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Determinants of Small and Medium Enterprises’ Choice of Microcredit Provider: A Multinomial Logit Approach

Vol. 11, No. 11, 2021, Pg. 673 – 685 Abstract Over the past decade, the contribution and the role of SMEs has been clearly acknowledged as the backbone of economic growth in Malaysia. As SMEs contribute towards economic growth, the SME development has had increased interest from policymakers and has been placed high on the government development agenda. The involvement of the banking institutions in the microfinance industry is significant in ensuring financial inclusion by providing microcredit to SMEs. Accordingly, SMEs have many choices of microcredit providers, and recognising the factors that influence the choice of providers is vital to understand SMEs’ pe rformance better. This paper investigated three choices of microcredit providers in Malaysia: microfinance institutions, commercial banks, and development financial institutions and the behaviour influences of small to medium enterprises (SMEs) microcredit borrowers. A multinomial logit (MNL) regression was utilised to investigate the microcredit provider chosen by SMEs, and empirical findings indicate that different loaning features of microcredit providers like credit amount, location of the provider, loan handling, the duration of loan, and method of interest payment significantly influence the demand of microcredit among SMEs. Understanding the various microcredit provider preferences among SMEs' will support policymakers and microcredit providers to increase financial presence and the growth of SMEs, leading to a boost in the nation’s economy.