RELATIONSHIP BETWEEN BUSINESS S CHARACTERISTIC TOWARDS LOAN REPAYMENT PERFORMANCE OF SME S CONSTRUCTION SECTOR IN KELANTAN

Transcription

1 RELATIONSHIP BETWEEN BUSINESS S CHARACTERISTIC TOWARDS LOAN REPAYMENT PERFORMANCE OF SME S CONSTRUCTION SECTOR IN KELANTAN ZAMINOR Z.Z., NOR HAFIZA O., NOR ASMA A, ZATUL KARAMAH A.B.U., AZILA J., NURUL AZIAH A. &SITI ZAMANIRA M. Z. Faculty of Entrepreneurship and Business, Universiti Malaysia Kelantan ABSTRACT This paper determines the relationship affecting repayment performance in SME s construction by looking on business s characteristics in Kelantan by using purposive sampling. The data used in this study is gathered through a questionnaire on 50 company managers of SME s construction in Kelantan. Result on this study shows there is a significant relationship between age of business, number of employees and business profit with loan performance but there is no significant relationship between types of business and loan repayment performance. This study suggests related agencies appointed could monitor the borrowers performance by providing suitable support according to the borrowers level in order to encourage them to repay their loan on schedule without delay. Key Words: Business s characteristic, loan repayment performance, Small Medium Enterprise. INTRODUCTION In Malaysia, SMEs form a major component of the economy constituting 97.3% of business establishments, employing a large section of the population and contributing significantly to Gross Domestic Product (GDP). According to Bank Negara Malaysia (2012), an enterprise is considered an SME in each of their respective sector based on either the Annual Sales Turnover or Number of Full- Time Employees. There are some eligibility criteria that are considered as a SME Firm. The following Table 1 highlighted the annual sales turnover for each of the SME in accordance to the size namely micro, small and medium: Sector Size Primary Agriculture Table 1: Based on Annual Sales Turnover Manufacturing (Including agro based) & Manufacturing related service Service (including ICT), Mining & Quarrying and Construction Micro Less than RM200, 000 Less than RM250, 000 Less than RM200, 000 Small Between RM200, 000 & less than RM1 million Between RM250, 000 & less than RM10 million Between RM200, 000 & less than RM1 million Medium Between RM1 million & RM5 million Between RM10 million& less than RM25 million Between RM1 million & RM5 million Source: Bank Negara (2012) 1 icmrrjournal@gmail.com

2 According to Hulme and Mosley (1996) loan repayment performance is very important. This is due to the borrowers if they do not repay, then there may not be sufficient funds to ensure that the liquidity position of the MFI is maintained. Repayment performance refers to the total loans paid on time as stated in the loan agreement contract. Godquin (2004) defines repayment performance in terms of binary variable; based on an arbitrary definition of what constitutes repaying on time (a given maximum grace period is allowed). Meanwhile Guttman (2007) measures repayment performance based on the degree of arrears. While, the term delinquency is defined as a failure to meet the repayment obligations at the date complete repayment was promised (Nannyonga, 2000) and delinquent loans are loans that have been written off by a MFI (Norell, 2001). Issues of Non Performing loan (NPL) have gained increasing attentions in the past few years. Failure to payback the loan will contribute to NPLs that create bad image to the bank performance. If it is well manage bank profitability and sustainability will be increase. Opposite of that, it will be a major threat to their performance and profitability. According to Bank Negara Malaysia (2014), most of the NPL by sector has shown decreasing amount but there are some sector shows oppositely. Table 2: Non Performing loan Year Construction (RM) in million Sources: Bank Negara Malaysia (2014) Based on Table 2, NPL by construction sector showed a decreasing trend in term of repayment. From year to year the amounts of NPL slightly reduce compared to transport, storage and communication sector. With this positive trend in the construction, thus it is important to strongly identify what are the factors that determine better repayment performance. In line with this, hopefully better predicament to other sectors. So, this study intends to determine the business characteristics of loan repayment performance of SME s construction sector in Kelantan. Apart from that, based on previous researches most of the studies conducted focused on microfinance repayment, which involved micro companies. Thus there is a great need for further research conducted to cover the missing area, which is small and medium enterprise or companies focusing on especially those construction industry. 2 icmrrjournal@gmail.com

3 LITERATURE REVIEW Roslan and Abd Karim (2009) stated that the probability for default is also dominated by the characteristics of the project or business, which consist of ownership structure of the project and types of project. If a borrower s business is stationed near to the lender, it is easier for the lender to observe and get information on the borrower and allocate proper technical assistance. Thus, borrowers with businesses within the reach of the lending agency will have higher repayment rate. It is also claimed that partnership type of ownership promotes more discipline and positive behaviour to the owners compared to single ownership. Hence, projects with different types of ownership may vary in repayment rates aspect. Different types of projects have various levels of risk, hence profitability. Borrowers that incorporated in services/support activities has a lower probability to default compared to those in production activities. The size of business is concerned with the amount of income gained from it. Mpunga (2004) defended that the levels of business income are an influential aspect that would control the credit worthiness of a client. At low level income, business has little money to save while at higher level much can be saved and even used to purchase collaterals or insurance which can be used as loan securities. Such securities can be sold to reimburse the loans. Horne (2007) revealed that if the security exceeds the total amount of the loan, it could have impacted the lender s margin of safety. If the borrower is incapable to meet the lender s obligation, the lender can sell the security to fulfill the claim. If the security is sold for an amount that exceeds the total amount of the loan and interest owed, the difference is remitted to the borrower. The levels of income can also be used as an indicator to determine the credit worthiness of client. Munene and Guyo (2013) further stated that type of business, age of the business, and business profit are the business s characteristics and loan repayment performance. The study proved that high cases of default of loan repayment were common in the manufacturing sector. The trade sector recorded the least cases of loan repayment defaults. This could be associated with the observation that trade industry imposes in fast moving products on high demand, which could be translated into good business performance and increased revenue that accounts for low default cases. It was stated that the highest default cases were regular in businesses that had been in operation for a period of five to ten years. In addition, the businesses located within the municipality have high loan repayment default rates as compared to business outside municipality. Apart of that, businesses making lower monthly profits have the highest cases of loan repayment default. In 2002, Bhatt and Tang conducted a study to explore the determinants of loan repayment in microcredit programmes that applied in the group approach. Both researchers found that a higher education level was significant and positively related to better repayment performance. Conversely female borrowers, levels of household income, type of business and borrower s experience have no significant effect on repayment behavior. METHODOLOGY The sample of the study was confined to selected small and medium enterprises (SMEs) operating in Kelantan construction sector. There were 50 company managers of SME s construction involved in this study. This study used a quantitative research and to achieve the objectives of this study, the researchers used purposive sampling to gather the data. This method of sampling is necessary to obtain information from specific target groups. Here, the researchers only focused on 3 icmrrjournal@gmail.com

4 SME s construction companies who have business loan with any established financial institution in Malaysia. The data for this study was gathered through the questionnaire. The research team uses a document analysis technique to develop the questionnaire items. The data were analyzed by using SPSS 22.0 software. This study used inferential analysis to determine the relationship between two variables (Chi-Square analysis). RESULT AND DISCUSSION This section consists the business characteristics towards loan repayment performance. In this study, the business characteristics include age of business, types of business, number of employees and business profit. The hypothesis tested as below; H1 H2 H3 H4 =There is relationship between age of business and loan repayment performance. =There is relationship between types of business and loan repayment performance. =There is relationship between number of employee and loan repayment performance. =There is relationship between business profit and loan repayment performance. Variable Table 3: Chi-square for business characteristics Value (Pearson DF Significant level Value (Phi) Value Chi-Square)- X 2 (Cramer s V) Age of business Types of business Number of employee ** ** Business Profit ** **Indicate significant, p-value < 0.05 Based on Table 3, there was a significant relationship between the age of business (p=0.025<0.05), number of employees (p=0.033<0.05) and business profit (p=0.031<0.05) towards loan repayment performance. Besides, there was a moderate relationship between age of business (value phi & cramer s v= 0.433) and business profit (value phi & cramer s v= 0.422) towards loan repayment performance. While, there was a weak relationship between number of employees and loan repayment performance (value phi & cramer s v=0.370). Therefore, hypothesis was accepted (H1, H3, H4) that age of business, number of employees and business profits have affected the loan repayment performance among SME s construction. However, there was no significant relationship between types of business towards loan repayment performance among SME s construction (p>0.05). Thus, hypothesis was rejected (H2). 4 icmrrjournal@gmail.com

5 The results showed that the age of business is an important predictor towards loan repayment performance. It means that the long operated or established business is unable to repay the loan business appropriately. According to Munene and Guyo (2013), how long a business operates, it can affect the repayment loan. This study proved that the highest default case was 58% respondents that had their business operated more than ten years. This happened because the longer a business is established, the more challenges that will be encountered such as economic recession, customer demand, politic and so on. In addition, a growing number of workers in a company would cause the employer to delay paying the loan. This is because an increasing number of employees leads to high salaries payable. Business profit also affects the respondent to pay the loan on time. When respondents earned more profit, their ability to repay the loan is more accomplished. This was supported by Munene and Guyo (2013), Norhaziah and Mohd Noor (2012) and Mpunga (2004) that business profit is a good predictor to determine the ability of borrower to pay the loan. However, in this study the types of business did not affect the respondents to pay the loan right on time. This was supported by Bhatt and Tang (2002) and Munene and Guyo (2013) that types of business are not related with a better performance of repayment. CONCLUSION AND RECOMMENDATIONS The study of the successful factors of loan repayment on SME s construction sector in Malaysia is carried out using primary data through purposive sampling. The survey results were analyzed using inferential analysis by applying SPSS 22.0 software. The analysis discovers that age of business, number of employee and business profit determine successful loan repayment performance of the borrowers positively and significantly. In contrast, types of business has no significant relationship towards loan repayment performance among SME s construction. A major policy implicated from the moderate relationship between age of business and business profit towards successful loan repayment performance is that there is a necessity to consider the different levels of borrowers which can be grouped into two categories such as new entrepreneurs and senior entrepreneurs. Thus, related agencies appointed could monitor the borrowers performance by providing suitable supportaccording to the borrowers level in order to improve their business skills especially in financial management. Ultimately, for the borrowers who already applied for loans from the bank, provision of entrepreneurship trainings during follow up or with in some arranged time will help the borrowers to repay their loan successfully. REFERENCES Bank Negara Malaysia. (2012). SME Assistance Guarantee Scheme. Accessed at Bank Negara Malaysia. (2014).Banking System: Non-Performing/Impaired Loans by Sector. Accessed at Bhatt, N., & Thang,S.Y. (2002). Determinants of repayment in microcredit: Evidence from programs in the United States. International Journal of Urban and Regional Research, 26 (2), icmrrjournal@gmail.com

6 Godquin, M. (2004). Microfinance repayment performance in Bangladesh: How to improve the allocation of loans by MFIs, World Development, 32(11), Guttman, J. M. (2007).Repayment Performance in Microcredit Programs: Theory and Evidence, accessed at on March Horne J. C. (2007). Financial Management and Policy. Chand & Sons, New Delhi. Hulme, D., & Mosley.P. (1996) Finance Against Poverty 2, London, UK, Routledge. Sterns, K. (1995) The hidden beast: delinquency in micro enterprise credit programme. ACCION Discussion Thesis Document No. 6. Mpunga P. (2004). Demand for credit in Rural Uganda: who cares for the peasants? Paper Presented at the Conference on Growth, Poverty Reduction and Human Development in AfricaCenter for the Study of African Economies. Uganda. Munene H., and Guyo S.H., (2013). Factors Influencing Loan Repayment Default in Microfinance Institutions: The Experience of Imenti North District, Kenya. International Journal of Applied Science and Technology, 3 (3), Nannyonga, H. L. (2000). Determinants of repayment behaviour in the Centenary Rural Development Bank in Uganda, Unpublished Doctoral Dissertation, The Ohio State University, United States. Norell, D. (2001). How to reduce arrears in microfinance institutions.journal of Microfinance, 3(1), Norhaziah,N., and Mohd Noor,M. (2013). Loan Repayment Problem in Microfinance Programs That Use Individual Lending Approach: A Qualitative Analysis. Journal of Transformative Entrepreneurship,1(2), Roslan, A.H. & Abd Karim,M.Z. (2009). Determinants of microcredit repayment in Malaysia: The case of Agro Bank. Humanity & Social Sciences Journal, 4(1), icmrrjournal@gmail.com