majority of the entrepreneurs give up their business due to the difficulties in raising finance.

PositiveTable 1: The relationship between financial accessibility and business performance from existing literature

With the existing literature in examining the relationship between financial accessibility and business performance, the following hypotheses are developed.

H1: There is no association between financial inaccessibility and SMEs business performance.

H2: There is an association between financial inaccessibility and SMEs business performance.


Tracing back the history of large companies, it is not difficult to found that majority of them started up as SMEs before achieving today successes. Hence, SMEs Masterplan has been drafted to support the New Economic Model and the Tenth Malaysia Plan in the next 10 years (2011-2020) (NSDC, 2010). Due to the low SMEs contribution to national GDP (31%) compared with other countries, Malaysia government launched out SME Annual Report 2009/10 themed "Transformation to the New Economic Model", aimed to achieve the quantum leap in GDP growth (NSDC, 2010).

Numerous programs and schemes are launched with the objective to foster the SMEs development (Abdullah, 1999); one of them is financial and credit assistance. The approval rate for SMEs financing via banking institutions was up to 78% in 2009 (RM50.9 billion to 140,141 SME accounts), and rose further to 80% in the first half of 2010 (NSDC, 2010). Meanwhile, incremental on annual GDP contributed by SMEs by 40% (NSDC, 2010) resulting government viewed that the up-going trend as the outcome of their comprehensive policies. However, according to Abdullah (1999), a large proportion of respondents did not gain access to the government support programs, whilst majority of those who gained the support did not enjoy the assistance. Thus, Abdullah stressed that although government stated its commitment and interests in SMEs programs, the intention does not turn into effective action.

With the background information, hypotheses are developed to access the effectiveness and successfulness of government financial policies in assisting SMEs growth.

H3: There is no association between government financial programs and SMEs performance.

H4: There is an association between government financial programs and SMEs performance.


Before evaluating the research paper, secondary data – document review is conducted with the aim to obtain a background and history of the research topic – "The impact of financial accessibility on SMEs performance". From the review, it is found that majority of the SMEs faced financial accessibility problems, for instance Australia (Johnsen & McMahon, 2005), UK (Beck & Demirguc-Kunt, 2006), Scottish (North et a;., 2008), China (Junjie et al., 2008), etc.

The approach to this research involved gathering data via self-administered questionnaire survey, enabling the researcher to describe and measure the phenomena at a point of time and to determine the causality to make "if-then" statements. Three types of measurement scales are used in the questionnaire, including nominal, ordinal and scale. Non-probability convenience and quota sampling are implemented due to the time and cost restrictions. The questionnaire which consisted of five main sections: Personal details, Company background, Business performance measurement, Financial accessibility, and Government financial initiatives, is distributed to targeted respondents, whom are entrepreneurs/managers of 150 SMEs in two states of Malaysia through mail or personal. The limited geographical areas are Penang and Perak, representing industrialized area (Penang) and non-industrialized area (Perak) in Malaysia, with the purpose to obtain comparative samples. During the stage of questionnaire design, pre-test study will be conducted and the feedback are revise with the aim to achieve reliability and validity on the final version of questionnaire. The data collected will be analyzed using the SPSS software.

Research ethics is defined as the application of moral rules and professional codes in collection, analysis, reporting and publication of information about research subjects (Dictionary of Sociology, 1998). The respondents will be informed that the questionnaire survey is under voluntary nature of participation. A written consent is not always necessary, for example, in questionnaire surveys, completing and returning the questionnaire form to the researcher can itself be interpreted as implied consent to participate (Finnish Social Science Data Archive, 2008). Yet the researcher has the responsible in ensuring the respondents are under comprehension of consent when involving in questionnaire survey. As it is under voluntary basis, the respondents have the rights to withdraw from the study anytime if the feel discomfort or stress in answering the questions.

Indeed the primary data collection in bulk is with minimal sensitiveness and the intent of characterizing populations instead of individual respondents (Seltzer, 2003); some of the respondents worry that the confidential data provided will be access by third parties. As a researcher, I will treat the information given as strictly confidential and ensure that the personal privacy will be maintained. The data will be collected under anonymity basis, personal details such as personal identity numbers, names, address and telephone numbers are not required. These ethics are believed will help in smoothen the data collection process. In conclusion, other than a well-designed questionnaire, attitude and ethics when approaching the respondents play important roles.

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Impact Of Financial Accessibility On Smes Performance Finance Essay. (2017, Jun 26). Retrieved January 27, 2023 , from

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