Buku Cross Border SMEs: Comparion of Indonesia and Malaysia

Cross Border
SMEs:
Malaysia & Indonesia
E D I T E D B Y:
MOHA ASRI ABDULLAH \ RIZAL YAYA
DZULJASTRI ABDUL RAZAK
Cross Border SMEs: Malaysia Indonesia
Editor MOHA ASRI ABDULLAH, RIZAL YAYA, DZULJASTRI ABDUL
RAZAK
Design JOKO SUPRIYANTO
UMY PRESS, May 2020

First Print
UMY Press, Universitas Muhammadiyah Yogyakarta
Jalan Brawijaya, Tamantirto, Kasihan, Bantul, Yogyakarta 55183
Telpon : +62.274-387656 pesawat 159
Cross Border SMEs: Malaysia Indonesia

Editor Moha Asri Abdullah, Rizal Yaya, Dzuljastri Abdul Razak,
16,5 x 24 cm, XII + 284 hlm
Yogyakarta, UMY PRESS 2019
Preface
M
uch have been written in various forms with re
spect to Micro, Small and Medium Enterprises
(MSMEs). In spite of this, a compilation of works
on “cross border SMEs”, especially between
Malaysia and Indonesia, has still not been made available to the pub-
lic. Prior to addressing the issue at hand, let us look at what we mean
by MSMEs for Malaysia and Indonesia? Micro, Small and Medium
Enterprises (MSMEs) have been defined differently in both countries.
So far, there has not been a unified definition that is accepted by all.
In Malaysia, SME Corp, a coordinating body on SMEs, refers to
micro size SMEs as companies with sales turnover of less than
RM300,000 and employees less than five. However, for small size
SMEs in the manufacturing sector, it refers to companies that have
sales turnover between RM300,000 and RM15 million and employ-
ees between 5 and 75 people, while in the services sector it is de-
scribed as companies that have sales turnover between RM300,000
and RM3 million, and employees between 5 and 30 people. As for
medium size SMEs, in the manufacturing sector, it includes compa-
nies with sales turnover between RM15 million and 50 million, and
employees between 75 and 200 people. However, in the services sec-
tor, companies that have sales turnover between 15 million and RM
20 million and employees between 30 and 75 people are already con-
sidered as medium size SMEs. In Indonesia, MSMEs are defined as
those enterprises which have full time employment of less than 100
employees with a substantial proportion of them consisting of micro
enterprises with not more than five full-time employees.
Elsewhere in these two nations, SMEs are much regarded as “un-
sung heroes” as they play significant economic and social roles by
offering new job opportunities, lowering unemployment rate, increas-
ing competition and productivity, and providing substantial benefits
to the economy of the two countries, Malaysia and Indonesia alike.
The SMEs in both the neighboring nations are considered to be the
backbone of the modern-day economy. Thus, it is far from being a
surely not a “fish bone” anymore. The importance of this segment is
undisputed. For instance, a total of 98.5 percent of the Malaysian
business establishments are SMEs. In 2017, these businesses were re-
sponsible for 37.1 percent of the country’s GDP, 66 percent the total
employment of the country, and 17.3 percent of the total Malaysian
export. The annual growth of these SMEs’ contributions towards the
GDP, employment and export are 7.2 percent, 3.4 percent and 7.9
percent respectively. A more or less similar example can be illustrated
for the Indonesian counterpart. The importance of MSMEs in the
Indonesian national economy has been well noted. There are more
than 56.8 million MSMEs establishments and they consist of approxi-
mately 99.9 percent of the total number of enterprises. It can be
further emphasized that within MSMEs, microenterprises seem to be
more dominant compared to small and medium enterprises. It covers
about 98.7 percent, while small and medium enterprises represent
only about 1.13 percent and 0.09 percent respectively.
vi HILMAN LATIEF
Having those figures are insufficient as there is a yawning gap be-
tween the needs, demands and policy responses in SMEs that often
dampen their prospects. The recent economic turbulence has only
added to SMEs’ problems. In this regard, SMEs in both nations have
also been struggling for the improvement in the cost reducing indus-
tries by providing relatively lower prices which bring transformation
to the industrial structure and development of new markets along
with large and multinational corporations (MNCs). SMEs directly
and indirectly assist and facilitate growth, multiply and replicate into
sufficient mass across industries and sectors. Starting in the late 70s
and early 80s, SMEs have started to become more innovative and
flexible in terms of reducing cost, technology adoption and diversifi-
cation of products. Hence, it becomes imperative for us to ensure
that SMEs, which are facing one of the toughest times in the indus-
trial history, are strongly supported by the relevant stakeholders; gov-
ernments, financial agencies, institutions and associations.
Realizing the need to leverage further on the development of small
and medium enterprises (SMEs) in these two brotherly countries,
Malaysia and Indonesia, a small group of scholars/researchers from
IIUM, UMY, UNIDA Gontor and UNISSULA have collaboratively
embarked on a little-known project known as the Research Matching
Grant Schemes (RMGS), International Islamic University Malaysia
(IIUM), Project ID: RMGS 17-001-0027. After a successful Malay-
sia-Indonesia Workshop on SMEs in 2019, that was conducted to
present all the RMGS findings, a subsequent effort is to compile the
selected-relevant papers in the form of a book to enable the knowl-
edge and the latest findings to be shared with the public at large.
Thus, the book, “Cross Border SMEs: Malaysia and Indonesia”, is
put forward as an extension of a compilation of works designed to
foster the status, growth, progress and development of SMEs, espe-
FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

vii
cially in Malaysia and Indonesia. Such an effort has not been made
elsewhere.
In view of this, we would like to extend our appreciation to the
Research Management Center (RMC) of the International Islamic
University Malaysia (IIUM), the research centers of Universitas
Muhammadiyah Yogyakarta (UMY), Universitas Darussalam (UNIDA)
Gontor, and Universitas Islam Sultan Agung (UNISSULA) for undoubt-
edly giving us the opportunity by providing research grants under
RMGS. The grants from our respective institutions enabled us to
generate and integrate these research papers into an edited book.
Therefore, special thanks and the flagship’s appreciation to those who
have contributed their papers and their efforts and unquestionable
support which have eventually led to this edited book.
Edited By:
Moha Asri Abdullah

Rizal Yaya
Dzuljastri Abdul Razak
viii HILMAN LATIEF

Author,s Biodata
International Islamic University Malaysia (IIUM)

Assoc. Prof. Dr. Dzuljastri bin Abdul Razak obtained his PhD
in Islamic Banking and Finance from University Sains Malaysia
(USM) in 2011. He has undertaken several research and
consultancy project with the industry. He has completed leading
a research grant on the study of Abandoned Housing Project
amounting to RM 78,000 under FRGS. To date, he has published
more than 10 articles on refereed and indexed journals. He has
also won several awards for his submissions in the University re-
search and exhibitions projects. In addition, he has examined sev-
eral PhD theses and has supervised numerous post graduate stu-
dents.
Asst. Prof. Dr. Khairunisah Ibrahim obtained her Bachelor’s
degree in Business Administration from the International Islamic
University Malaysia (IIUM) in 2000 and MSc in Operational Re-
search from The Strathclyde University, UK in 2002. Dr.
Khairunisah obtained her Doctorate in Business Administration
(DBA - Finance) from University Kebangsaan Malaysia (UKM) in
2015. Her areas of expertise include corporate finance, capital
structure, market risk and social finance. She has published her
research works in local and international refereed journals such as
the Global Business Review, Jurnal Pengurusan, Intellectual Dis-
course, Journal of Islamic Finance, Planning Malaysia Journal and
International Journal of Bank Marketing. She also actively pro-
vides courses and data analysis workshops, among others, on both
time series and cross-sectional analysis using SPSS and SEM. Her
recent research works and postgraduate supervisions are essentially
on Social Finance, focusing on Microfinance and Small and Me-
dium Enterprises (SMEs).
Dr Maliah Sulaiman is a Fellow of the Association of Chartered
Certified Accountants (UK), and was the former Dean of the
Kulliyyah of Economics and Management Sciences (KENMS),
International Islamic University Malaysia (IIUM). She is currently
a Professor of Accounting at the Department of Accounting,
KENMS. She holds a PhD in Accounting from the University of
Otago, New Zealand. Her research interests are in Islamic Ac-
counting, Managerial Accounting as well as Environmental Ac-
counting. On Islamic Accounting, she has written three books; Is-
lamic Corporate Reporting: Between the Desirable and the De-
sired, Accounting for Islamic Banks and Principles of Islamic Ac-
counting. She sits on various editorial committees both locally and
abroad. At the international level, she sits on the ISO TC 207
working group on Material Flow Cost Accounting (MFCA). She is
an executive council member of the Malaysian Institute of Ac-
countants (MIA). At MIA, she chaired the Islamic Finance Com-
mittee in 2018 as well as the MIA Qualifying Exams Committee
from 2016 to 2018.
Fodol Mohamed Zakaria, holds an MSc in Finance (Malaysia)
x HILMAN LATIEF
and is a research assistant in SMEs and their Accessibility to Is-
lamic Financing project, Kulliyah of Economics and Management
Sciences (KENMS), International Islamic University Malaysia
(IIUM). Zakaria has contributed to some publications and confer-
ences at national and international levels. Zakaria obtained his
Bachelor’s degree from Imam Muhammad Ibn Saud Islamic Uni-
versity (IMAMU), Saudi Arabia in Finance and Investment. He is
interested in social finance, entrepreneurship, and Islamic finance.
Zakaria has the vision to contribute to knowledge transfer, social
activities, and research development for the virtue of Muslim soci-
eties and humanity.
Md. Siddique E Azam, is currently pursuing his Ph.D. at the In-
ternational Institute for Halal Research and Training (INHART),
IIUM after completing his MBA in January 2018 from IIUM as
well. He obtained his M.Sc. in Agriculture Education from Sher-
e-Bangla Agricultural University, Dhaka, Bangladesh. He obtained
his Bachelor’s degree in agriculture science from Hajee Mohammad
Danesh Science and Technology University, Bangladesh. Along-
side serving in the banking industry in Bangladesh, he has contrib-
uted a few publications in different journals. He foresees Muslim
entrepreneurs receiving action civics education which will provide
them with the knowledge and skills to develop the economy as
practicing Muslims.
Moha Asri Abdullah, Professor (Ph.D.) at KENMS, IIUM; Deputy
dean of INHART, IIUM; Director of IEC Sdn. Bhd., and Na-
tional Panel of Evaluation Committee for Research Grants,
MOHE. He is a former Director of Innovation and
Commercialisation Office at the university, a former Deputy Dean
at the Research Management Centre (IIUM) and Head of the
Department of Economics. He was a Visiting Research Scholars

xi
of Economic Research Centre, Japan and University of Auckland,
AUT and Massey University, New Zealand. He has presented more
than 60 papers in renowned journals and presented a number of
papers at international conferences/forums. He has conducted
more than 35 research projects from different funding agencies,
local and international alike. He also has been a consultant to a
number of agencies and involved in a wide range of consultancy
works. He has been an editor and author of more than 15 books.
His expertise is in Small Business/SMEs, Entrepreneurship and
Venture Capital, Economic Development, and Halal Industry. His
research interest areas include Halal entrepreneurship and capital
venture, Small Business/SMEs, and Halal Micro-credit.
Mohamed Asmy Bin Mohd Thas Thaker obtained his Bach-
elor of Economics (Hons), Master of Economics and PhD in Eco-
nomics from the International Islamic University Malaysia (IIUM).
Upon completion of his PhD, he joined IIUM in October 2014 as
an Assistant Professor at the Department of Economics. His re-
search interests include economic development, SMEs, Islamic eco-
nomics, Waqf, Zakat and Islamic banking, and finance. Currently,
he is a member and a research fellow at the Centre of Islamic
Economics, IIUM and Malaysian Economic Association. He has
published a number of publications in cited refereed journals, and
chapters in books and presented papers at national and interna-
tional conferences. Some of his papers have won Distinguished
and Best Paper awards. Recently, his thesis also won Bronze award
at the international exhibition. His works have been made pos-
sible by his receipt of support in the form of grants from various
agencies and organizations nationally and internationally.
Norhayati Mohd Alwi has been an Assistant Professor at the De-
partment of Accounting, International Islamic University Malay-
xii HILMAN LATIEF

sia since 2000. Prior to that, she had worked with a manufacturing
firm as a financial controller. To date, she has published articles in
reputable journals, presented at many international conferences
and has been actively involved in sponsored research and
consultancy work. Her research interests include performance
management system, management accounting practices, environ-
mental management accounting, organizational change, zakat, and
waqf. Her research works landed her several awards including an
MIA-Articles of Merit Award in 2012, IIUM Research, Invention
and Innovation Exhibition (IRIIE 2012 and 2013) and the 2nd
Best Paper Award JAKI Accounting Paper Awards 2018. Profes-
sionally, she is an associate member of the Malaysia Institute of
Accountants.
Suharni Maulan is an Assistant Professor in the Department of
Business Administration, Kuliyyah of Economics and Manage-
ment Sciences, International Islamic University Malaysia. She
obtained her PhD in Business Administration from the Graduate
School of Business, UKM where she specialised in halal branding
and service marketing. She has more than 20 years experience in
teaching and the subjects she lectured in include marketing, man-
agement and economics. Her research interests are in areas re-
lated to Islamic marketing, branding and entrepreneurship. She
has authored numerous academic and professional articles in repu-
table journals and presented at various international conferences.
She is also actively involved in supervisory and consultancy works
as well as community services.
Yusof Ismail obtained his Diploma in Accountancy from ITM,
Shah Alam, and worked with auditing organizations before con-
tinuing his studies in the fields of Finance, Marketing and Man-
agement in the United States. He has authored a number of books

xiii
on Management and translated a few titles on Islam from English
into Malay. His research and journal publications include Islamic
Management, Human Resource Management, and Knowledge
Management. He served on the technical and working groups
on Shari’ah standards with the Malaysian standards body, SIRIM.
He has been associated with the International Islamic University
Malaysia since 1986.
Universitas Islam Sultan Agung, Semarang, In-

donesia (UNISSULA)
Ardian Adhiatma is a senior lecturer and researcher at the De-
partment of Management, Faculty of Economics and Business,
Universitas Islam Sultan Agung, Semarang, Indonesia. He received
his Doctoral degree from Airlangga University, Indonesia and
Masters in Management from Gadjah Mada University, Indone-
sia. He has published several articles in international journal and
proceedings. His teaching and research interests include Islamic
Economics, Human Resource Management and Knowledge Man-
agement.
Bedjo Santoso obtained his Ph.D in Islamic Banking and Finance
from the International Islamic University Malaysia (IIUM) in 2015.
He is currently the Deputy/Vice Rector for Academic and Col-
laboration Affairs at the Islamic University Sultan Agung
Semarang- Indonesia. He is active in the fields of Islamic Banking
and Finance. Besides that, he is the heads quarter ICIFE (Interna-
tional Council For Islamic Finance Educators) Central Java – In-
donesia. He is also the secretary of Islamic Studies on Economic
and Finance for Indonesian Development (ISEFID) for Central
Java and he is also in the ICMI committee (Muslim Scholars Indo-
nesian Association). He is active in writing articles on Islamic Bank-
xiv HILMAN LATIEF

ing and Finance. He has published some articles on Islamic eco-
nomic stability, Islamic Banking and Finance strategy and prod-
ucts, Sukuk, Digital Finance, and Gold Dinar as Future Lancape
on Global finance. Lastly, he was also invited as a speaker for the
Plenary Session during the 6th AICIF (ASEAN University Inter-
national Conference on Islamic Finance) in Manila in November
2018.
Hendar is a senior lecturer and researcher at the Department of
Management, Faculty of Economics and Business, Universitas Is-
lam Sultan Agung, Semarang, Indonesia. He received his Doc-
toral degree from Diponegoro University, Indonesia and Magister
Saint from Padjadjaran University, Indonesia. He has published
several articles in international journal and proceedings. His teach-
ing and research interests include Marketing Management, Entre-
preneurial Marketing and Cooperative Management
Olivia Fachrunnisa is a senior lecturer and researcher at the De-
partment of Management, Faculty of Economics and Business,
Universitas Islam Sultan Agung, Semarang, Indonesia. She received
her Ph.D from Curtin University, Australia and Masters in Hu-
man Resource Management from Gadjah Mada University, Indo-
nesia. She has published several articles and books in high reputa-
tion publication outlets. Her teaching and research interests in-
clude Human Resource Management, Organizational Behavior,
Knowledge Management and Digital Business.
Winarsih is a senior lecturer and researcher at the Department
of Accounting, Faculty of Economics and Business, Universitas
Islam Sultan Agung, Semarang, Indonesia. He received his Doc-
toral degree from Diponegoro University, Indonesia and Masters
in Accountingfrom Padjadjaran University, Indonesia. She has
published several articles in international journal and proceedings.

xv
Her teaching and research interests include Behaviour Account-
ing, Islamic Finance and Accounting and Knowledge Accounting.
University of Darussalam Gontor UNIDA

Atika Rukminastiti Masifah, M.E.Sy. is a graduate of Tazkia
University. She holds a Bachelor’s degree in Islamic Economics
(2013) and obtained Masters degree in Sharia Economics in 2017.
She was recruited to join Bank Indonesia and served the bank
from 2014 to 2017 as an Assistant Researcher in Islamic Econom-
ics and Finance Department, Bank Indonesia. She joined Univer-
sity of Darussalam Gontor in 2018 as a lecturer in the Depart-
ment of Islamic Economics, in the Faculty of Economics and Man-
agement. She has published a number of academic papers in do-
mestic and international journals, including papers on micro, macro
and financial sector issues. In addition, she has received the Best
Paper Awards in the 6th Sharia Banking Research Paper Forum in
the category of Young Researchers di Banjarmasin.
Dhika Amalia Kurniawan is a senior lecturer in the Manage-
ment Department at the University of Darussalam Gontor
(UNIDA) Indonesia. She holds a Magister Management in the
Faculty of Economics and Business from the University of Sebelas
Maret Surakarta, Indonesia. Dhika Amalia has published various
research papers in refereed journals such as Journal of Business,
Journal of Economics and Management, and International pro-
ceedings. Her research interests include Marketing and Islamic
Marketing. Dhika Amalia is the corresponding author and can be
contacted at: dhika.amalia@unida.gontor.ac.id
Eko Nur Cahyo is currently working as Director of International
Affairs and Relations, University of Darussalam Gontor. He is also
an associate researcher at the Centre for Islamic and Occidental
xvi HILMAN LATIEF

Studies (CIOS), University of Darussalam Gontor. He has pre-
sented various research papers in some international conferences
such as the International Conference on Integration of Contem-
porary and Islamic Knowledge in Islamic Universities in Malay-
sia, International Thematic Workshop “Revival of Waqf for Socio
Economic Development”, IRTI-IDB in Surabaya. In addition, he
has received an International Research grant from the Ministry of
Religious Affairs of Republic of Indonesia (MORA) on Curricu-
lum Design of Islamic Economics which was conducted at some
universities in Turkey, Pakistan, Malaysia, and Indonesia. His re-
search interests include Islamic economics, Islamic economics law,
and waqf. Eko Nur Cahyo can be contacted at
eko.nurcahyo@unida.gontor.ac.id
Ely Windarti Hastuti is a Lecturer in the Management Depart-
ment at the Universitas Darussalam Gontor (UNIDA Gontor), In-
donesia. She holds a MSc in Public Sector Accounting from Uni-
versitas Gadjah Mada, Indonesia. Her research interests include
Islamic finance, sharia governance, Islamic accounting, and Pub-
lic sector accounting.
Fajar Surya Ari Anggara is a Senior Lecturer in the Management
Department at the Universitas Darussalam Gontor (UNIDA
Gontor), Indonesia. He holds a master’s degree in management
from the State University of Malang. Fajar has published various
research papers such as Potential Analysis of Bromo Tengger as
an International Tourist Attraction Through the Canvas Business
Model Approach in refereed journals and in the community ser-
vice in the East Java area.. His research and community service
interests include Management, Entrepreneurship and International
Business. Fajar Surya Ari Anggara is the corresponding author
and can be contacted at: fajarsurya@unida.gontor.ac.id

xvii
Hartomi Maulana is a Senior Lecturer in the Management De-
partment at the Universitas Darussalam Gontor (UNIDA Gontor),
Indonesia. He holds a PhD in Business Administration from the
International Islamic University Malaysia. Hartomi has published
various research papers in refereed journal such as the Gadjah
Mada International Journal of Business, International Journal of
Business, Economics and Law, International Journal of Islamic
and Middle Eastern Finance and Management. His research in-
terests include Islamic finance, financial inclusion and Islamic
microfinance. Hartomi Maulana is the corresponding author and
can be contacted at: mhartomi@unida.gontor.ac.id
Khoirul Umam is the Dean of the UNIDA Gontor Faculty of Eco-
nomics and Management, where he started teaching Islamic eco-
nomics, Islamic monetary economics and other courses. He re-
ceived his B.A. in Islamic Finance from ISID Gontor in 2003, and
his M.A. in Economics from the International Islamic University,
Malaysia in 2007 and takes doctoral program in Islamic Econom-
ics at Islamic University of Indonesia, Yogyakarta. He has pub-
lished a number of articles in the areas of Islamic financial and
monetary economics. He co-authored his latest book with Dr.
Hamid and this book has been published by LAP, Germany.
Umam’s email is khoirulumam@unida.gontor.ac.id.
Rahma Yudi Astuti is a Senior Lecturer in the Management De-
partment at the Universitas Darussalam Gontor (UNIDA Gontor),
Indonesia. She holds a M.E.Sy Institut Agama Islam Negeri
Ponorogo. Rahma Yudi Astuti has published various research pa-
pers in refered journals such as Altijarah Unida Gontor, Islamic
Economics Journal and Khodimul Ummah. Her research inter-
ests include Islamic finance and financial inclusion. Rahma Yudi
Astuti is the corresponding author and can be contacted at:
xviii HILMAN LATIEF

rahmayudi67@unida.gontor.ac.id
Roghiebah Jadwa Faradisi is a Junior Lecturer in the Manage-
ment Department at the Universitas Darussalam Gontor (UNIDA
Gontor), Indonesia. She earned her Masters of Accountant de-
gree from Universitas Indonesia in 2018. Roghiebah also holds a
Chartered Accountancy qualification from the Indonesian Accoun-
tant Association at the prior year. She has published various re-
search papers in refereed journal, especially in financial account-
ing areas such as corporate performance and corporate governance
relations in Indonesia. Her research interests include Auditing,
Financial and Sharia Accounting. Roghiebah Jadwa Faradisi is the
corresponding author and can be contacted at:
rossyrjfaradisi@yahoo.com.
Royyan Ramdhani Djayusman is currently a lecturer and head
of the Department of Islamic Economics at the University of
Darussalam Gontor. He has contributed to many publications and
conferences on Islamic economics, finance, and public economics
and, in particular, Islamic philanthropy. He has the vision to en-
hance the model of Islamic economics education system in order
to increase the implementation of Islamic economics both among
the academicians and the community. In this regard, he and his
colleagues established the Institute of Mudharabah Funds (IMF)
promoting and educating the mudharabah contract whose prac-
tice is nowadays less popular than the murabahah contract in the
mainstream Islamic financial institutions.
Universitas Muhammadiyah Yogyakarta UMY

Rizal Yaya is an Associate Professor in the Department of Account-
ing, Universitas Muhammadiyah Yogyakarta. He is currently Dean
of the Faculty of Economics and Business, Universitas

xix
Muhammadiyah Yogyakarta. Rizal obtained his Bachelor’s de-
gree from Universitas Gadjah Mada, his Master of Science de-
gree in Accounting from the International Islamic University
Malaysia and his Doctor of Philosophy in Accountancy from Uni-
versity of Aberdeen. He is the author of textbook on Accounting
for Islamic Banks published by Salemba Empat, Jakarta. He re-
ceived an award from UMY as the best lecturer in 2017 and also
received an award for the best paper at the International Confer-
ence on Islamic Perspective of Accounting, Finance, Economics
and Management in Istanbul Turkey in 2017.
Susilo Nur Aji Cokro Darsono, is Lecturer in the Department of
Economics, Universitas Muhammadiyah Yogyakarta, Indonesia.
Susilo received his master’s degree in Rural Development Man-
agement from Khon Kaen University, Thailand and bachelor’s
degree in Economics from Universitas Muhammadiyah,
Yogyakarta. Currently, Susilo is a Ph.D student at the College of
Management, Department of Business Administration, Asia Uni-
versity Taiwan. Susilo has contributed to many publications and
conferences at both national and international levels. He conducts
research in the broad area of development economics and Islamic
investment. He is also serving in the editorial board of Jurnal
Ekonomi & Studi Pembangunan.
Taufik Akhbar, SE., holds an MBA in financial management (In-
donesia) and is a lecturer in the management department, Univer-
sitas Muhammadiyah Yogyakarta. Taufik obtained his Bachelor’s
degree from the management department, Universitas Gadjah
Mada in 2011 and graduated with Masters of Business Adminis-
tration in Magister Management, Universitas Gadjah Mada in
2014. His research interest is on corporate finance.
xx HILMAN LATIEF
Table of Contents
Chapter-1: “Profile of Entrepreneurs and SMEs: Issues & Challenges” By

Suharni Binti Maulan, Yusof Ismail, Royyan Ramdani Djayusman,
Roghiebah Jadwa Faradisi, and Bedjo Santoso — 1
Chapter-2: “Profile of MSMEs in East Java: challenges and prospects” By Dhika

Amalia Kurniawan, Eko Nur Cahyo, Suharni Binti Maluan, Rizal
Yaya, and Winarsih — 18
Chapter-3: “Business Success Factors of SMEs in Malaysia: An Empirical Study”

By Mohamed Asmy Bin Mohd Thas Thaker, Moha Asri Abdullah,
Fodol Mohamed Zakaria, Atika R. Masrifah, and Ardian Adhiatma
— 39
Chapter-4: “Measuring Sharia Financial Inclusion: Evidence from Indonesia” By

Atika R. Masrifah, Khoirul Umam, Yusof Ismail, Bedjo Santoso, Lil-
ies Setariti — 67
Chapter-5: “Identifying accessibility of financing for MSMEs in East Java Indo-

nesia” By Hartomi Maulana, Ely Windarti Hastuti, Lilies Setiartiti,
Dzuljastri Abdul Razak, and Olivia Fachrunnisa — 91
Capter-6: “Capacity Building for SMEs: Realizing the Training Gap Amongst
SMEs in Malaysia” By Moha Asri Abdullah, Dzuljastri Abdul Razak,
Md. Siddique E Azam, Winarsih, and Taufik Akhbar — 107
Chapter-7: “Training Needs: How SMEs Improve Their Competitiveness.” By

Taufik Akhbar, Susilo Nur Aji Coko Darsono, Mohamed Asmy,
Hendar, and Fajar Surya — 132
Chapter-8: “A Gap Analysis of SMEs’ Training Needs and Knowledge of Chal-

lenges to Enter Global Market” By Olivia Fachrunnisa, Ardian Adhiatma,
Rizal Yaya, Rahma Yudi, and Norhayati Mohd Alwi — 148
Chapter-9: “Examining Issues and Challenges in Integrating SMEs into Global

Value Chains: Malaysia Evidence” By Khairunisah Ibrahim, Moha Asri
Abdullah, Maliah Sulaiman, Ardian Adhiatma, and Royyan Ramdani
Djayusman — 172
Chapter-10: “Determinants of Small and Medium Enterprises (SMEs) Com-

petitiveness in Global Market” By Susilo Nur Aji Cokro Darsono, Taufik
Akhbar, Khairunisah Ibrahim, Dhika Amalia, and Hendar — 192
Chapter-11: “Financial Literacy for SMEs in Yogyakarta after a Decade of SMEs

Act” By Rizal Yaya, Lilies Setiartiti, Susilo Nur Aji Cokro Darsono,
Taufik Akbar, and Norhayati Mohd Alwi — 209
xxii HILMAN LATIEF

List of Tables
Table1. 1 SME Definition - 4

Table1. 2 Respondents’ Profile - 7
Table1. 3 Business Profile - 10
Table1. 4 Issues and Challenges - 12
Table1. 5 KMO and Bartlett’s Test - 13
Table1. 6 Factor Analysis for Issues and Challenges - 14
Table1. 7 Increase in business performance/success - 14
Table 2. 1 Gender - 23
Table 2. 2 Marital status - 24
Table 2. 3 Age - 25
Table 2. 4 Expertise - 26
Table 3. 1 Definitions of MSME - 47
Table 3. 2 Background of the Respondents - 54
Table 3. 3 Prior to Business Experience for SMEs - 54
Table 3. 4 Number of Family Members Working Full-time in the Busi-
ness - 55
Table 3. 5 Issues and level of challenges faced by SMEs - 56
Table 3. 6 KMO and Bartlett’s Test - 57
Table 3. 7 Factor Analysis - 57
Table 3. 8 Cronbach Alpha, Mean, and Standard Deviation - 58
Table 3. 9 Multiple Regression Analysis - 59
Table 4. 1 Statistics of Micro, Small and Medium Enterprises* - 68
Table 4. 2 Indicators of Financial Inclusion - 71
Table 4. 3 Grouping of Respondent Profile - 72
Table 4. 4 Summary of Respondent Profile’s Association (Chi-Square)
Tests - 78
Table 4. 5 The Summary of the Paired Samples T-Test of Source of
Financing - 86
Table 4. 6 Measuring the ISFI Results - 87
Table 5. 1 The Profile of MSMEs in 2013 - 94
Table 5. 2 Demographic - 99
Table 5. 3 Differences between Islamic and conventional financing - 100
Table 5. 4 Types of funding - 100
Table 5. 5 Sources of funding among MSMEs - 102
Table 5. 6 Accessibility to source of financial capital. - 1033
Table 5. 7 Using Islamic Finance in near future - 104
Table 5. 8 Familiarity with any of Islamic finance products - 104
Table 6. 1: Background of the Respondents - 111
Table 6. 2: Business Background of the SMEs - 120
Table 6. 3: Training by the private sector * Type of training received
Crosstabulation - 121
Table 6. 4: Fields of Training received by the Respondents - 121
Table 6. 5: Current Training Requirement - 122
Table 6. 6: Future Training Requirement - 123
Table 6. 7: Training Received and Future training requirement - 124
Table 6. 8: Crosstabulation between Received Training and Current
Training requirement in different fields - 124
Table 6. 9: Crosstabulation between Training Received and Future Train-
ing requirement in different fields - 124
Table 6. 10: Reliability Statistics - 125
Table 6. 11: Paired Samples Test - 126
Table 6. 12: Correlation - 126
Table 7. 1 Type of Training Needs Related to Business Process - 140
Table 7. 2 Type of Training Need Wanted by SMEs in the Future - 144
Table 8. 1Table 1 Demographic of Respondents - 162
Table 8. 2 Type of Sector - 163
Table 8. 3 Type of attended training - 163
Table 8. 4 Comparison between current needs and future needs of train-
ing - 164
Table 8. 5 Knowledge on Challenge to enter Global Market - 165
Table 8. 6 Rank of Knowledge needed to enter global market - 166
xxiv HILMAN LATIEF

Table 8. 7Table 6 Summary of Findings - 166
Table 9. 1: Level of Challenges on Business Future and Global Trading
by Malaysian SMEs - 179
Table 9. 2: Personal and Business Characteristics of SMEs - 181
Table 9. 3 Level of Challenges Perceived to be faced by Malaysian SMEs
in the next 3 years - 182
Table 9. 4: Level of Challenges faced by Malaysian SMEs in the Global
Market - 182
Table 9. 5: Highest Rating (Likert Score of 4 and 5) on Challenges Per-
ceived to be faced by Malaysian SMEs in the next 3 years across
Demographic Characteristics - 182
Table 9. 6: Highest Rating (Likert Score of 4 and 5) on Level of Chal-
lenges faced by Malaysian SMEs in the Global Market across Demo-
graphic Characteristics - 184
Table 10. 1 Corresponding questions about challenges faced by SMEs
regarding global market competition and collected variables - 196
Table 10. 2. KMO and Bartlett’s test for global challenges to SMEs com-
petitiveness - 197
Table 10. 3. Total variance explained - 198
Table 10. 4 Component matrix after orthogonal rotation - 200
Table 10. 5. Components associated with SMEs competitiveness - 201
Table 11. 1 Respondents position in the Company - 212
Table 11. 2: Respondents Based on Age and Education - 213
Table 11. 3: Age and Total Aset of surveyed firms - 214
Table 11. 4: Legal Form and Business Area of Surveyed Firms - 214
Table 11. 5: Record Keeping - 215
Table 11. 6: Budgeting - 217
Table 11. 7: Utilizaton of Accounting Information - 219

xxv
List of Figure
Figure 2. 1 Number of Fulltime Employees - 26

Figure 2. 2 Annual Income of MSMEs - 27
Figure 2. 3 Number of Fulltime Employees - 27
Figure 2. 4 Total Asset value - 28
Figure 2. 5 Year of Establishment - 28
Figure 2. 6 Form of Business - 29
Figure 2. 7 Business Sector - 29
FIGURE 3.1 Research model - 47
Figure 4. 1 An Inclusive Financial System - 71
Figure 4. 2 Research Framework - 77
Figure 4. 3 Gender (left) and Source of Financing (right) - 79
Figure 4. 4 Education (left) and Its Correspondence Analysis (right) - 80
Figure 4. 5 Sector of Business (left) and Its Correspondence Analysis
(right) - 81
Figure 4. 6 Number of Employee (left) and Its Correspondence Analysis
(right) - 82
Figure 4. 7 Owner’s Expertise (left) and Its Correspondence Analysis (right)
- 83
Figure 4. 8 Enterprise’s Legal Form (left) and Its Correspondence Analy-
sis (right) - 84
Figure 4. 9 Net Profit Performance (left) and Its Correspondence Analy-
sis (right) - 85
Figure 6. 1 SMEs Contribution to GDP (%) in Selected Asian Countries
- 111
Figure 6. 2: Conceptual Framework of the Study - 117
Figure 7. 1 Composition of Gender and Age of Respondent - 138
Figure 7. 2 Status Ownership and Level of Education - 139
Figure 8. 1 Knowledge and Training needs to enter global market - 167
xxvi HILMAN LATIEF

01
C H A P T E R
PROFILING OF ENTREPRENEURS
AND SMEs: Issues & Challenges
Suharni Binti Maulan, Yusof Ismail, Royyan Ramdani Djayusman,
Roghiebah Jadwa Faradisi, and Bedjo Santoso
ABSTRACT
As Malaysia aims to become a high-income country by the year 2020,
where the small medium enterprises (SMEs) play critical roles, this chapter
focuses on profiling the SMEs and the challenges that they are currently fac-
ing. This finding confirms that the majority of Malaysian SMEs is of micro
and small size where the issues of financial accessibility and sufficiency are
still prevailing. Using factor analysis, 344 data was analyzed, and it was found
that the challenges faced by Malaysian SMEs can be divided into four factors,
namely: “human resource management (HRM) challenges”, “external chal-
lenges”, “entrepreneur competency challenges” and “organizational-related
challenges”. It is hoped that these findings will assist the government to
identify relevant policies to further enhance the performance of SMEs in
Malaysia.
KEY WORDS: Small and Medium Enterprises (SMEs), Malayisa, SMEs Profile
and Challenges
1.0 INTRODUCTION
Small and medium enterprises (SMEs) continue to be the back-
bone of an economy of a country. In Malaysia, 98.5 percent of busi-
ness establishments are SMEs. In 2017, these businesses were respon-
sible for 37.1 percent of the country’s GDP, 66% of the country’s
employment, and 17.3 percent of Malaysia’s exports. The annual
growth of these SMEs’ contributions towards the GDP, employment
and exports are 7.2 percent, 3.4 percent and 7.9 percent respectively
(SME Annual Report 2017/2018). This performance is in tandem
with Malaysia’s SME Masterplan 2012-2020 that assumed a greater
role for SMEs not only as an enabler, but also as a driver and ‘game
changer’ to move the economy towards becoming a high income na-
tion.
However, it is indeed a challenging task to accelerate the growth
of SMEs as the businesses are known as operating with scarce re-
sources and complex environment (Ng & Kee; 2012). For Malaysian
SMEs, six factors which influence their performance are identified
namely: innovation and technology adoption; human capital devel-
opment, access to financing, market access, legal and regulatory envi-
ronment; and infrastructure (SME Masterplan 2012-2020). Hence
the Government’s role is to effectively act as facilitator and catalyst,
creating an enabling environment and ecosystem for SMEs to thrive.
Under the National SME Development Council (NSDC), various
ministries and agencies have been brought together to work towards
achieving this national agenda (Chin & Lim 2018).
Therefore, this chapter is significant because Malaysia aims to be-
come a high-income country by the year 2020. SMEs have been an
important driver of Malaysia’s economic transformation since the
1990s to an upper-middle income nation; and it is very clear that her
transition to a high-income economy will also highly depend on SMEs’
contribution to the country’s GDP growth (SME Masterplan 2012-
2020). Thus, the objectives of this chapter are to profile the SMEs in
Malaysia and to identify issues and challenges faced by them. The
profiling includes information on the demography, business experi-
2 MOHA ASRI ABDULLAH \ RIZAL YAYA \ DZULJASTRI ABDUL RAZAK

ences and establishment of the SMEs. The chapter also attempts to
identify challenges faced by the SMEs, particularly in this era of digi-
tization. Their perceptions on business performance are also recog-
nized.
2.0 LITERATURE REVIEW

In general, the definition of SMEs differs from country to country
(Omar, Arokiasamy & Ismail, 2009). Researchers tend to provide a
definition that often differs from other academic researchers. Absence
of consensus of the definition could be due to researchers’ areas of
focus. Despite this, available definitions have been using the number
of employees as an important dimension. In China, for example,
Xiangfeng (2008) defined small companies as those employing fewer
than 300 employees, and the medium-sized companies as companies
that employ between 301 and 2,000 employees, while in Taiwan, com-
panies with 650 or fewer employees were defined as SMEs. On the
contrary, Mozambique defined SMEs as small enterprises which have
less than ten employees, whereas medium-size enterprises with em-
ployees between 11 and 50 employees (Osano & Languitone, 2016).
As for Malaysia, in 2014, the definition of SMEs had been revised
based on two quantitative criteria: sales turnover and number of
employees (Chin & Lim 2018). Table 1 shows that the definitions also
vary according to key sectors. Regardless of the sectors, micro size
SMEs are companies with sales turnover of less than RM300 000
and employees with less than five. However, in the manufacturing
sector, small size SMEs refer to companies that have sales turnover
between RM300 000 and less than RM15 million and employees
between 5 to 75 people, while in services it is described as companies
that have sales turnover between RM300 000 and less than RM3
million and employees between 5 to 30 people. As for medium size
CROSS BORDER SMEs: MALAYSIA AND INDONESIA

3
SMEs, in the manufacturing sector it includes companies with sales
turnover between RM15 million to RM50 million and employees
between 75 to 200 people whereas in the services sector, companies
that have sales turnover between RM15 million to RM 20 million
and employees between 30 to 75 people are already considered as
medium size SMEs.
TABLE1.1: SME DEFINITION
Size Micro Small Medium
Sales turnover Employees Sales turnover Employees Sales turnover Employees
Manufacturing Less than <5 RM300,000-< 5 to < 75 RM15 million - 75 to < 200
RM300,000 employees 15 million employees <50 million employees
Services & other RM300,000-< 5 to < 30 RM15 million- 30 to < 75
sectors 3 million employees <20 million employees
Source: SME Corp Malaysia
Given the new definition, the majority (76.5 percent) of SMEs in

Malaysia is micro size, 21.2 percent are small and 2.3 percent are
medium. By economic sector, 89.2 percent of the companies are in
services, 5.3 percent in manufacturing, 4.3 percent in construction,
1.1 percent in agriculture and 0.1 percent in mining and quarrying.
The statistics also show that 20.6 percent of SMEs are women owned
(SME Corp Malaysia).
In supporting the development of SMEs in the country, the Ma-
laysian government has initiated various policies integrating numer-
ous ministries and agencies. For example, the recent Eleventh Malay-
sian Plan (11MP) and particularly SME Masterplan 2012-2020 shows
that government commitment towards assisting the SMEs continues
and the focus is not only domestic but also regional and global mar-
kets (Chin & Lim 2018). In line with this, under the Entrepreneurship
Action Plan 2016-2020, the Malaysian Ministry of Education has
also reinforced entrepreneurship education in higher learning insti-
tutions with the primary aim that the students will venture into entre-
preneurship upon graduation. The graduates are encouraged to be-

come “job creator” rather than “job seeker” (The Star, 2017). Led by
the Malaysian SME Corporation (SME Corp), policies are translated
via programmes such as competitiveness rating, brand development,
market access, financing outreach, recognition and awards, capacity
building and technology and innovations (SME Corp Malaysia).
However, to achieve the targets, Malaysian SMEs have to face at
least six challenges revolving issues pertaining to innovation and tech-
nology adoption and these challenges are human capital develop-
ment, access to financing, market access, legal and regulatory envi-
ronment, and infrastructure (SME Masterplan 2012-2020). Mean-
while, the digitization survey conducted by the SME Corporation
reported that key challenges faced by SMEs in this Industry 4.0 era
are lack of understanding of digital tool usage, lack of technology
knowledge, lack of awareness in financing options and limited access
to technology (SME Annual Report 2017/2018). Past literatures also
have shown that SMEs are facing many issues related to human re-
source and motivation, financial capacity and management, entre-
preneur competencies, organizational management, organizational
innovation and market orientation that are essential to sustain the
entrepreneurial success (Alom, Abdullah, Moten & Azam, 2016;
Hashim, Ali & Fauzi, 2008, Saleh & Ndubisi, 2006; Saleh, Caputi &
Harvey, 2008; Ng & Kee, 2012; Tehseen & Ramayah, 2015)
3.0 METHODOLOGY
The chapter employs a structured questionnaire with four parts:
A, B, C and D. Part A comprises 8 background questions. Part B
comprises 16 questions related to business. Part C comprises 6 ques-
tions related to finance. The last part, i.e., Part D comprises a section
each on issues, business performance, financial literacy, global trad-
ing and environment.

5
The questionnaire was pilot-tested with respondents who held simi-
lar characteristics with the target respondents. Minor changes were
made to the original version of the questionnaire before the finalized
version was administered on the target sample population, i.e. SMEs
in the capital of Malaysia i.e., Kuala Lumpur and neighboring cities.
The chapter employed six enumerators to administer the data in public
places. They were able to elicit 344 usable questionnaires.
Other than Part A, the other parts consist of Likert-like scaled
items Least agree 1 2 3 4 5 Most Agree. Overall, the scaled items during
the pilot test (ranging from .704 to .992) meet the minimum thresh-
old of reliability of 0.700 Cronbach alpha (Bruin, 2006) confirming that
the contents of the questionnaire may be retained. This paper em-
ployed selected variables in the survey data. It performed rudimen-
tary analyses in order to achieve the research objectives. The data
was analyzed using SPSS.
4.0 FINDINGS AND DISCUSSIONS

4.1 Respondents’ Profiles
Table 1 illustrates the demographic profiles of the respondents.
About 67 percent of them are male. This is consistent with the statis-
tics that the majority of SMEs in Malaysia is owned by males (SME
Corp Malaysia). Seventy-five (75) percent of the respondents are
married, almost 66 percent are between the ages of 30 to 49 years
old, 42 percent completed secondary school and 78.5 percent of the
respondents are Muslims. Interestingly, more than 50 percent of the
respondents have no prior business experience. For the 154 respon-
dents who have prior business experiences, their involvement is less
than five years. However, around 10 percent of the respondents have
vast business experiences which is more than 15 years.
The respondents were also asked on their reasons for involvement.

Almost 70 percent stated that it is because of “personal interest”,
followed by “for additional income” (45.2%) and “by profession”
(45.6%). The highest percentage for “personal interest” as the main
reason for involvement in business indicates the importance of pas-
sion in entrepreneurship (Cardon, Wincent, Singh & Drnovsek, 2009).
As for training, more than half of the respondents attended training
on business plan (62.8%), marketing and promotion (58.7%), opera-
tion/manufacturing (58.4%) and finance (50.3%). 42.7 percent at-
tended training on motivation and ICT application, 39.5 percent on
leadership and 34.6 percent on human resource management. Less
than 30 percent attended training in accounting (29.4%) and research
and development (23.5%).
TABLE1. 2 RESPONDENTS’ PROFILE

Personal Profile Frequency (n=334) Percent (%)
GENDER
Male 229 66.6
Female 115 33.4
MARITAL STATUS
Single 78 22.5
Married 258 75.0
Others 5 1.5
AGE
20-29 Years 71 22.6
30-39 Years 115 33.4
40-49 Years 111 32.3
50 Years and above 47 13.7
EDUCATION
Non-formal education 3 0.9
Primary school 8 2.3
Secondary School 144 41.9
Diploma 72 20.9
First Degree/Equivalent 93 27.0
Postgraduate degree 21 6.1
RELIGION

7
RELIGION
Buddhism 48 14.0
Christianity 3 0.9
Hinduism 16 4.7
Islam 270 78.5
Others 7 2.0
PRIOR BUSINESS EXPERIENCE
Yes 154 44.8
No 190 55.2
YEARS OF EXPERIENCE (IF YES)
Less than 5 years 98 63.6
6 – 15 years 41 26.6
16 - 30 years 12 7.79
More than 30 years 3 1.9
REASONS OF INVOLVEMENT (CAN CHOOSE MORE THAN 1 ANSWER)
Personal interest 233 67.7
For additional income 159 46.2
By Profession 157 45.6
Economic Hardship 155 45.1
No other jobs 111 32.3
More Challenges 103 29.9
Inherited Business 53 15.4
Government assistance 24 7
Others 11 3.2
Training Attended (can choose more than 1 answer)
Business Plan 214 62.8
Marketing and Promotion 202 58.7
Operation/Manufacturing 201 58.4
Finance 173 50.3
Achievement/Motivation 147 42.7
ICT Application 147 42.7
Leadership Training 136 39.5
Human Resource Management 119 34.6
Business Feasibility Study 111 32.3
Accounting 101 29.4
Research and Development 81 23.5
4.2 SMEs Profile

Table 2 shows the business profiles of the SMEs that are involved
in the sample. Almost 80 percent of the businesses were established
after the year 2000. However, around 5 percent have been in exist-
ence for more than 30 years. In terms of type of ownership, it is as
expected that the majority of the business is sole proprietorship

(48.5%). Meanwhile for the business sector, consumer (16.9%) and
trading/services (15.1%) are the most popular sectors for the respon-
dents. The least involved are hotel/tourism, plantation and transpor-
tation in which the respondents’ involvement in each business sector
is less than 1 percent. This is consistent with the SME Corp statistics
that almost 90 percent of Malaysian SMEs are involved in the ser-
vices sector. It is understandable because SMEs are always associated
with lack of funds and the services sector, in general, requires less
capital than manufacturing.
For the source of funds, surprisingly, 84.9 percent used conven-
tional financing even though the majority of respondents are Mus-
lims. This finding is similar to the recent survey conducted by the
Malaysian Central Bank (BNM) that revealed that almost 60 percent
of the SMEs were not aware of the availability of Islamic business
financing facilities (Bank Negara Malaysia, 2018). Indeed, most SMEs
adopted conventional financing and some may still have the miscon-
ception that Islamic finance is only for Muslims (Bank Negara Ma-
laysia, 2018). For the initial funding, the majority used personal sources
- which is 69.9 percent from personal savings and 25 percent are loan
from relatives and 25 percent from bank loans. Less than 50 percent
obtained initial financing from banks (45.6%). This indicates that the
issues of financial accessibility and sufficiency are still prevailing
amongst Malaysian SMEs.
In terms of financial performance, the total asset turnover for 34.6
percent of the businesses is RM50 000 and below per year. However,
there is 15.7 percent of the businesses that has a total asset turnover
exceeding RM1 million. As for annual sales turnover, 36.9 percent of
the businesses earn between RM101 000 and RM500 000. Around
10 perc Bank Negara Malaysia, 2018ent has more than half million
sales turnover per year while the rest gain less than RM100 000. (Please

9
check this sentence. ) As for employees, the majority of the respon-
dents have less than 10 full-time and part time employees which are
64 percent and 97 percent respectively. In addition, 82 percent has
around 1 to 5 family members working as full time staff in the busi-
ness. These findings confirm that the majority of Malaysian SMEs is
of micro and small size with annual sales turnover below RM500,000
with the number of employees less than 10.
TABLE1. 3 BUSINESS PROFILE

BUSINESS PROFILE FREQUENCY (N=334) PERCENT (%)
Year of Establishment
1960-1970 2 0.6
1971-1980 4 1.2
1981-1990 14 4.1
1991-2000 52 15.1
2001-2010 110 32.0
2011-2018 161 46.8
Type of Ownership
Sole proprietorship 167 48.5
Partnership 41 11.9
Private Limited 129 37.5
Co-operative 1 0.3
Others 6 1.7
Business Sector
Consumer 58 16.9
Construction 8 2.3
Hotel and Tourism 2 0.6
Industrial 29 8.4
Plantation 2 0.6
Technology 7 2.0
Trading/Services 52 15.1
Transportation 2 0.6
Others 184 53.5
Source of Initial Financing Capital
Personal savings 237 68.9
Bank loan 157 45.6
Loan from relatives 86 25.0
Unregistered lenders 21 6.10
Microfinancing 18 5.2
NGOs 16 4.7
Cooperative society 12 3.5
Registered lender 8 2.3
Crowdfunding 6 1.7

Rotating credit scheme 4 1.2
Others 1 0.3
Type of Financing
Islamic 52 15.1
Conventional 292 84.9
Total Asset Turnover per year (in Ringgit)
50k and below 119 34.6
51k -100k 48 14.0
101k -500k 102 29.7
501k – 999k 2 0.60
1 Million and above 54 15.7
Total Sales Turnover per year (in Ringgit)
50k and below 96 27.9
51k -100k 63 18.3
101k -500k 127 36.9
501k – 999k 11 3.2
No of Full-time Employees
Less than 10 220 64.0
11 -20 56 16.3
21 and above 67 19.5
No of Part-time Employees
Less than 10 334 97.1
11 -20 3 0.9
21 and above 5 1.5
No of family members working full time in the business
No family member 20 5.8
Less than 5 282 82.0
6 and above 8 2.3
4.3 Issues and Challenges

The list of issues and challenges were listed in the questionnaire
where the respondents had to choose between the 6-scales from the
lowest to the highest. Table 3 summarizes the findings. It shows that
“competitive advantage” scores the highest mean (4.06) which indi-
cate that the most challenging issue faced by the SMEs is competi-
tion. A firm is said to have competitive advantage when it is imple-
menting strategies which are different from the current or potential
competitors (Barney, 1991). However, for SMEs, the lack of resources,
which are rare and difficult to duplicate, accompanied by entrepre-

11
neurial incompetency, may cause it difficult for competitive advan-
tage, if available, to be sustained. The other main challenges faced by
SMEs are “economic fluctuations” (3.67) and “product cost” (3.67),
followed by “operational cost” (3.49) and “ICT development” (3.43).
All mean scores are above average and “uncertainty of market direc-
tion” is the lowest (3.01). The mean score for “foreign product com-
petition”, however, is relatively low (3.19) indicating that SMEs may
perceive that their direct competitors are local products.
TABLE1. 4 ISSUES AND CHALLENGES

Response (Lowest to Highest)
Challenges
Lowest Very low Medium Very high Highest Mean Std. D.
Competitive Advantage 0 12 73 143 116 4.06 0.829
Economic Fluctuations 1 13 127 161 42 3.67 0.749
Product Cost 2 10 108 206 18 3.67 0.635
Operational Cost 0 15 176 123 30 3.49 0.716
ICT development 4 30 158 117 35 3.43 0.834
Net Profit (Margin Profit) 1 22 182 118 21 3.40 0.713
Financial difficulties 3 38 156 120 27 3.38 0.817

Knowledge and Skills in Technology 0 33 189 98 24 3.33 0.744
Knowledge and Skills in Marketing 0 34 197 88 25 3.30 0.745
Recruiting Staff 6 32 177 119 10 3.28 0.733
Knowledge and Skills in Research & 2 41 195 83 23 3.25 0.762
Development
Retaining Staff 6 26 205 89 18 3.25 0.742
Environmental Issue 6 54 153 118 13 3.23 0.819
Knowledge and Skills in Finance and 0 48 183 98 150 3.23 0.739
Accounting
On-line Sales 15 42 175 73 39 3.23 0.955
Foreign Product Competition 8 61 153 100 21 3.19 0.88
Uncertainty of Market Direction 9 58 204 65 8 3.01 0.746
Others 3 29 201 14 4 2.95 0.53
Next, the data was further tested using EFA in order to determine
if the issues can be themed. Thus, prior to performing the EFA, the
suitability of data was assessed. Table 4 shows that the Kaiser-Meyer-

Oklin (KMO) value was 0.724, exceeding the recommended value
0.6 and the Barlett’s Test of Sphericity reached statistical significance
(p=0.000). Therefore, this gives support that factor analysis is appro-
priate (Pallant, 2007).
TABLE1. 5 KMO AND BARTLETT’S TEST

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .724
Bartlett's Test of Sphericity Approx. Chi-Square 1912.049
Df 153
Sig. .000
Using extraction method of principal component analysis (PCA)

and varimax rotation, the result of factor analysis revealed the pres-
ence of four components with eigenvalue exceeding 1, explaining
60.108 percent of total variance. Table 5 shows the final results after
inspection on the rotated solution; cross-loadings items and items below
cut-off point 0.5 were deleted. This exercise resulted in the dropping
of “product cost” and “foreign product competition”. As for the four-
factor solutions, all the items showed adequate factor loadings rang-
ing between 0.547 and 0.857.
Based on the items loaded under each factor, Factor 1 can be la-
belled as “human resource management (HRM challenges)” in which
the highest loading is “retaining staff ” (0.857). Factor 2 is labelled as
“external challenges” which include competition, financial, economic,
ICT and environment. Factor 3 is labelled as “entrepreneur compe-
tencies challenges” which involve entrepreneurs’ knowledge in mar-
keting, finance and technology. Finally, Factor 4 is categorized as “or-
ganizational-related challenges” which include “operational cost”,
“profit margin”, “online sales” and “knowledge in R&D”. These find-
ings are more or less similar to Alom et al.’s (2016) findings that SMEs
success depends on owners’ characteristics, firm conditions and con-
ditions of external environment.

13
TABLE1. 6 FACTOR ANALYSIS FOR ISSUES AND CHALLENGES
Rotated Component Matrix
Component
1 2 3 4
Retaining staff 0.857
Market direction 0.809
Other Challenges 0.785
Recruiting staff 0.784
Competitive advantage 0.776
Finance difficulties 0.763
Economic fluctuations 0.735
ICT development 0.588
Environmental concern 0.547
Knowledge-Marketing 0.827
Knowledge of Finance 0.756
Knowledge-Technology 0.711
Operational cost 0.797
Margin (Profit) 0.772
On-line sales 0.620
Knowledge-R&D 0.556
Eigenvalue 5.332 2.686 1.493 1.308
Percentage of variance 29.623 14.922 8.295 7.267
Cumulative (%) 29.623 44.545 52.841 60.108
TABLE1. 7 INCREASE IN BUSINESS PERFORMANCE/SUCCESS

Response (Strongly Disagree to Strongly Agree)
Performance Strongly Strongly
Disagree Neutral Agree Mean Std. D.
Disagree Agree
Demand for the
0 4 84 196 60 3.91 0.677
product
Total asset 3 6 99 177 59 3.82 0.760
Improvement in overall
1 6 144 178 15 3.58 0.620
business environment
Total sales 0 23 179 129 13 3.38 0.669
Profit margin 0 26 188 118 12 3.34 0.668
Number of employees 9 28 194 99 14 3.24 0.763
Market share 15 59 186 71 12 3.02 0.830
4.4 Perceptions on Business Performance

Finally, the respondents were also asked on their perceptions to-
wards the performance of the business. Regardless of the challenges

faced, the respondents’ perceptions towards the business performance
are fairly encouraging in which the all the scores are above 3.0. Table
6 shows that the highest mean score is for the “demand for product”
(3.91), followed by “total asset” (3.89), “improvement in overall busi-
ness” (3.58), “total sales” (3.38), “profit margin” (3.34), “number of
employees” (3.24) and “market share” (3.02).
5.0 CONCLUSION
The findings show that the majority of the SMEs’ owners in Ma-
laysia are male Muslims, below 40 years old, who are involved in
business mainly because of personal interest. The chapter also rein-
forces the common profile of SMEs in the country in which most of
the SMEs are of micro and small size, involving the service sector.
Sole proprietorship is the most popular form of legal establishment
in which personal source of funds such as own savings and loans from
relatives remain as the main initial capital funding as compared to
bank loans.
The study also found that the issues and challenges faced by the
SMEs revolved around the owners’ characteristics, firms’ conditions
and conditions of the external environment. These challenges can be
categorized into four factors, namely: “human resource management
(HRM) challenges”, “external challenges”, “entrepreneur competen-
cies challenges” and “organizational-related challenges”. Neverthe-
less, despite the challenges that they are facing, the SMEs have posi-
tive perceptions on their business performances.
From the findings, a few suggestions can be recommended to the
SMEs and the government as policy makers. The first suggestion is
the importance of training. The chapter reveals that HRM challenges
are the main issues faced by the SMEs yet leadership and HRM train-
ing are among the least attended by the entrepreneurs. Training will

15
also increase the entrepreneur competencies and assist them to deal
more effectively with internal (organizational related) and external
challenges, particularly in this era of technology, where the local and
global competitions are getting more intense.
The government can continue to give support in terms of capacity
building, infrastructure, and financial accessibility especially Shariah-
compliant financing which anchors on sustainable values beyond prof-
its. The emphasis on microenterprise, women, bumiputera and young
entrepreneurs may also continue to strengthen and further develop
and grow the Malaysian SMEs.
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17
02
C H A P T E R
PROFILE OF MSMEs IN EAST JAVA:

CHALLENGES AND PROSPECTS
By: Dhika Amalia Kurniawan, Eko Nur Cahyo, Suharni Binti Maluan,
Rizal Yaya, and Winarsih
ABSTRACT
This chapter aims to explore further information about the background,
the profile of the MSME’s sector in East Java. The identification results can be
utilized in various ways: policy formulation, identify problems MSMEs, map-
ping of a strategy to build competitive advantage for MSMEs. This chapter
applied a quantitative approach and the data collection techniques used are
survey methods using questionnaires. Data analysis techniques are a descrip-
tive statistical test. The sample used is mostly MSMEs in East Java (according
to) the number of samples used by 250 respondents. This chapter shows that
the profile of MSME business actors (key players) in East Java can be viewed
from the perspective of gender differences, MSMEs were dominated by re-
spondents’ female spouses surveyed. Based on the aspect of Marital Status,
MSME is dominated by married respondents with a percentage of 81.6%,
Based on the aspect of age distribution, SMEs are dominated by respondents
aged 40-49 years, with a percentage of 37.6%. Based on the aspect of Edu-
cation Level, East Java MSME was dominated by respondents with high school
level education with a percentage of 62.8%. Based on the aspect of owner-
ship of expertise (what do you mean?) before entrepreneurship, MSME with
the same percentage, the respondents already have expertise in entrepre-
neurship and some do not have expertise before becoming entrepreneurs.
Based on the aspect of the number of full time workers in their business, East
Java MSME has only one worker in their business operations, with a percent-
age of 40.8%. Based on the aspect of income, MSME has amassed between
11 million and 50 million per year with a percentage of 28.4%. Based on the
aspect of the duration works carried out, MSMEs has been working for more
than 10 years, with a percentage of 55%. Based on the aspect of Total assets
in business, MSME has assets of 500 thousand - 50 million with a percentage
of 67,2%. Based on the aspect of the establishment of the business, East Java
MSME entrepreneurs set up businesses in 2011 to 2018 with a percentage of
61.2%. Based on the aspect of the form of the business entity , East Java
MSME has individual / private business entities, with a percentage of 60%.
Based on the aspect of the type of business sector, MSMEs entrepreneurs are
worked in the trade and services sector, with a percentage of 38.4%.
KEYWORDS: Profile of MSMEs, East Java, Micro Small and Medium Enter-
prise
1.0. INTRODUCTION
Indonesia is the 15th largest country in the world, with a total
population of 265 million people in 2018 (Central Bureau of Statis-
tics) which consists of 133.17 million men and 131.88 million women.
With a huge population, Indonesia has advantages and disadvantages
in many sectors, both in terms of education, economy and health.
Concerning the economy, the prevailing situation in Indonesia is sup-
ported by multiple business sectors including agriculture, trade, in-
dustry, mining, transportation, MSMEs and various other sectors. The
MSMEs sector is a sector that provides an excellent opportunity for
the Indonesian population in terms of providing employment. Also,
according to the Central Bureau of Statistics (BPS), the MSME sec-
tor is a sector that contributes greatly and plays a vital role in the
economic growth of Indonesia. Based on this fact, it was concluded
that the majority of Indonesian people involved worked in the field
of MSMEs, both small, medium and large scale.
The MSMEs sector has been a pillar of the economy in Indonesia

19
and can contribute 60.34% to the country’s gross domestic product
(GDP), creating employment for nearly 108 million Indonesians. GDP
is the amount of added value produced by all business units in a par-
ticular country or is the sum of the value of final goods and services
produced by all economic units. It can be interpreted that MSMEs
are one of the advantages of a country, especially Indonesia, that can
help alleviate unemployment and enhance the economy of Indone-
sia. With these conditions, it is a mandatory task for the government,
institutions and other parties to support the development of MSMEs
in all regions in Indonesia, one of which is the East Java province,
which has the second largest population among all the provinces in
Indonesia.
In the effort to develop MSMEs, both government, institutions
and other parties can contribute through various programs in educa-
tion, training, financial assistance, entrepreneurship assistance and
other development programs. In supporting this, the profile and char-
acteristics of MSMEs in East Java are needed to determine the model
of MSME development seen in various aspects.
Departing (digressing somewhat) from the explanation above, the
research problem will revolve around the profile of the MSME sector
in East Java. The formulation of research problems is as follows: “What
is the profile of the MSMEs sector in East Java?”. In general, the
objective to be achieved from this research is to explore further infor-
mation about the background and the profile of the MSME sector in
East Java, with the hope that results can be utilized to identify various
matters, namely, policy formulation, MSMEs problems, and strategy
mapping that are expected to be used to build competitive advantage
for MSMEs as a sector that has an important role for the Indonesian
economy ( Ascarya, 2007)

2.0. THEORETICAL REVIEW
Definition of Micro, Small and Medium Entreprises
(MSMEs)
There are few forms of businesses run by the community in Indo-
nesia, starting from the micro, the small and the medium scale. Ac-
cording to Law No. 20 of 2008, ‘‘A company can be classified as
MSMEs. It is the effort in terms of productive economic activity that
stands alone, managed by one or owned by a small group of people
or business entities with a certain amount of wealth and income “.
Most forms of business are classified as informal businesses because
the operations of such entities do not have any business licenses or
official operational letters from the government.
It can be understood that what is meant by a micro-scale business
is an economic activity carried out by individuals or business entities
or households that produce goods and services with the intention to
trade with a maximum total asset of 50 million and a maximum in-
come of Rp. 300 million - Rp2.5 billion per year, with approximately
ten employees. Furthermore, a small-scale business is a type of busi-
ness that has total assets> IDR 50 million - IDR 500 million and
income from operations is> IDR 300 million with a number of em-
ployees of approximately 30 people. Next is the medium-scale busi-
nesses which are run by the community with a total asset of > Rp500
million and earning > Rp2.5 billion - Rp50 billion per year and hav-
ing an employee base of up to 300 people. There is also a large-scale
business that can be viewed as a creative economic venture under-
taken by a business entity that includes the national business state and
private property, joint ventures, and which have assets of > Rp 10
billion with earnings of > 50 billion.
Profile of MSMEs
It has been proven that the MSMEs business is a business sector

21
that has the largest contribution to the Indonesian economic devel-
opment. MSMEs has a proportion of 99.99% of the total business
sectors in Indonesia or as many as 56.54 million perpetrators(???).
Among the different sectors contained within the MSME business
sector are Agriculture, Animal Husbandry, Forestry and Fisheries,
Mining and Excavation, the Processing Industry, Trading, Hotels and
Restaurants, Transportation and Communication and a few other
service sectors.
The business profile carried out by MSMEs businesses can be clas-
sified into a few criteria which include : Kinds of business, Education
Level, Income, Gender, Age of business actors, Status, Religion, Char-
acter of the law, and Business sectors.
3.0. RESEARCH METHODOLOGY

The design that is the object of this research is the profiling of the
micro, the small and the medium enterprises (MSMEs) in the East
Java province. This research is targeted in East Java because the con-
centration of MSMEs is as much as 9.59 million, which in addition,
contributed to the domestic Gross Regional Product (GDP) of 74.36%
in 2018 in the province of East Java. This research was conducted to
investigate the type of profiles of MSMEs in East Java, and the re-
sults can be used as significant data in developing various policies for
developing business needs..
The approach used in this research is quantitative and the data
collection techniques used are survey methods with questionnaires
given to respondents.. The population in this study are all entrepre-
neurs of MSMEs in East Java, while the sample used is 250 respon-
dents, mostly from MSMEs in East Java.
This research used nonprobability sampling together with purpo-
sive sampling technique from MSMEs in the business areas ranging

from culinary, transport to trade sectors.The determination is based
on the number of East Java MSMEs who engage in those areas rather
than those who are from other areas of businesses. The data analysis
technique used is the Descriptive Statistics Test.
4.0. RESULTS AND DISCUSSION

4.1. The General state of MSMEs in East Java
East Java is one of the provinces in Indonesia, with an area of
47,922 km² and with a total population of 39.29 million people, con-
sisting of 19.4 million male and 19.9 million female, which are equiva-
lent to 49.3% and 50.63% respectively from the total population.
The National economic census data stated that the number of
MSMEs in East Java was 9.59 million, with 4.61 million MSMEs
engaged in the non-agricultural sector and 4.98 million MSME en-
gaged in the agricultural sector. East Java contributes 14.85% to the
National Gross Domestic Product.
4.2. Research Results

The results of this chapter will present the profile of MSMEs in
East Java province with informants, who are MSMEs actors in the
culinary, trade and transportation fields with as many as 250 of them.
TABLE 2. 1 GENDER
FREQUENCY PERCENT VALID PERCENT CUMULATIVE PERCENT
Valid Man 123 49.2 49.2 49.2
Women 127 50.8 50.8 100.0
Total 250 100.0 100.0

23
NUMBER OF RESPONDENTS BASED ON GENDER
It can be seen from these results that MSMEs in East Java is domi-
nated by businesses which are being run by females with a percentage
of as much as 50.8%, with the remaining 49.2% from the business
people who are males.
NUMBER OF RESPONDENTS BASED ON MARITAL STATUS
The number of respondents according to their marital status can
be seen in the results of the following percentages: Respondents from
the MSMEs businesses in East Java with single status accounted for
17.6%, whereas the married ones/and the ones with get married sta-
tus as much as 81.6%, and respondents with more status by 8%.
TABLE 2. 2 MARITAL STATUS

Frequency Percent Valid Percent Cumulative Percent
Valid Single 44 17.6 17.6 17.6
Married 204 81.6 81.6 99.2
Others 2 .8 .8 100.0
Total 250 100.0 100.0
THE NUMBER OF RESPONDENTS BASED ON THE AGE DISTRIBUTION.

The respondents from MSMEs businesses, show that most respon-
dents were in the age group of 40-49 years with a percentage of 37.6%,
followed by the age group of 30-39 years at 33.6%, and respondents
from the age group of 20-29 years assessed at 18%, while the the age
group of 50 years or more is measured at a percentage of 10.8%.

TABLE 2. 3 AGE
FREQUENCY PERCENT VALID PERCENT CUMULATIVE PERCENT
Valid 20-29 45 18.0 18.0 18.0
30-39 84 33.6 33.6 51.6
40-49 94 37.6 37.6 89.2
50 > 27 10.8 10.8 100.0
Total 250 100.0 100.0
NUMBER OF RESPONDENTS BASED ON THE EDUCATION LEVEL

The number of respondents in East Java MSMEs business actors
according to their level of education can be seen in the following
percentages. Most MSMEs practitioners are secondary school gradu-
ates or high school graduates (equivalent) at 62.8%, followed by busi-
ness people with an elementary school education at 16.8% and Bach-
elor graduates or equivalent with a percentage of 14%. The rest are
Diploma graduates at as much as 3.6% and postgraduate at as much
as 1.6%. The last is business actors (participants with a non-formal
education background) at 1.2%.
NUMBER OF RESPONDENTS BASED ON EXPERTISE BEFORE

ENTREPRENEURSHIP
The results of the research on the respondents as MSMEs busi-
ness operators indicate that the percentage of respondents who have
expertise in entrepreneurship before going into entrepreneurship is
52.8% and the percentage of respondents who stated that they do
not have expertise in entrepreneurship is 47.2%.

25
TABLE 2. 4 EXPERTISE
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 132 52.8 52.8 52.8
No 118 47.2 47.2 100.0
Total 250 100.0 100.0
THE NUMBER OF RESPONDENTS BASED ON THE NUMBER OF FULL-TIME

WORKERS IN THEIR BUSINESSES.
The results showed that 40.8% of MSMEs businesses has one full-
time worker working with them, 38.8% has two workers working in
their businesses and the rest being businesses with 3 or more workers.
FIGURE 2. 1 NUMBER OF FULL-TIME EMPLOYEES
THE NUMBER OF RESPONDENTS BASED ON TOTAL INCOME

Data obtained at the time of the study shows that the amount of
annual income generated by respondents was approximately Rp. 1
million - 10 million per year which is as much as 4.8 %, income be-
tween 11 million and 50 million per year was 28.4 %, while the in-
come of MSMEs, which is between 51 million - 150 million per year

is at 32.4%. Income between 151 million - 500 million per year is at
22.8% and the rest are MSMEs with income above 500 million per
year with a percentage of 11.6%.
FIGURE 2. 2 ANNUAL INCOME OF MSMES
THE NUMBER OF RESPONDENTS BASED ON DURATION OF WORK

Based on the results of the chapter, the lengths of time spent try-
ing to be a part of East Java MSMEs are as follows: the length of
businesses that was most often done were businesses built for approxi-
mately 3 years which are as much as 14%, then 13.6% of businesses
have a duration of about 1 year and 13.2% of businesses were built
in about 2 years. The rest were businesses which were built for more
than ten years with the largest percentage of 55%.
FIGURE 2. 3 NUMBER OF FULL-TIME EMPLOYEES

27
THE NUMBER OF RESPONDENTS BASED ON THE NUMBER OF ASSETS IN
THE BUSINESS
The results of the chapter showed that the East Java MSMEs busi-
nesses have total assets of between IDR 500 thousand- 50 million
with a percentage of 67,2 %, while the number of MSMEs assets is
between 51 million and 100 million with a percentage of 25.2%, and
the remaining 7.6% are MSMEs businesses having total assets of 500
million to 10 billion.
FIGURE 2. 4 TOTAL ASSET VALUE
FIGURE 2. 5 YEAR OF ESTABLISHMENT
THE NUMBER OF RESPONDENTS BASED ON THE YEAR OF BUSINESS

ESTABLISHMENT
The results show that the respondents established their businesses
from 1927 to the present day, with the difference, among others, which

were built between 2000 and 2010 which is as many as 20.8%, while
the MSMEs which were built between 2011 to 2018 were as many as
61.2% and the remaining 17.2% is the East Java MSME businesses
that were built before 2000.
THE NUMBER OF RESPONDENTS BASED ON THE FORM OF BUSINESS

ENTITY
The results show that 60% of the businesses that were run by the
respondents of MSME entrepreneurs in East Java were individual /
self-owned businesses, then 8.4% were limited liability businesses (PT),
of which 7.6% were businesses in partnership (CV), as much as 5.2%
were businesses in the form of cooperatives and the remaining 16,
8% were in the form of businesses with other legal entities.
FIGURE 2. 6 FORM OF BUSINESS
FIGURE 2. 7 BUSINESS SECTOR

29
THE NUMBER OF RESPONDENTS BASED ON THE BUSINESS SECTOR
Based on the results of the research, 38.4% of the MSME busi-
ness sectors were in the business of trade and services, then 24% of
the businesses were in providing consumer goods, 26.8% were in other
fields, and the rest were in the fields of transportation, industry, con-
struction and agriculture.
5.0. DISCUSSION
From the results of research conducted on the MSME players in
East Java, there are 12 important variables that can be used to de-
scribe the profiles of the MSMEs. The twelve variables studied in-
cluded respondent differentiation based on: Gender Differences,
Marital status, Age Distribution, Education Level, Ownership of ex-
pertise before entrepreneurship, Number of full-time workers in their
businesses, Income, Duration of work by the Respondents, Number
of assets in their businesses, Year of business establishment, Kinds of
business entity and Business Sectors.
The following will discuss the variables mentioned above one by
one so that the results can be used in decision-making by the various
parties.
1. Characteristics of MSMEs in East Java by Gender
The results showed that 50.8% of East Java MSMEs are females
and 49.2% of the business people were males . It can be concluded
that the majority of MSMEs in East Java is currently dominated by
women: this is supported by data from the Central Statistics Agency
that the population of East Java is as big as 50.63% and dominated
by female residents, which suggests that there is a huge potential for
women to involve themselves as business participants in the field of
MSME.

2. Characteristics of East Java MSME actors based
on marital status
From the results of research related to marital status, it is known
that East Java MSME respondents who are married are 81.6%, while
those who are single are 17.6% and respondents with other status are
rated at 8%. It can be concluded that MSME actors are dominated
by business people who have a family which means that respondents
have a responsibility to support their families through entrepreneur-
ship. While single-status respondents run MSME businesses for vari-
ous reasons such as limited job vacancies, they are the ones who also
come from the category of those who have completed school or
dropped out of school. There are also those who want to earn more
income to help their family. This is in accordance with the previous
research conducted by Riat Aziz, (2016) in an earlier study which
stated the same reasons for informal businesses? doing such businesses.

on age distribution.
37.6% of the MSME players in East Java are between 40-49 years
old, and as much as 33.6% are MSME actors aged between 30-39
years. In addition, business is also carried out by the age group of 20-
29 years who account for18% and there are 10% of business people
who are older than 50 years. It can be concluded that MSMEs in East
Java are dominated by people who are in the productive-age group
with the largest percentage of business people aged between 40-49
years and there are those aged 30 to 39 years. This illustrates that in
this productive age, respondents are required to produce and meet
the economic demands of the family, while at the age of 20 to 29
years, which is the second largest percentage of business people, they
are the ones who are motivated by the fact that this age is the age of

31
adolescence and college students who may continue their studies. Most
recently, business people above 50 years accounted for the smallest
percentage, which suggests that this is an unproductive age to work in
the MSME entrepreneurial sector.
4. Characteristics of East Java MSMEs based on the

education level
The results showed that the majority of MSMEs in East Java are
dominated by people with a secondary school level education or are
high school graduates rated at 62.8%. In addition, business is also
carried out by many people with an elementary school education level
which accounted for 16.8% of the respondents. The rest are MSME
respondents who have successfully gone through the education levels
of a Bachelors degree or equivalent, Those with Diploma qualifica-
tions and also those who have a background in non-formal education
accounted for 20.4%. It can be concluded that the majority of MSME
participants (key players) are people with a high school level of edu-
cation and those without a bachelors degree or a diploma. These
findings suggest that the education level of MSME entrepreneurs in
East Java is generally low.

on expertise ownership before entrepreneurship
The results showed that 52.8% of East Java MSMEs stated that
they had expertise in entrepreneurship and the remaining 47.2% had
no expertise in entrepreneurship. Looking at these comparisons, they
do not have many differences and as such can be concluded that the
number of MSME participants who have expertise before entrepre-
neurship and who do not have the expertise before entrepreneurship
are balanced.

number of full-time workers in their businesses
The research shows that the majority of MSMEs which are run by
one worker accounted for 40.8%. The MSMEs run by two workers
has a percentage of 38.8%, and the remaining 20.4% are the ones
run by three or more workers. It can be concluded that the efforts
made in MSMEs are mostly by small scale businesses with one worker
as the owner and also the operator of the business.
7. The characteristics of East Java MSMEs based on

total income
Based on the research, MSME in East Java has an annual income
of 11 million to 50 million per year which is equivalent to 28.4%,
revenue of 151 million - 500 million per year which has a percentage
of 22.8%, and the rest are MSME businesses with an income of 500
million per year with a percentage of 19.2%, and businesses with an
income of Rp. 1 million - 10 million per year with a percentage of
11.6%. The results of the research conducted showed that the ben-
efits obtained from the respondents varied. The majority of East Java's
MSME income is dominated by micro-enterprises, with revenues of
11 million to 50 million per year. This condition can be said to be
feasible for MSME players where the level of capital expended is not
too large.

duration the businesses have been successfully run
Based on the research, the majority of the East Java MSMEs, has
been successfully run for more than 10 years, with a percentage of
55%. In addition, the percentage of businesses which have been suc-
cessfully run for about 3 years is 14%, and the rest are MSME busi-

33
nesses that have stayed operational in about 1 to 2 years with a per-
centage of 26.8%. It can be concluded that the majority of the MSME
respondents are successful in running their businesses for more than
10 years. This is because the respondents were able to run their busi-
nesses well and have benefited from being able to meet the demands
of the economy. One of the reasons is that the respondents were well
aware of their inability to compete with large scale businesses in their
competitive markets. Therefore they chose to maintain their current
scale of business and were able to be successfully competitive in their
respective market segments. There were also new businesses which
established themselves as MSMEs between one to three years, due to
the lack of formal jobs in the country as well as in other parts of the
world. As such, the respondents chose to engage in informal busi-
nesses such as businesses in the sectors of MSME.
9. Characteristics of East Java MSME players based

on the number of assets in the business
Based on the research, MSME players who have assets of IDR
500 thousand - 50 million are assessed at a percentage of 67.2%. In
addition, MSMEs that have total assets of 51 million to 800 million
have a percentage of 25.2%; the rest are MSMEs which have total
assets between 500 million and 10 billion with a percentage of 7.6%.
It can be concluded that the majority of MSMEs in East Java have
assets of 500 thousand - 50 million.
10. The characteristics of East Java MSME based on

years of business establishment
Based on the research, the majority of businesses run by MSME
were established between 2011 and 2018; namely, 61.2% in percent-
ages and businesses that built in 2000 to 2010 were 20.8%, and the

remaining 17.2% were long-term efforts, which were built before the
year 2000.

form of a business entity
The results from the research showed that 60% of businesses were
run by individuals / self-owned businesses, and 8.4% were in the form
of limited liability companies (PT), 7.6% were in the form of part-
nership (CV), and 5.2 % of businesses were in the form of coopera-
tives and the remaining 16.8% were in the form of businesses which
had other legal forms. It can be concluded that the majority of East
Java MSME businesses are private businesses. This is because many
businesses are established independently without cooperation with
other parties and traditional business entities which are mostly illegal.
12. Characteristics of the East Java MSMEs under-

taken by the business sector
The results of the chapter indicate that 38.4% of the businesses
run by the East Java MSME are in the field of trade and services.
The remaining 26.8% are in the sectors of transportation, industry,
construction and agriculture, and 24% of the business focus is about
providing goods for consumers. It can be concluded that the majority
of businesses carried out by MSME are businesses in the field of trade
and services. This is because these businesses are easy to run and are
needed by consumers every day, so they have a great chance to be
successful in running them.
6.0. CONCLUSION
Based on the results of the research, it can be concluded that:
1. The profile of MSME business players in East Java can be viewed
from several aspects, namely: Gender Differences, Marriage Sta-

35
tus, Age Distribution, Education Level, Ownership of expertise
before entrepreneurship, Number of full-time workers in their busi-
ness, Income, Duration of Respondents, Number of assets in busi-
ness, Year of business establishment, Form of business entity and
Type of business sector.
2. From these various aspects, it can be concluded that:
a. Based on the aspect of Gender differences, the East Java MSMEs
are dominated by female respondents, with a percentage of
50.8%.
b. Based on the aspect of Marital Status, the East Java MSMEs
are dominated by married respondents with a percentage of
81.6%,
c. Based on the aspect of age distribution, the East Java SMEs are
dominated by respondents aged 40-49 years, with a percentage
of 37.6%.
d. Based on the aspect of Education Level, the East Java MSMEs
are dominated by respondents with a high school level educa-
tion with a percentage of 62.8%.
e. Based on the aspect of ownership of expertise before entrepre-
neurship, the East Java MSMEs have the same percentage,
namely the respondents already have expertise in entrepreneur-
ship and some do not have expertise before venturing into busi-
ness..
f. Based on the aspect of the number of full-time workers in their
businesses, the East Java MSME with only one worker in their
business operations, accounts for 40.8%
g. Based on the aspect of income, the majority of the East Java
MSME has income between 1 million and 50 million per year
with a percentage of 28.4 %.
h. Based on the aspect of duration (duration of work?), the East

Java MSMEs have been successfully run for more than 10 years,
with a percentage of 55%.
i. Based on the aspect of total assets in a business, the majority of
the East Java MSMEs have assets of 500 thousand - 50 million
with a percentage of 67.2%.
j. Based the aspect of the establishment of the business, the ma-
jority of the East Java MSMEs entrepreneurs have set up busi-
nesses from 2011 to 2018 with a percentage of 61.2%.
k. Based on the aspect of the form of the business entity, the ma-
jority of the East Java MSMEs have individual or private busi-
ness entities, with a percentage of 60%.
l. Based on the aspect of the type of business sector, the majority
of the East Java MSME entrepreneurs are in the trade and
services sector, with a percentage of 38.4%.
SUGGESTIONS
1. Further research is expected to be carried out to develop a more
accurate respondents' profiles with a broader scope by using more
multiple aspects.
2. Further research is also expected to use more respondents to be
able to describe the MSME's situation more accurately.
3. Future studies are expected to be carried out to develop discus-
sions on various business areas that have not been included in this
chapter.
REFERENCES
Undang-Undang Republik Indonesia Ascarya., and Yumanita, D. (2017). The
Nomor 20. 2008. Tentang Usaha Profile of Micro, Small, and Medium
Mikro, Kecil, Dan Menengah. Enterprises in Indonesia and the
Badan Pusat Statistik (BPS) diakses dari Strategy to Enhance Islamic Financial
http://www.bps.go.id/, diakses pada Services through Baitul Maal wa
tanggal 30 Desember 2018 Tamwi. Proceedings of the 2nd Islamic

37
Conference: Islamic Science University
of Malaysia.
Riat, A., and Zulva, K. (2016). Profil
Sektor Informal di Kabupaten
Ponorogo. Journal Al Tijarah. Vol. 2,
No. 1

03
C H A P T E R
BUSINESS SUCCESS FACTORS OF

SMES IN MALAYSIA: An Empirical
Study
By: Mohamed Asmy Bin Mohd Thas Thaker, Moha Asri Abdullah, Fodol
Mohamed Zakaria, Atika R. Masrifah, and Ardian Adhiatma
ABSTRACT
Small and Medium-sized Enterprises (SMEs) contribute significantly to the
Malaysian economy, in terms of productivity (GDP), employment, and eco-
nomic growth. Thus, to ensure the sustainability of SMEs, the success and
growth of businesses must be studied by identifying key factors of business
success. Therefore, this chapter identifies the background of SMEs in Malay-
sia and provides implications of the requirements for the success and use of
SMEs in various fields. Emphasis was placed on financial challenges, external
challenges, accessibility to financial capital, accessibility to Islamic finance
and Knowledge Skills’ Challenges. The survey was conducted using a struc-
tured questionnaire that included questions about their initial, current and
future use of 11 various sources of funding and access to these resources, as
well as the various challenges that SMEs face. Data collected from 344 re-
spondents were analyzed using descriptive and inferential statistics using the
Statistical Package for the Social Sciences (SPSS). After the reliability test, five
variables were adopted and the variable “Technological Improvement Chal-
lenges” was deleted. The multiple regression analysis was implemented to
ascertain the relationship between the variables and the degree of statistical
significance. The study found that all reliable study variables have positive
relationship with SMEs’ business success, but only three are significant while
the two variables have no statistical significance. The chapter finally provides
recommendations to various stakeholders.
KEYWORDS: SMEs, business success, financial challenges, external challenges,
accessibility to Financial capital, accessibility to Islamic finance and Knowl-
edge Skills’ Challenges.
1.0. INTRODUCTION
SMEs have been successful in many sectors in Malaysia and have
been, until recently, receiving government support and financial as-
sistance from various financial bodies. Bank Negara (MNM) has
adopted special programmes to support Malaysian SMEs through
supporting financial institutions at the national level. The programmes
include financial support, awareness raising for SMEs’ owners and
managers to reach financial literacy, as well as training and consumer
rights.
The issue of business success has been addressed by many authors
globally. Forsman, (2008) studied four Russian SMEs, using “multiple
case study methodology” and “the replication approach” to assess
the development projects initiated to make better business perfor-
mance. The study ranked two successful and unsuccessful SMEs. The
conclusion showed that the success of the business development project
depends on some interconnected dimensions. Nonetheless, success in
one dimension could lead to successful in other factors, thus produc-
ing a loop of ascending favorable outcomes. Failure in one dimension
might lead to failure in other factors, thus leading to a descending
spiral. Furthermore, Pletnev & Barkhatov (2016) surveyed more than
250 SMEs’ managers to examine success patterns used by managers
of SMEs in Russia to define the relationship between the business
success of SMEs and the scale of their supervisors. The findings prove
that the workers and their professional features are fundamentals in
business success.

Small and Medium enterprises (SMEs) are an active, sensitive, and
dynamic sector in economic and social development across the world
(Srinivas, 2013) because of their abilities to generate employment,
mobilize resources, use traditional or inherited skills, use local re-
sources, reduce capital and technology requirements, and export po-
tential. It is one of the most energetic and important sectors of the
world’s economies. According to Gulbro, (2018), in the United States,
small businesses represent 97 percent of total business and engage
employees about 58 percent of the whole workforce, whereas in the
Southeast Asia region, for example, the evidence showed that SMEs
contribute to approximately 99.9 per cent of the total enterprises in
all sectors, and to GDP. It contributed to around 53 per cent and
nearly 30 per cent of its total exports. Therefore, its participation in
the total employment in the region represented between 51.7 to 97.2
percent (Yean & Tambunan, 2018).
According to Duncombe & Heeks, (2005), expanding the circle of
SMEs will contribute significantly to generate income and livelihood
opportunities for the poor in developing countries, giving further pro-
tected work possibilities for the needy, and implementing other social
gains to the lower-income people - enhancing skills, increasing self-
confidence, increasing women’s participation, empowerment and
protection toward income loss. Indeed, a crucial point that should be
highlighted here is that the SMEs’ business needs more investigations
and research compared with other large enterprises.
The attention-grabbing significant role played by SMEs in the
economies of countries, of course, faced many different challenges
and problems. However, this paper focused on the following variables:
financial challenges, external challenges, accessibility to financial capi-
tal, accessibility to Islamic finance and Knowledge Skills’ Challenges.
A total of 344 questionnaires were collected in Kuala Lumpur, Ma-

41
laysia, and the data were analyzed using the statistical approach. The
following sections will explain all the steps of the chapter.
The paper is organized as follows. Section one is the introduction,
and section two reviews the literature and discusses hypothesis devel-
opment. Section three describes the methodology and the relation-
ship between the key business success factors for SMEs. This is then
followed by the findings in section five. The discussion and implica-
tions of the chapter will be followed by the last section which is the
conclusion.
1.1. Problem Statement

In fact, there are various programmes that form the financial land-
scape for SMEs alongside BNM special funds, including government
funds, credit information services, Guarantee Schemes by CGC &
Prokhas, venture capital companies, leasing and factoring companies,
and micro-finance institutions. Moreover, the FIN-TECH body also
involves providing different assistance through Equity Crowdfunding
(ECF), Peer-to-Peer (P2P), Investment Account Platform (IAP), and
Leading Entrepreneur Accelerator Platform (LEAP). Although SMEs
have attracted governmental attention and received diverse types of
care including financial support, they are still facing different sorts of
difficulties and business challenges. Some challenges may lead to busi-
ness failure. Some statistics have indicated that more than half of the
many new projects will not achieve long-term success (Abdul Rahman,
Yaacob, & Mat Radzi, 2016).
Most pointedly, the questions that may arise after knowing the
above-supporting programmes is: To what extent did the technical
and financial support programmes contribute to the SMEs’ business
success, and what are the current problems or challenges that are
representing the major obstacles to the success of SMEs. Indeed, it is

important to conduct an empirical study to identify these problems
from the small and medium entrepreneurs.
1.2. Research Objectives

This research seeks to examine the variables that pose challenges
to the business success of Malaysian SMEs. This chapter will focus
on registered SMEs that have more than five employees or sales turn-
over greater than 300000 in addition to their activities or sectors (SME
Corporation Malaysia, 2018). Obviously, there are many challenges
such as demographic, environmental, financial and economic dimen-
sions that are limiting the business success of such institutions, There-
fore, this chapter will focus on the economic, financial and techno-
logical variables as well as knowledge skills excluding the demographic
and environmental factors. Thereafter, variables that have a clear
impact on business success will be selected according to the literature.
The main objective of this chapter is to identify the issues and
challenges that face the business success of SMEs in Malaysia as well
as highlight the access to financial services, including access to Is-
lamic finance. To further clarify this objective, the ensuing sub-objec-
tives have been developed:
· To identify the business success factors of SMEs in Malaysia.
· To determine the relationship between success of the various busi-
ness factors and Malaysian SMEs’ performance.
· To assess the business performance level of SMEs generated by
the accessibility to financial services in Malaysia as well as Islamic
finance.
1.3. Research Questions

To realize the research objectives mentioned earlier, the following
research h questions have been formulated:

43
· What are the factors that determine the success of the business in
the SMEs’ sector in Malaysia?
· What is the relationship between success of the business dimen-
sions and SMEs’ performance in Malaysia?
· To what extent do Malaysian SMEs get access to financial services
generally, and to Islamic Financial products, in particular?
1.4. Significance of the Chapter

There are numerous parties that can notably benefit from the re-
sults of this study. Firstly, after identifying the success factors of busi-
ness for SMEs, business supervisors and entrepreneurship in the SMEs
sector can improve and develop the success of their business. Sec-
ondly, financial challenges usually hamper many major financial in-
stitutions’ performances, and SMEs’ institutions are also more ex-
posed to these challenges, and therefore they need to know the rela-
tionship among factors that have impact on business success in order
to obtain solutions. However, identifying the current financial prob-
lems of small enterprises helps decision-makers, both in the govern-
mental and the private sectors to develop periodical and emergency
plans in an effective way that will assure performance stability. Fi-
nally, academics and researchers can identify the real problems of
Malaysian SMEs and thus will have opportunities to classify their
research areas and gaps with great accuracy.
1.5. Limitation of this chapter

The chapter will be limited to the Malaysian SMEs that are offi-
cially registered, according to the definition presented earlier. At least
300 questionnaires will be distributed among owners and managers
surround Kuala Lumpur, using a targeted selection methodology. The
study is restricted to the Kuala Lumpur City only, and therefore, it

will be limited to the study’s main objective which aims to identify the
SMEs’ financial challenges and evaluate the relevant variables to de-
termine their impact on the success of SMEs. The time range will be
narrowed to 2018/2019.
1.6. Conceptual Framework

The chapter attempts to determine the general framework of re-
search by identifying study variables that can provide results to an-
swer the above research questions. The dependent variable is the
SMEs’ business success in Malaysia while the independent variables
are as follows: accessibility to Islamic finance, accessibility to finan-
cial capital, financial challenges, external challenges, knowledge skills
challenges, and technological improvement challenges. Figure 1 pre-
sents the research model.
FIGURE 3. 1 RESEARCH MODEL
1.7. “Hypotheses”
The following hypotheses have been formulated to test the rela-
tionship between the dependent variable and the independent vari-
ables. The study then assesses the impact of dependent variables on
SMEs’ business success.

45
H1: The accessibility to financial capital has effects on SMEs’ busi-
ness success.
H2: The easier access to Islamic finance, the exceedingly SMEs busi-
ness will succeed.
H3: The financial challenges have a significant effect on SMEs’ busi-
ness success.
H4: The less SMEs have external challenges, the more SMEs’ busi-
ness will succeed and grow.
H5: The less knowledge skills challenges there are, the more SMEs’
business will succeed and grow.
H6: The technological improvement challenges has significant im-
pact on SMEs’ business success
2.0. LITERATURE REVIEW

General speaking, the definition of Small and Medium-Sized En-
terprises (SMEs) differs from country to country (Omar, Arokiasamy,
& Ismail, 2009; Jasra, Khan, Hunjra, Rehman, & Rauf-I-Azam, 2011).
Every researcher has attempted to provide a definition that often dif-
fers from other academic researchers, and they have not proposed a
standardized definition as they are used to looking at the issues from
narrow angles, each according to his own specific focus. In general,
SMEs from the international business perspective was defined based
on the economic and social development concept of each country. In
China, for example, small companies are defined as companies with
fewer than 300 employees, and medium-sized companies as compa-
nies that have employees between 301 and 2,000, while in Taiwan,
companies with 650 or fewer employees are defined as SME
(Xiangfeng, 2008). On the contrary, Mozambique SMEs are defined
as small enterprises which have less than ten employees and medium-
size companies with employees between 11 to 50 employees (Osano

& Languitone, 2016).
According to SME Corporation Malaysia (2018), the definition of
SMEs is based on fixed quantitative criteria such as number of em-
ployees, sales turnover, total assets, or total capital. Obviously, the
definition varies according to key sectors. For instance, in the manu-
facturing sector, small businesses are companies that have less than
200 employees or its sales turnover is less than 50 million ringgit,
while small companies are described as companies with 5 to 75 em-
ployees or has sales turnover of less than 50 million ringgit. Unlike
the manufacturing sector, in the service and others sectors, any com-
pany with 30 to 75 employees or companies with sales turnover of 3
to less than 20 million ringgit is categorised as medium-size compa-
nies. On the contrary, the small companies in these sectors are com-
panies with 5 to 30 employees or sales turnover of 300, 000 and 3
million ringgit (Council, 2005). In fact, this definition seems more
reasonable, because it takes into account the characteristics of local
economies which is an important concept in business performance
evaluation.
TABLE 3. 1 DEFINITIONS OF MSME

CATEGORY MICRO SMALL MEDIUM
Manufacturing Sales turnover of less than Sales turnover from RM300000 to Sales turnover from RM15 million
RM300,000 less than RM15 million OR to not exceeding RM50 million OR
OR Employees of less than 5 Employees from 5 to less than 75 Employees from 75 to 200
Services and Sales turnover of less than Sales turnover from RM300,000 to Sales turnover from RM3 million to
other sectors RM300000 less than RM3 million OR not exceeding RM20 million OR
OR Employees of less than 5 Employees from 5 to less than 30 Employees from 30 to 75
2.1. Business Success Factors of SMEs

There are many studies that addressed the variables that may af-
fect the success of SMEs’ business (Al-mahrouq, 2010; Ghosh, Liang,
Meng, & Chan, 2001; Kemayel, 2015; Walker & Brown, 2004;
Lückmann & Feldmann, 2017). For instance, study by Walker & Brown

47
(2004) was focused on non-financial variables only such as gender
and location. There is no doubt that these variables are gaining im-
portance in such studies, but after the availability of financial factors,
these factors have become the cornerstone and nerve of each busi-
ness project. However, the current study will investigate the financial
factors that may have a significant effect on SMEs’ business success.
Recently, Lückmann & Feldmann, (2017) conducted a descriptive
study to determine the factors that affect the success of projects and
stressed that as long as there are no studies in this subject, the descrip-
tive study if the quantitative study will be confirmed, and an explor-
atory of the most important research. Thus, his research addressed
various problems, such as risk management, supply, logistics and pur-
chasing costs. The world café approach was used in this study, and 31
project managers from 23 German SMEs participated in the study
which was conducted in a workshop dedicated to this purpose. The
results showed that there are nine variables that influence the success
of the SMEs business, but eight of came under one branch which is
the organizational culture, and the rest belong to project manage-
ment knowledge.
Despite the importance of this chapter, it did not focus on a spe-
cific SMEs challenge and give it enough attention. Besides this prob-
lem, the business factors for SMEs need more investigations and the
studies should focus on a specific challenge and highlight the real
needs of this business sector based on their specific problems. The
following paragraphs will highlight several financial challenges that
could significantly affect business success for SMEs in Malaysia,
namely, accessibility to financial capital, accessibility to Islamic finance,
external challenges, financial challenges, and technology improvement
challenges.
The importance of accessibility to Islamic finance for SMEs is no less

than accessibility to finance in general; it may even go so far beyond
that. The World Bank and Islamic development bank (2015) reported
that 68 per cent of SMEs in developing countries have not able to get
access to financing opportunities. From the point of view of financial
institutions such as banks, the SMEs are more risky customers. They
have high-risk factors such as lack of guarantees and adequacy of the
credit history. As a result, this lack of funding creates a barrier to
SMEs to develop and grow as emerging companies. However, ac-
cording to the report of World Bank’s International Finance Corpo-
ration in 2014, there is a deficit in Islamic finance of US $ 13.2 bil-
lion in the MENA region. Despite the increasing demand for Islamic
finance among SMEs, only 36 percent of banks in the region provide
products for the SMEs, and only 17 percent of them provide Islamic
options (Elasrag, 2016). Although this gap has been addressed by a
few studies as mentioned earlier, their findings are still not satisfac-
tory.
SMEs faces many challenges and obstacles. These hurdles could
be seen through the secretions of globalization, rapid development
of technology, customer expectations, and intense competition by
organizations in the sector at times, and often by the institutions in-
volved in the market and the economy (Banham & College, 2010).
There are many studies which have attempted to identify the effect
of external factors that can influence the business success of SMEs.
The quite recent and common study is the study conducted by Wang,
(2016) which aimed to analyse the business obstacles faced by SMEs.
In order to realize this goal, the study selected five independent vari-
ables including external factors, namely, finance, tax competition, elec-
tricity, political, and high growth.
This paper concluded with positive results, and it highlighted the
most important points which said that the external factors can be

49
attributed to the shortcomings of the financial system, which are due
to several factors, such as fluctuations of financial markets, asymmetri-
cal information between SMEs and banks, high costs and the lack of
customized banking services for these institutions (Wang, 2016). It
should be noted that these results showed the need to study the exter-
nal factors of SMEs because they vary according to the environment
and the market for each country. Although the author carried out
good analysis, the methodology used was merely surveying the SMEs’
managers by interviewing them. Indeed, inferential statistics and fur-
ther analysis are quite important for this kind of study.
SMEs need proper sources of financing overhead in all their stages,
namely, their establishment, operations, and outgrowth (OECD, 2018).
Therefore, financial challenges is considered an international obstacle
that must be addressed more methodically by different relevant par-
ties and agencies (Malaysia World’s Islamic Finance Marketplace,
2016). Therefore, access to finance has been defined as obtaining af-
fordable and appropriate funding through an appropriate time-pe-
riod (Tagoe, Nyarko, & Anuwa-Amarh, 2005). Accessibility to finance
is the most crucial factor in business success. However, access to fi-
nance is critical, according to SMEs. Several studies (Abdullah,
Khadijah, & Manan, 2010; Rupeika-Apoga, 2014; Woldie, Laurence,
& Thomas, 2018) have pointed out that limited access to finance poses
many barriers for corporate growth, in general, particularly to SMEs
in many countries.
The characteristics of access to finance could be illustrated by several
elements, namely, credit access, adequacy, affordability and duration
of the credit. In the context of Malaysia, Abdullah et al., (2010) high-
lighted that the proportion of SMEs that had access to finance was
very small and that most SMEs did not get financing opportunities
despite the existence of various financing institutions in the country,

in addition to clear government directives, but they were not trans-
lated into reality significantly. Additionally, Elasrag, (2016) confirmed
that around 70 percent of all SMEs in emerging economies faced
challenges of financial accessibility. Hence, to achieve reliable results
from Malaysian SMEs, the current study should pay attention to that
factor within the study variables. Despite the importance of financ-
ing and accessibility to financial capital, which will be discussed in the
next few paragraphs, only few studies have addressed them implicitly
when defining terms or reviewing the literature (Abor & Biekpe, 2009;
Ali, Thabit Masheko; Mnzava, 2013; Shinozaki, 2014).
As long as access to finance is a major obstacle to SMEs, alterna-
tive funding sources need to be considered. Briefly, it would be useful
to mention that, the money market and capital market instruments
may be preferable. However, money market instruments related to
SMEs are still weak, not liquid, and investors have really limited exit
options, in addition to the number of participants are few (OECD,
2018). In a like manner, capital Market funding for the SMEs is one
of the biggest corporate policy challenges especially under the con-
cept of diversified financing, which requires advanced institutional
procedures and innovative reforms in order to respond to SMEs’ needs.
Undoubtedly, long-term financing for investment is the key to growth
and a development instrument for all companies, and in particular
for the SMEs. Moreover, these initiatives have been confirmed by
financial experts, politicians, as well as academicians around the world
(Shinozaki, 2014). As a result, the current chapter will consider finan-
cial challenges and accessibility to finance as independent variables
to identify the level of financial challenges of SMEs in Malaysia to
provide relevant solutions.
Technological improvement was identified as a key challenge for SMEs
(Tan, Chong, Lin, & Eze, 2009). Information, communication tech-

51
nologies (ITCs), and the use of the Internet has witnessed great de-
velopment around the world, thus affecting the business practices of
enterprises regardless of their sizes. ITC improvement has become
one of the most effective tools in relation to the cost and speed. In
many cases, however, SMEs suffer from this development, and they
need more assistance. Jasra et al. (2011) assessed the role of the main
factors playing vital role in the success of SMEs in Pakistan by inves-
tigating the relationship between the determinant factors and SMEs
success. The factors are entrepreneurial skills, financial resources,
marketing strategies, technological resources, and government sup-
port. The results illustrated that financial resource is the principal
factor in the success of SMEs, followed by technological resources
and entrepreneur skills.
Knowledge skills training is needed in different areas, such as ac-
counting, team management, marketing, communication, and tech-
nology use. Knowledge is getting enough information about some-
one or something (Carminati et al., 2007). It could be indicated to the
theoretical or practical comprehension of the subject. The concept
of knowledge may include facts, information, descriptions, or skills
gained through experience or education. This can refer to the theo-
retical or practical understanding of the subject. In this regard,
Ramukumba, (1996) found that knowledgeable and skilled workers
are the key factors in product performance of South African SMEs
and attracting repeat customers. Modestly, it could be said that the
enhancement of technology in SMEs’ sector leads to knowledge skills
upgrading, and thus both will affect business success meaningfully.
3.0. METHODOLOGY
The chapter used both secondary and primary data. Secondary
data includes books, published articles in high journals, and theses.

The primary data was collected through questionnaires distributed
to the formal SMEs’ owners or business managers in Malaysia. Ap-
proximately 344 respondents were surveyed. Six enumerators were
appointed to conduct the survey and the whole survey was monitored
periodically to maintain the accuracy and validity of data collection.
In order to practically realise this, a set of questionnaires was de-
signed and the questionnaires were then administered to the respon-
dents in Malaysia. The survey was conducted using structured ques-
tionnaire that involved 16 questions in different terms. Therefore, the
data collected was then analysed using descriptive statistics as well as
inferential statistics through SPSS software to see the level of signifi-
cance between the variables. Pearson r Correlation Coefficient test
and multiple regression analysis were used. A reliability test was ap-
plied to identify multicollinearity issues and check the internal consis-
tency of the data.
4.0. FINDINGS
4.1. Respondents Background
Table 1 presents the descriptive statistics of the profiles of the re-
spondents. It was found that about 67 percent of the respondents
were male, and 75 percent of the respondents were married. The age
age categories of 30-39 and 40-49 years old constituted 32 and 33
percent respectively, and those in the category of 50 years and above
comprised 13.7 percent of the respondents. The data showed that
about 42 percent of the respondents have completed secondary school
and another 47 percent had either diploma or a first degree. How-
ever, only 6.1 percent of the respondents had a postgraduate degree.
In terms of religion, 78.5 percent of the respondents were Muslims
and 14 percent of them were of the Buddhist faith.

53
TABLE 3. 2 BACKGROUND OF THE RESPONDENTS
GENDER FREQUENCY PERCENT (%)
Male 229 66.6
Female 115 33.4
MARITAL STATUS
Single 78 22.5
Married 258 75.0
Others 5 1.5
AGE
20-29 Years 71 22.6
30-39 Years 115 33.4
40-49 Years 111 32.3
EDUCATION
Non-formal education 3 .9
Diploma 72 20.9
RELIGION
Buddhism 48 14.0
Christianity 3 .9
Hinduism 16 4.7
Islam 270 78.5
Others 7 2.0
4.2. Business background

Tables 2 and 3 show that about 55.2 percent of the respondents
did not have any prior business experience. Those who reported to
have some experience ranged from less than 3 to above 30 years,
most (98) had less than five years of experience among 154 respon-
dents. On an average, 82.0 percent of respondents had around five
of their family members work full-time in their business.
TABLE 3. 3 PRIOR BUSINESS EXPERIENCE FOR SMES

ANSWERS FREQUENCY PERCENTAGE MEAN MIN. MAX. STD. DEVIATION
Yes 154 44.8 1.55 1 2 0.498
No 190 55.2
Business Expertise Years
Years Yes No
Less than 5years 98 150
6 - 15 41 0
16-30 12 2
31 an above 3 0

Total sales turnover and total assets turnover per year ranged from
RM10,000 to RM23 million, and RM3,000 to RM50 million respec-
tively.
TABLE 3. 4 NUMBER OF FAMILY MEMBERS WORKING FULL-TIME IN THE BUSINESS

Answers Frequency Percentage Mean Min. Max. Std. Deviation
No family member 20 5.8 1.96 1 7 0.299
Less than 5 282 82.0
6 and above 8 2.3
Total Sales Turnover per year (Ringgit)
Less than 5 96 27.9 2.41 1.17936
10,000
23,000,000
5 -100 63 18.3
101 -500 127 36.9
501 - 999 11 3.2
Total Asset Turnover per year (Ringgit)
Less than 5 119 34.6 2.46 1.4127
3,000
50,000,000
5 -100 48 14.0
101 -500 102 29.7
501 - 999 2 0.60
4.3. Level of Challenges

To achieve the objective of the chapter, the respondents were asked
to score the level of challenges (Lowest to Highest) that they will face
in their business over the next three years against 17 (seventeen) se-
lected issues.
All the issues mentioned in the questionnaire were scored as me-
dium to very high by 40.0 to 50.0 percent of the customers. Online
sales and Retaining staff & Operational cost were scored as very high by
63.6 and 68.2 percent of the respondents respectively. Competitive ad-
vantage and Environmental concern were scored as highest by 22.7 per-
cent of the respondents. Also, 36.4 percent of the respondents scored
Margins (profit) and Recruiting staffs as highest level of challenge. The
mean score of all the issues shows that the level of challenges faced
by the respondents ranged from medium to very high.

55
TABLE 3. 5 ISSUES AND LEVEL OF CHALLENGES FACED BY SMES
Challenges Response (Lowest to Highest)
Lowest Very Medium Very high Highest Mean SD

low
Competitive Advantage 0 12 73 143 116 4.06 0.829
Economic Fluctuations 1 13 127 161 42 3.67 0.749
Environmental Issue 6 54 153 118 13 3.23 0.819
Finance difficulties 3 38 156 120 27 3.38 0.817
Foreign Product Competition 8 61 153 100 21 3.19 0.880
ICT development 4 30 158 117 35 3.43 0..834
Knowledge and Skills in Finance and 0 48 183 98 150 3.30 189
Accounting
Knowledge and Skills in Marketing 0 34 197 88 25 3.30 0.745
Knowledge and Skills in Technology 0 33 189 98 24 3.33 0.744
Knowledge and Skills in Research & 2 41 195 83 23 3.25 0.762
Development
Net Profit (Margin Profit) 1 22 182 118 21 3.40 0.713
Operational Cost 0 15 176 123 30 3.49 0.716
On-line Sales 15 42 175 73 39 3.23 0.955
Product Cost 2 10 108 206 18 3.67 0.635
Recruiting Staff 6 32 177 119 10 3.28 0.733
Retaining Staff 6 26 205 89 18 3.25 0.742
Uncertainty of Market Direction 9 58 204 65 8 3.01 0.746
Others 3 29 201 14 4 2.95 0.530
4.4. Reliability Test

Factor analysis and Cronbach alpha were used to confirm data
validity and reliability. Factor analysis showed the validity of the test
and measures, while Cronbach alpha was used to evaluate reliability
by exploring the inter-item consistency.
However, the factor analysis results confirmed the validity of the
selected study variables, namely, accessibility to Islamic finance, ac-
cessibility to financial capital, financial challenges, external challenges,
knowledge skills’ challenges, and technological improvement chal-
lenges. The variables are “orthogonal” which means it is expected
that they are different factors. Hence, factor analysis with varimax
rotation to test was implemented for the uniqueness of the variables.
Consequently, the study found that some of the variables had nega-
tive items which indicated that these items were errors and some of
the items had similarities among them, and therefore, they were re-
moved to achieve data validity and reliability.

TABLE 3. 6 KMO AND BARTLETT’S TEST
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.814
Df 528
Sig. 0.000
The results in Table 6 affirm that there is sufficient inter-correla-

tion as the KMO measure of sampling fitness is 0.814 (a value of
greater than 0.6 is a good measure). It is a general rule of thumb that
a KMO value of 0.6 is acceptable and a value closer to 1 is better.
Bartlett’s test of sphericity was also applied to check the significance
of the relationship between the items of the construct and if there is
no correlation between the items of the constructs then it is worthless
to proceed with factor analysis. The Bartlett’s test of Sphericity was
significant (p<0.01) with approximate Chi-Square of 6318.035.
TABLE 3. 7 FACTOR ANALYSIS

Variables
1 2 3 4 5 6 7 8
Accessibility Kafala 0.949
Accessibility Others 0.943
Accessibility Qard Hassan 0.937
Accessibility Murabaha 0.932
Accessibility Sukuk 0.930
Accessibility Ijara 0.910
Accessibility Musharakah 0.909
Accessibility Mudarabah 0.882
Accessibility Diminishing
0.872
Musharakah Ijara
Challenges Competitive advantage 0.807
Challenges Finance difficulties 0.744
Challenges Economic fluctuations 0.742
ICT development 0.559
Challenges Environmental concern
Challenges Retaining staff 0.843
Challenges Market direction 0.82
Challenges Others 0.775
Challenges Recruiting staff 0.714
Challenges Knowledge Marketing 0.816
Challenges Knowledge Finance 0.748
Challenges Knowledge-Technology 0.712
Challenges Foreign Product 0.511
Accessibility to Cooperative Society 0.773
Accessibility-Bank loan 0.772

57
Variables
1 2 3 4 5 6 7 8
Accessibility- Crowd Funding 0.75
Accessibility- Loan from relative 0.605
Margin f(Profit) 0.826
Challenges Operational cost 0.627
Challenges Knowledge-R&D 0.524
Challenges Product cost 0.774
Challenges On-line sales
Accessibility NGO 0.795
Accessibility Microfinance 0.562
Eigenvalue 9.136 3.668 2.786 2.687 1.553 1.387 1.198 1.033
Percentage of variance 27.686 11.115 8.443 8.143 4.706 4.202 3.63 3.130
Cumulative (%) 27.686 38.801 47.244 55.387 60.093 64.295 67.925 71.055
Table 7 shows the Exploratory Factor Analysis (EFA) made for this
chapter. After satisfying all relevant assumptions, these factors ex-
plained the accumulated variance about 66.897 percent with an eigen-
value greater than 1.0 (9.136, 3.668, 2.786, 2.687, 1.553, 1.387, 1.198,
& 1.033).
TABLE 3. 8 CRONBACH ALPHA, MEAN, AND STANDARD DEVIATION
VARIABLES NUMBER OF ITEMS CRONBACH ALPHA MEAN SD
Accessibility to Islamic Finance, 9 0.978 5.46 10.329

Accessibility to Financial Capital 6 0.773 14.73 3.668
Financial Challenges, 3 0.681 10.26 1.758
External Challenges 4 0.706 14.14 2.395
Knowledge Skills' Challenges 4 0.852 13.12 2.491
Technological Improvement Challenges 2 0.418 6.66 1.425
Table 8 shows the reliability coefficients for the variables studied.

The Cronbach á reliability values are all above 0.7 except for the
variables “Technological Improvement Challenges (0.418)”, and “Fi-
nancial Challenges (0.681)”. Nunnally (1978) has suggested that reli-
ability value of .70 or greater is acceptable when used in basic social
science research. Thus, the value of 0.418 for “Technological Im-
provement Challenges” is lower than the required value, and thus,
the variable should be ignored. But the values of 0.681 for “Financial
Challenges” is too close to 0.7. Up to here, the study results are in the

acceptable range. Moreover, the results of multiple regression analy-
sis later will demonstrate that the variable is also significant.
1.1. Hypotheses Testing
TABLE 3. 9 MULTIPLE REGRESSION ANALYSIS

Variables Standardized β p-value VIF
Financial Challenges 0.211 0.002* 1.672
External Challenges 0.198 0.004* 1.634
Accessibility to Financial Capital 0.096 0.074*** 1.013
Accessibility to Islamic Finance 0.008 0.891 1.141
Knowledge Skills' Challenges 0.022 0.734 1.437
F 10.563*
R2 0.150
Adjusted R2 0.136
Correlation Matrix:
* Correlation is significant at the 0.01 level (p < 0.01)
*** Correlation is significant at the 0.05 level (p < 0.1)
Table 9 illustrates the results of multiple regression analysis which

was applied to test the hypothesis. The standardized â coefficients for
variables “Accessibility to Islamic Finance & Knowledge Skills’ Chal-
lenges” are insignificant (p > 0.01), and for this reason, they should
have been removed from the multiple regression equation when based
on p-value significance levels (p > 0.01, 0.05 & 0.10). It is important
to note that R2 value is 0.150, meaning that approximately 15 per-
cent of the variation in business success for SMEs could be explained
by the three variables- Financial Challenges, External Challenges,
and Accessibility to Financial Capital. Furthermore, the f-value of
10.563 is significant with confidence level of 99 percent.
The three variables are significant and positively related to busi-
ness success “Financial Challenges” (â=0.211, p < 0.01), “External
Challenges” (â=0.198, p < 0.01), and “Accessibility to Financial Capi-
tal” (â=0.096, p < 0.10). Therefore, H1, H3, and H4 in this chapter
are fully maintained while the H2 and H5 are rejected at (á > p-
value).

59
Eventually, the potential multicollinearity issues were examined,
and it can obviously state that the value of Variance Inflation Factor
(VIF) is less than 5 (i.e. 1.672 as bigger value). Consequently, the as-
sessment points that there are no multicollinearity problems and the
regression expectation is still valid. Accordingly, it is strongly advised
to proceed with hypotheses testing through multiple regression analysis.
2.0. DISCUSSIONS & IMPLICATIONS

The hypothesis test results indicate that the three factors- financial
challenges, external challenges, accessibility to financial capital are
having an impact on the business success of SMEs’ business in Ma-
laysia. However, those variables were positive relationship (Standard-
ized â) and significant. This means that financial challenges, external
challenges, accessibility to financial capital are the key factors for the
SMEs’ sector, and therefore their impact on business success is great.
Financial challenges are the most studied factors in the SMEs lit-
erature. Many researchers stress the importance of finding solutions
to these challenges (Malaysia World’s Islamic Finance Marketplace,
2016; OECD, 2018). Thus, the SMEs’ owners or entrepreneurs in
Malaysia also emphasise this importance through the results of this
chapter (H1: is rejected). Accordingly, financial institutions around
the world have developed periodic plans and programmes to assist
SMEs institutions at the governments, the private sector and the glo-
bal levels. This underscores the importance roles of the government’s
support and bank loans provided to the SMEs, because the success of
SMEs will lead to achievement of common interests of government,
financial institutions and the family sector in the economy. These find-
ings correspond to the results of Emine (2012).
External challenges in this chapter consist of competition, eco-
nomic fluctuations, environmental issues and foreign product com-

petitions. However, all the previous factors have significant effects on
SMEs’ business success, and therefore, the chapter found a positive
relationship between the external challenges and SMEs business suc-
cess in Malaysia in terms of statistical significance. Indeed, their pro-
motion have attracted the attention of entrepreneurs, financial inter-
mediaries and economic decision-makers alike.
Access to financial capital is one of the biggest growth problems
for SMEs. The chapter found that there is a positive relationship be-
tween access to financial capital and the success of the business of
SMEs in Malaysia with statistical significance. Although significant
efforts used to be made by private and public entities to provide capi-
tal for SMEs, they are still relatively low, particularly when compared
to the steady and high growth of SMEs. On the contrary, these re-
sults were somewhat contrary to the results obtained by Ali, Thabit
Masheko; Mnzava, (2013) which indicated that some SMEs, espe-
cially in the rural area, have little access to financial capital, although
it is available, because the SMEs’ owners do not like to deal with the
loans in their business and also because of the presence of internal
sources of financing. Up to this point, the chapter has able to reject
hypothesis H:1, H:3, and H:4.
Accessibility to Islamic finance has shown a positive relationship
with the SMEs’ business success, but the relationship is not signifi-
cant. This finding may be explained by the fact that Islamic banks
have been highly successful in obtaining a large market share in com-
petition with their traditional counterparts, and they are still seeking
to achieve higher levels of market share. However, this behavior is,
most probably causing a decrease in the amount allocated for financ-
ing and lending, and thus the SMEs sector will face difficulties to
access Islamic finance (Mohamed Shaban, 2016).
Knowledge Skills’ Challenges presented a positive relationship with

61
SMEs’ business success but again the relationship is not significant.
The positive relationship emphasises the importance of knowledge
skills for SMEs, but the chapter fails to prove the statistical signifi-
cance, and therefore the result is not consistent with the literature.
Moreover, in order to out the causes or reasons it would be necessary
to conduct further specialised study. Therefore, the chapter failed to
reject hypothesis H:2 and H:5.
Overall, the results of the empirical study showed that there is a
positive relationship between the independent reliable variables (fi-
nancial challenges, external challenges, accessibility to Financial capi-
tal) and the SMEs’ business success. In terms of statistical significance,
there were only three variables, namely, financial challenges, external
challenges, and accessibility to financial capital are significant, which
confirms the importance of these variables in the SMEs’ owners in
Malaysia. Furthermore, the other two variables (accessibility to Is-
lamic finance and Knowledge Skills’ Challenges) are important to
the business success, but have a lesser degree in SMEs’ sector, which
can be explained by the absence of some elements that may be im-
portant but not included in this chapter.
3.0. CONCLUSION
The SMEs’ sector plays a pivotal role in local and international
economic development, and, therefore, their business success is en-
tirely important. There are many factors that contribute to business
success and growth, including and most importantly, access to finance
in its different forms. Therefore, this chapter aimed to examine the
main factors that may have an impact on the growth and success of
SMEs’ business in Malaysia.
The paper examined the following variables: financial challenges,
external challenges, accessibility to financial capital, accessibility to

Islamic finance and Knowledge Skills’ Challenges. The chapter found
that all the variables have positive relationship with the success of the
SMEs’ business, but only three of them are significant (financial chal-
lenges, external challenges, accessibility to Financial capital). The
variables’ accessibility to Islamic finance and Knowledge Skills’ Chal-
lenges were not significant but had positive relationship with the SMEs’
business success.
In terms of implications, entrepreneurs can use the results of this
chapter to focus on significant factors to ensure the success of their
business. Financial institutions can also diversify funding and focus
on entrepreneurs’ perceptions and preferences. In addition, researchers
and academicians can take advantage of the results of this chapter
and conduct extensive research to clarify other variables that are not
addressed in this chapter and appear to be important in SMEs’ busi-
ness success.
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04
C H A P T E R
MEASURING SHARIA FINANCIAL

INCLUSION: Evidence From Indonesia
By: Atika R. Masrifah, Khoirul Umam, Yusof Ismail, Bedjo Santoso, and
Lilies Setariti
ABSTRACT
Micro Enterprises’ (MEs) contribution towards absorbing the labor for
about 88.90% of total enterprises in Indonesia, but almost all MEs called as
an unbanked or non-bankable people. This chapter aims to calculate and
analyse the Index of Syariah Financial Inclusion (ISFI) covering two dimen-
sions; the accessibility and the usage of Islamic financial services, using field
survey. Assessing 250 household of MSMEs across the region in Indonesia,
this paper found that the utilisation of Islamic financial institutions, even
cooperative, is generally low in Indonesia (0.384 for usage dimension and
0.438 for accessibility dimension). It has been proven by the respondents’
profile that MSMEs prefer conventional loan (75%), while others (25%) pre-
fer Islamic financing. Furthermore, the results show that the enterprise’s source
of financing at the first time is different from the last condition significantly
when the survey was conducted. MSMEs prefer to use loans from relatives,
their personal saving, rotating scheme and even loans from moneylenders.
This study recommends that the education and promotion of Sharia Finan-
cial Inclusion be given a policy priority in Indonesia to gain the main goals of
financial inclusion, inclusive growth, welfare as well as economic develop-
ment.
JEL Classification: G2, G21, O17
Keywords: Financial Inclusion, Sharia Financial Inclusion Index, MSMEs
1. INTRODUCTION
Several data show the significance of MEs’ contribution towards
absorbing about 88.90% of the labor in 2013, placing MEs far above
everything in the Statistics of Micro, Small and Medium Enterprises
in Indonesia, and especially, therefore, above large enterprises (3.01%
in 2013). The MEs’ sector also contributed about 36.90% towards
the growth of domestic product in 2013. This is almost close to the
contribution of large enterprises (39.66%) towards GDP. Moreover,
the MEs sector has not been able to contribute much to exports (1.38%
in 2013).
TABLE 4. 1 STATISTICS OF MICRO, SMALL AND MEDIUM ENTERPRISES*
Number GDP Labor Export*

Micro 57.189.393 98.77% 36.90% 104.624.466 88.90% 1.38%
Small 654.222 1.13% 9.72% 5.570.231 4.73% 2.76%
Medium 52.106 0.09% 13.72% 3.949.385 3.36% 11.54%
Large 5.066 0.01% 39.66% 3.537.162 3.01% 84.32%
MSMEs 57.189.393 98.77% 36.90% 104.624.466 88.90% 1.38%
Source: Ministry of Cooperation and SMEs; *2013 data.
Despite the statistical success of MEs, there is an unresolved mat-

ter that need to be further consideed and this unresolved matter is
that members of MEs are referred to as “nonbanked” or “non-bank-
able” people. MEs have always been in difficulties to access financing
from the banking industry (conventional as well as Islamic financial
institutions) for several reasons. The financial access to formal finan-
cial institutions is still relatively low. This is based on a World Bank
survey which shows that only 20% of people use the services of for-
mal financial institutions, while in the household sector, only 49% of
the total national households (Karim, 2014).
In the Household Balance Sheet Survey 2011 conducted by Bank
Indonesia, it was also found that the percentage of household saving

in formal and non-formal financial institutions was 48%. Thus the
people who do not have savings accounts are still relatively very high
at 52%. The condition of people who have not utilised the services of
formal financial institutions is a significant market which can become
the target market, because unbanked people are not 100% because
they are unbankable and they also need loans.
Based on this background, this chapter attempted to analyse the
prospects for expanding ûnancial access to the MSMEs, and the au-
thors assessed 250 MSMEs in several regions in Indonesia to judge
their level of financial inclusion. Using the indicator of financial in-
clusion from several sources, this chapter measured the level of Sharia
financial inclusion across regions in Indonesia.
The highlights of this article are as follows: (1) improvements in
measuring Sharia financial inclusion, and (2) proposing of feasible
ways to enhance the prospect of Islamic finance institutions for
MSMEs.
This chapter is organized as follows: Part II provides a brief re-
view on the framework of Islamic microfinance and financial inclu-
sion which is in accordance with Islamic perspective. Part III discuss
the data and methodology to create an index of Sharia financial in-
clusion (IFI) to measure Sharia financial inclusion. Part IV presents
the measurement results and discusses the results. Section V concludes
the chapter.
2. LITERATURE REVIEW
Islamic microfinance could be pointed to microfinance in Islamic
view. Profit oriented is the main goal in conventional microfinance,
while Islamic microfinance can not only stand for profit orientation
but also for social orientation. Therefore, this part will question a
brief review on the framework of Islamic microfinance by first ques-

69
tioning microfinance in common, then microfinance which is in ac-
cordance with Islamic view.
There are many studies which have focused on the definitions of
microfinance. Some of these studies include, among others, Abdul-
Rahman (2007), Khan (2008), Kaleem and Ahmed (2010), as well as
Shahinpoor (2009). In summary, microfinance could be defined as
making minor loans prepared for poor people through programmes
designed in particular to fulfill their particular needs and circum-
stances.
Lower poor, poor, and upper poor are also vulnerable and nonpoor
people who work in informal sector or micro enterprises become the
main customer of microfinance. The poor mainly start their own micro
enterprises out of needs, because of the lack of jobs that they find
suitable. However, some of them are actually entrepreneurs, and they
enjoy producing and running their own businesses.
Furthermore, there is growing studies addressing the definition of
financial inclusion, and among others are studies by Beck, Demirguc-
Kunt and Martinez Peria (2007), Sarma (2008), Demirguc-Kunt and
Klapper (2012), as well as Chakravarty and Pal (2013). Financial in-
clusion, which means the delivery of financial services at affordable
costs to sections of the disadvantaged and low income segments of
the society, is an integral part of Islamic microfinance to provide vari-
ous Islamic financial services that are needed (Obaidullah (2008:p.13-
24); Consultative Group to Assist the Poor Helms (CGAP, 2006: p.27).
Moreover, according to CGAP (2010:p.16), financial inclusion refers
to a state in which all working age adults have effective access to credit,
savings, payments, and insurance from formal service providers.
Moreover, CGAP has also built some principles into the frame-
work for an inclusive financial system. That framework is divided into
three levels of financial system, namely: micro, meso and macro (see

figure 2.1). It recognses that more people will have access only if fi-
nancial services for the poor are integrated into all three.
FIGURE 4. 1 AN INCLUSIVE FINANCIAL SYSTEM1

Source: Helms (CGAP, 2006: p.14)
The hub of micro financial systems that work for the poor is on
building market places, where numerous strong and viable financial
service providers compete for the business of the poor and the low-
income people. These micro financial service providers ideally gain
financing from funding sources. However, up to now microfinance
has depended heavily on external donor funding, even international
donor funding. In fact, international funding could be helpful at all
levels of the financial system—micro, meso, and macro—to jump-
start and speed up the process of building market places.
In this article, we agree with the definition of financial inclusion.
This means that everyone not only has access to financial services but
also can enjoy various types of financial services, such as saving de-
posits, time deposits, financing, payment, and other products and ser-
vices of financial institutions.

71
The measure of Sharia financial inclusion in this paper covers two
dimensions; the accessibility and the usage of Islamic banking ser-
vices. Moreover, to avoid correlations between dimensions (in Sarma
(2008), ‘accessibility’ is similar to ‘availability’, which may cause
multicollinearity in the calculations), the authors have used two indi-
cators, namely, the accessibility and the usage of Islamic banking ser-
vices. The authors have also differentially weighted every dimension.
TABLE 4.
Existing global Dimension of

Categories Indicator source (if financial inclusion
relevant) measured
%of adults with an account at a formal financial
Global Findex
institution
Formally banked adults Access,usage
Numer of depositors per 1000 adults OR number
IMF FAS
of deposit accounts per 1000 adoults
% of adults with at least one loan outstanding from
Global Findex
Adults with credit by a regulated financial institution
Access,usage
regulated institutions Number of borrowers per 1000 adults OR number
IMF FAS
of outstanding loans per 1000 adults
% of MSEs with an account at a formal financial WB enterprise
Formally banked institution surveys
Access,usage
2 enterprises deposit accounts OR number of SME
IMF FAS
depositors/number of depositors
%of SMEs with an outstanding loan or line of WB enterprise
Enterprises with
credit surveys
outstanding loan or line of
Number of SMEs with outstanding loan/number of Access,usage
credit by regulated
outstanding loan OR number of outstanding loans IMF FAS
institutions
to SMEs/ number of outstanding loans
Points of service Number of branches per 100000 adults IMF FAS Access
INDICATORS OF FINANCIAL INCLUSION

Source: Global Findex; IMF FAS; WB enterprise surveys; modified by Authors
Access: This measure evaluates the outreach of sharia financial

services. In this chapter, the authors measured the access to sharia
finance mainly by using the perception questionnaire, and this ques-
tionnaire used the likert scale, namely, 1) Not Accessible; 2) Can be
accessed; 3) Neutral; 4)Accessible; 5) Satisfied with the Accessibility.
However, some reference conclude that commercial banks take a lead-
ing role in providing access to finance.

Usage: This measure evaluates the frequency with which custom-
ers use sharia financial services. Indicators of this dimension are de-
veloped from saving deposits, time deposits, financing, payment, and
other products and services of financial institutions, which are key
functions of finance. In this chapter, the authors also measured the
frequency of the usage to sharia finance mainly using the perception
questionnaire and the scale of measurement used the likert scale,
namely, 1) Rare; 2) Unlikely; 3) Possible; 4) Likely; and 5) Almost
Certain. Table 2.1 shows all the indicators considered in the index
based on some literature.
With regard to financial inclusion, several studies have tried to
measure the extent of inclusive finance found in several countries.
Honohan (2008) used an econometric approach by combining
survey based data and secondary data to estimate the proportion
of households that can access formal financial services or services in
160 countries in the world. Honohan found that the financial access
index significantly affected to reduce income inequality.
The study of Beck et al. (2007) in 99 countries in 2003-2004 showed
that the factors that determine the reach of the financial sector are
the same as the factors that determine the depth of the financial sec-
tor. These factors are the level of development which is proxied by
GDP per capita, the quality of institutions that is proxied by gover-
nance index, and credit information that is proxied by credit infor-
mation index.
Demirguc-Kent and Klapper (2012), in a study that measured the
use of adult financial products (micro level) in 148 countries in 2011,
found that 50% of adults worldwide (samples) used formal financial
services, and more than 2 5 billion adults worldwide do not have for-
mal financial services accounts. However, partial and incomplete in-
formation from micro-level analysis can lead to misinterpretations of

73
the macro perspective.
Sarma (2012) developed a method for calculating the Index Fi-
nancial Inclusion (IFI) that can be used to compare the level of finan-
cial inclusion between countries or provinces in a country over a cer-
tain period of time. This method fulfills the assumptions of compara-
bility, mathematical property, and three dimensions (accessibility, avail-
ability, and use of banking services). The low IFI is indicated by the
low income of the middle class, while most high-income countries
have high IFIs.
Sanjaya and Nursechafia (2016) in their research measured and
analysed the level of inclusive finance and inclusive growth in Indo-
nesia. The study found that inclusive finance in Indonesia was strongly
influenced by the dimensions of accessibility, while the dimensions of
availability and use only had a small proportion. This brings us to the
conclusion that the poor are quite limited in utilising financial sector
services.
Umar (2018) measured the Index of Syariah Financial Inclusion
(ISFI) covering three dimensions: the availability, the accessibility, and
the usage of Sharia banking services. Using the annual data at the
provincial level during 2010-2015, this paper found that the Index of
Sharia Financial Inclusion was generally low and Bangka Belitung
was the most financially inclusive province of Indonesia. Furthermore,
this conclusion suggests the promotion of Sharia Financial Inclusion
to be a policy priority in Indonesia to achieve the central goals of
inclusive growth, welfare and economic development.
3. RESEARCH METHOD
This chapter applied quantitative methods, namely, chi-square test,
correspondence analysis and paired samples t-test, which needed
qualitative data. Chi-square test method was applied to evaluate

whether there is a significant association between the groups of the
two variables. Moreover, correspondence analysis is not much differ-
ent from chi-square test. Correspondence analysis provides a graphic
method of exploring the association or relationship between variables
in a contingency table. The primary data needed in this chapter were
obtained from field survey in several regions in Indoensia, where 250
MSMEs were selected from customers of Islamic and Conventional
financial institutions, including those who received loans from con-
ventional financial institutions and financing from Islamic financial
institutions, as well as those who did not receive any loan or financ-
ing.
Moreover, this chapter also used the Index of Sharia Financial
Inclusion (ISFI) method developed by Sarma (2012) in analysing and
measuring the Index of Sharia Financial Inclusion in Indonesia, where
the research variable used refers to the dimension of measurement
of ISFI, namely, accessibility and usage. The authors measured each
indicator by using the following formula (Wang and Guan, 2017:
p.1754).:
where xij is the transformed value of indicator j in dimension i; Aij

is the actual value; Mij and mij are the maximum and minimum of
each indicator, respectively. After transformation, the value of each
indicator lies between 0 and 1. The ISFI in dimension i is computed
as follows (Wang and Guan, 2017: p.1754).:
2 2 2 2 2
1 (1 − 1) + 2 (1 − 2) +⋯+ (1 − )2
=1−
2 2 2
( 1 + 2 + ⋯+ )
(3)

75
where xij is the transformed value (0 < xij < 1). wij stands for the
weight of indicator j in dimension i. In contrast to those scholars who
set weights subjectively (Sarma, 2008; Chakravarty and Pal, 2013;
Wang and Guan, 2017), in this chapter, the authors measured the
weight with an objective weighting method called CV (i.e. coefficient
of variation). CV was initially used in probability theory and statistics
to measure the dispersion in a probability distribution or frequency
distribution and is defined as the ratio of the standard deviation ó to
the mean value ì. Thus, the weight of each indicator is defined as the
proportion of its CV to the sum of all indictors’ CV numerically.
That is, (Wang and Guan, 2017: p.1754)
where wij stands for the weight of indicator j in dimension i, and vij
stands for the CV. Then, the final IFI is computed using the following
formula (Wang and Guan, 2017: p.1754):
2 2 2 2
(1 − 1) + 2 (1 − 2)
=1−
2 2
( 1 + 2)
where w1 and w2 are the weight of dimension 1 (access) and 2 (us-

age), and the computation follows the CV method. The aim of this
chapter was to measure the level of Sharia financial inclusion across
regions in Indonesia, as well as to analyse the prospects for expanding
ûnancial access to the MSMEs. Moreover, this chapter can propose
the feasible ways to enhance the prospect of Islamic finance institu-
tions for MSMEs. This chapter covers three groups of MSMEs which
are customers of Islamic and conventional financial institutions.
Based on the literature review summarized above, the research
framework of this chapter can be seen in figure 3.1. There are two

variables, namely: 1) Accessibility; and 2) Usage, which can be used
to calculate the Index of Sharia Financial Inclusion. Moreover, this
chapter also used chi-square test, correspondence analysis and paired
t test to describe the respondents profile of MSMEs.
FIGURE 4. 2 RESEARCH FRAMEWORK
4. RESULTS AND ANALYSIS

There are three categories of respondents’ profiles, viewed from:
1) Scale of Enterprises: Micro Enterprise (MEs; 191 respondents);
Small Enterprise (SEs: 54 respondents); and Medium Enterprise
(MDEs; 5 respondents); 2) Source of financing: MSMEs which re-
ceived financing from conventional banks (188 respondents) and
MSMEs which received financing from Islamic banks (62 respondents);
and 3) Profit performance: MSMEs whose net profit increased for
the last three years (108 respondents); MSMEs whose net profit was
stagnant for the last three years (128 respondents); and MSMEs whose
net profit decreased for the last three years (14 respondents).
TABLE 4. 3 GROUPING OF RESPONDENT PROFILE

Shariah Convent. TOTAL Decrease Stagnant Increase TOTAL
MEs 41 150 191 MEs 11 100 80 191
SEs 19 35 54 SEs 3 25 26 54
MdEs 2 3 5 MdEs 0 3 2 5
TOTAL 62 188 250 TOTAL 14 128 108 250

77
Table 4.2, which is based on Chi-Square (association) tests, shows
that MSMEs are very diverse business enterprises, which have almost
no specific significant association revealing their business patterns.
TABLE 4. 4 SUMMARY OF RESPONDENT PROFILE’S ASSOCIATION (CHI-SQUARE) TESTS

Employees Gender Age Education Expertise LegalForm Sector
Scale of enterprises 0.090 0.376 0.619 0.694 0.742 0.284 0.733
Source of financing 0.000 0.188 0.016 0.024 0.174 0.000 0.008
Profit performance 0.004 0.660 0.217 0.055 0.066 0.000 0.631
Asset Scale of enterprises Source of financing Profit performance
Scale of enterprises 0.000 - 0.870 0.900
Source of financing 0.892 0.870 - 0.460
Profit performance 0.017 0.900 0.460 -
The category of enterprises of MSMEs, based on either the scale

of enterprises or profit performance, mostly, have no association with
their characteristics or their source of financing. Only the number of
employees has significant association with MSMEs source of financ-
ing and profit performance (0.000; 0.004 < 0.05). Some MSMEs’
characteristics also have significant association with their source of
financing, such as: age (0.016), education (0.024), legal form (0.000),
and bussiness sector (0.008). Meanwhile, some MSMEs’ characteris-
tics also have significant association with their profit performance,
such as: legal form (0.000) and their asset (0.017). Moreover, some
MSMEs’ characteristics have almost significant association, such as:
employees (0.090) with scale of enterprises, education (0.055) and
their past expertise (0.066) with profit performance.
The survey shows at the owners of MSMEs almost split in half
between male (49%) and female (51%). However, MEs are mostly
owned by females (53%). Meanwhile, viewed from source of financ-
ing, figure 4.1 (left) shows that MSMEs prefer conventional loan (75%),
while others prefer Islamic financing (25%). Moreover, chi-square
results show that there is no association between the scale of enter-

prises and owner’s gender (0.376 > 0.05). However, there is a low
tendency that MSMEs correspond not only with conventional loan
but also with Islamic fianncing (0.870 > 0.05).
FIGURE 4. 3 GENDER (ABOVE) AND SOURCE OF FINANCING (BELOW)
Moreover, based on owner’s the education, figure 4.2 (left) shows

that most owners of MSMEs graduated from Junior – Senior High
School (63%) and Elementary School (17%), especially owners of
MEs where 63% graduated from Junior – Senior High School and
17% graduated from Elementary School. Meanwhile, most owners
of MDEs graduated with bachelors degrees and diplomas (20%).
Moreover, chi-square results (0.055 < 0.10) show that there is associa-
tion between net profit performance for the last three years and owner’s
education. However, there is a strong tendency that those who gradu-

79
ated from elementary and high school correspond with a stagnant
profit performance.
FIGURE 4. 4 EDUCATION (ABOVE) AND ITS CORRESPONDENCE ANALYSIS (BELOW)
Viewed from the sector of business, figure 4.3 (left) shows that most
MEs entered the trading and services sector (39%), and only MDEs
entered the consumer sector (10%). Moreover, chi-square results (0.631
> 0.05) show that there is no association between the sector of busi-
ness and MSMEs’ net profit performance. However, there is a ten-
dency that MEs and SEs entered the trade and service sectors, while
MDEs entered the consumer sector.

FIGURE 4. 5 SECTOR OF BUSINESS (ABOVE) AND ITS CORRESPONDENCE ANALYSIS (BELOW)
In terms of the number of employees, figure 4.3 (left) shows that

most MSMEs (83%) have less than five employees (93%), especially
ME (96%). Chi-square results (0.090 > 0.10) show that there is asso-
ciation between the number of employees and the scale of MSMEs’
enterprises as well as the source of financing (0.000 < 0.05) and profit
performance (0.004 < 0.05). However, there is a strong tendency that
MEs have less than 5 employees, while SEs have less than 11 employ-
ees and MEDs have more than a dozen employees. Moreover, the
more employees is associated with more net profit performance and

81
more employees will influence the type of business financing, as we
know that MSMEs prefer conventional loan (75%), while the rest (25%)
prefer Islamic financing. So, having no employees corresponds to be-
ing stagnant and a decrease in profit.
FIGURE 4. 6 NUMBER OF EMPLOYEE (ABOVE) AND ITS CORRESPONDENCE ANALYSIS (BELOW)
The survey shows that the owner’s expertise of MSMEs is almost

split in half between skilled employees (53%) and unskilled employ-
ees (47%). However, MEs are mostly owned by skilled owners and
employees (54%), because most MSEs are personally owned and

managed by themselves. Meanwhile, MDEs are mostly owned by
unskilled owners (60%). Only less than half of the owners are skilled
(40%) because most MDEs are not personally owned and not man-
aged by themselves, as they have many skilled workers to manage the
enterprises. Moreover, chi-square results (0.066 < 0.10) show that there
is association between the number of skilled owners and MSEs’ profit
performance for the last three years. However, there is a tendency
that MEs have employees all of whom are skilled while SEs have
mostly skilled employees to increase their profits.
FIGURE 4. 7 OWNER’S EXPERTISE (ABOVE) AND ITS CORRESPONDENCE ANALYSIS (BELOW)
Viewed from the perspective of legal form of business, figure 4.4

(left) shows that most MSMEs open their business as sole proprietor-

83
ship (60%), especially MEs (64%) and Ses (48%). Only a small part
of them choose co-operatives (5%), private limited companies (8%),
and partnerships (8%) as their legal form of business. Moreover, chi-
square results (0.000 < 0.05) show that there is an association be-
tween the legal form of enterprise and MSEs’ profit performance for
the last three years. However, there is a tendency that sole
proprietorships and private enterprises correspond to being stagnant
and increase in profit performance.
FIGURE 4. 8 ENTERPRISE’S LEGAL FORM (ABOVE) AND ITS CORRESPONDENCE ANALYSIS (BELOW)

Moreover, viewed from net profit performance for the last three
years, figure 4.4 (right) shows that most MSMEs (51%) experienced
stagnation in profit performance, especially MEs (52%) and MDEs
(60%). Only SEs experienced increse in profit performance (48%).
Chi-square results (0.900 > 0.05) show that there is no association
between net profit performance for the last three years and MSMEs’
scale of enterprises. Moreover, other chi-square results (0.460 > 0.05)
show that there is a low tendency between net profit performance for
the last three years and MSMEs’ source of financing.
FIGURE 4. 9 NET PROFIT PERFORMANCE (ABOVE) AND ITS CORRESPONDENCE ANALYSIS (BELOW)

85
As shown in table 4.3, financial institution practised by sharia as
well as conventional in Indonesia is able to enhance business perfor-
mance of MSMEs. The results of paired sample t test show that the
mean of the source of financing, such as Bank Loan, Coop Society,
Crowd Funding, Loan Relative, Micro Finance, Non-Government,
Personal Savings, Registered Moneylenders, Rotating Sheme, Un-
registered Moneylenders and others (condition 1 or initial condition)
differed significantly from the second condition when the survey was
conducted (condition 2 or current condition). The difference could
be seen in column six in this table below.
TABLE 4. 5 THE SUMMARY OF THE PAIRED SAMPLES T-TEST OF SOURCE OF FINANCING

Mean Mean Differences Sig. (2-
Indicators T-value df
(Initial) (Current) of Mean tailed)
Bank Loan 2.283 2.830 -0.547 -6.357 247 [0.000]***
Coop Society 2.552 2.608 -0.056 -1.291 250 [0.198]
Crowd Funding 2.460 2.512 -0.052 -1.183 250 [0.238]
Loan Relative 2.756 2.408 0.348 5.007 250 [0.000]***
Micro Finance 2.460 2.676 -0.216 -5.491 250 [0.000]***
Non-Government 2.587 2.579 0.008 0.19 247 [0.849]
Personal Savings 2.320 2.664 -0.344 -4.027 247 [0.000]***
Reg. Moneylenders 2.728 2.544 0.184 3.705 250 [0.000]***
Rotating Sheme 2.692 2.520 0.172 3.799 250 [0.000]***
Unreg. Moneylenders 2.592 2.388 0.204 4.175 250 [0.000]***
Others 2.628 2.532 0.096 3.001 250 [0.003]***
***significant at the 0.01 level; **significant at the 0.05 level; *significant at the 0.10 level
The result of paired sample t-test show that the household or

enterprise’s source of financing of the respondents at the first time
was different from the last condition significantly when the survey
was conducted. Generally, MSMEs are also able to enlarge the net
profit performance, even the number of employees from three em-
ployees to five employees after utilising the financial institution, espe-
cially micro finance.
Financing or credit in a financial institution do not always corre-
spond to the needs of the micro enterprises, because financing or

credit would be concentrated between the largest enterprises and
wealthiest enterpreneurs. Indeed, based on these results, mostly, they
still find barriers to the use of financial accounts. The barriers of
formal financial institutions have forced MSMEs to go to moneylenders
to borrow money, although they charge high interest. Not surpris-
ingly, most MSMEs in the traditional market are heavily indebted to
moneylenders, registered as well as unregistered, and do not have
money left as resource for their business capital and as such they con-
sider themselves as micro enterprises and poor people.
Inclusive finance must be supported by empirical analysis of how
to measure inclusive finance on aggregate economic indicators. Fur-
thermore, this can increase the participation of the poor in economic
growth and ultimately create inclusive growth.
TABLE 4. 6 MEASURING THE ISFI RESULTS

Dimension Topic Detailed Indicator ISFI Results
MSMEs with at least one loan outstanding from a regulated financial institution
Bank Loan
Satisfied with the accessibility of bank loan
Usage Coop MSMEs with at least one loan outstanding from a cooperative institution 0.384
Society Satisfied with the accessibility of coop society
MSMEs with at least one loan outstanding from a micro financial institution
MicroFin
Satisfied with the accessibility of microfin
MSMEs who saved at a financial institution in the current year
Savings
Accessibility Satisfied with the accessibility of saving account 0.438
Shariah MSMEs with an account at a Islamic financial institution
Account Satisfied with the accessibility of shariah account
Table 4.4 shows the results of the ISFI measurement of two di-
mensions of Sharia financial inclusion measurement in 250 MSMEs
in Indonesia that were estimated in 2018. The results found that the
utilisation of Islamic financial institutions, even cooperatives, is gen-
erally low in Indonesia (0,384 for usage dimension and 0,438 for ac-
cessibility dimension). This has been proven by the respondents’ pro-
file that MSMEs prefers conventional loan (75%), while others (25%)
prefer Islamic financing. MSMEs also prefer to use loan from rela-
tives, their personal saving, rotating scheme or other forms of loans.

87
5. CONCLUSION AND RECOMMENDATION
5.1 Conclusion
MSMEs are very diverse business enterprises (mostly in trade-ser-
vices, consumer and transportation sectors), which should not be gen-
eralized and should be treated accordingly. However, MSEs (in this
sample) have some common features, such as:
1. Most MSMEs’ Owners hold Junior – Senior High (63%) degrees,
elementary (17%) degrees and Undergraduate (14%) degrees.
2. Most MSMEs entered the trade-services sector (38%), which is
easy to enter and easy to exit with simple technology, and only
MDEs entered the consumer sector (20%).
3. Most MSMEs have less than 5 employees (93%), especially MEs
(96%), and they all have skilled employees (53%), especially MEs
(54%).
4. Most MSMEs have legal form as sole proprietorship (60%), pri-
vate and partnership (7%, each).
5. Most MSMEs (51%) experienced stagnation in profit performance,
especially MEs (52%). Only 43% of MSMEs experienced an in-
crease in profit performance, and 6% experienced a decrease.
6. Most MSMEs (75%) started their businesses with loan/financing
from conventional financial institutions, and only 25% of them
received financing from Islamic financial institutions.
Meanwhile, the results of the survey show that the source of fi-
nancing of the enterprises differed significantly between the first time
and the last condition. MSMEs prefer to use loans from relatives,
their personal savings, rotating scheme and even moneylenders. They
are financed by their own capital because they are unbankable or
view debt as an uncommon practice. Furthermore, the utilisation of
Islamic financial institutions, even cooperatives, is generally low in
Indonesia (0,384 for usage dimension and 0,438 for accessibility di-
mension).

5.2 Recommendation
On the basis of the results presented above, this research argues
for the importance of re-evaluation of the practice of the Islamic
financial institutions and the practitioners’ understanding of the con-
cept of Islamic finance. This low utilisation of Islamic financial insti-
tutions denotes the existence of a gap between the concept of the
practice of Islamic finance. Conceptually, Islamic finance is based on
cooperative financing design which is ideally easy for MSMEs to join
the finance. However, the results of this study shows the contradic-
tory fact. Therefore, this chapter recommends other researchers to
find out the rationale as to why the beautiful concept of Islamic fi-
nance cannot reach MSMEs’ practitioners. This rationale, according
to the authors, can be traced back to the Islamic financial institutions’
practices and the practitioners’ understanding of the concept of Is-
lamic finance.
ENDNOTES
1
CLIENTS. Poor and low-income clients includes a wide range of players and
are at the center of the financial activities, such as auditors, rating
system. Their demand for financial agencies, professional networks, trade
services drives the actions of those at associations, credit bureaus, transfer
all the other levels. and payments systems, information
MICRO. The backbone of financial technology, technical service provid-
systems remains retail financial service ers, and trainers. These entities can
providers that offer services directly to transcend national boundaries and
poor and low-income clients. These include regional or global organiza-
micro-level service providers run the tions.
gamut from informal moneylenders or MACRO. An appropriate legislative
savings clubs to commercial banks and policy framework is necessary to
and encompass everything in- allow sustainable microfinance to
between. flourish. Central banks, ministries of
MESO. This level includes the basic finance, and other national govern-
financial infrastructure and the range ment entities constitute the primary
of services required to reduce macro-level participants.
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Karim, Adiwarman, A., 2014. Kajian
Pengembangan Islamic Financial
Inclusion. Laporan. Jakarta: Karim
Consulting
Khan, A.A. (2008). Islamic Microfinance:
Theory, Policy and Practice. Birming-
ham, UK: Islamic Relief Worldwide.

05
C H A P T E R
Identifying Accessibility of Financing

for MSMEs in East Java Indonesia
Hartomi Maulana, Ely Windarti Hastuti, Lilies Setiatiti, Dzuljastri Abdul
Razak, and Olivia Fachrunnisa
ABSTRACT
This chapter examined the extent to which MSMEs have accessibility to
their financing in the current situation. Primary data was collected by self-
administered questionnaires with a sample of 250 respondents from selected
MSME owners in six different regencies in East Java. Descriptive statistics was
employed in the analysis. The study revealed that conventional financing is
preferred to Islamic financing. The study also indicated that personal savings,
categorized as internal financing, are the largest sources of fund for MSMEs
surveyed in initial, current and future time. This indicates that MSMEs de-
pend highly on their savings for financing their daily business operations.
However, the study also indicates that bank loans or external funding are
considered to be most accessible, followed by personal savings and loans
from relatives. Findings suggest that massive socialization on Islamic finan-
cial literacy is absolutely needed to enhance the awareness of MSME owners
on Islamic financing products.
KEYWORDS: Accessibility, financing, MSMEs, East Java
1.0. INTRODUCTION
The development of micro-small medium enterprises (MSMEs)
in Indonesia is indispensable as they play important an role in sus-
taining the foundation of the national economy. These are real sector
activities consisting of mostly low-income groups. However,
microenterprises are a very small business and usually there is an en-
trepreneur as well as an owner and there are a few workers (Schreiner
and Woller, 2003). They argue that microenterprises are a favourable
approach to assisting the working poor and the unemployed.
The importance of MSMEs in sustaining economy and its contri-
bution to the Indonesian national economy. There are more than
56.8 million units of MSMEs which have been established, which
means that around 99.9 percent of the total number of enterprises is
dominated by MSMEs (Ministry of Cooperative & MSMEs, 2017).
Among the MSMEs, microenterprises seem to be more dominant
compared to small and medium enterprises. It covers about 98.7 per-
cent, while small and medium enterprises represent only about 1.13
percent and 0.09 percent respectively (Ministry of Cooperative &
MSMEs, 2017).
East Java has strong economic growth at levels above the average
national economic growth. Statistics from Indonesia has shown that
about 5.57 percent of the economic growth in East Java had been
recorded in the first semester of 2018 which was above the national
economic growth of 5.27 percent (BPS East Java, 2018). In this sense,
the MSMEs’ sector plays an important role in sustaining economic
growth in East Java. It contributes about 57.2 percent to the total
economic growth in East Java (Soekarwo, 2018)1. According to BPS
(2017), there were about 9 million units of MSMEs established in
2016. Of these enterprises, microenterprises accounted for 97.8 per-
cent while small and medium enterprises covered only 2.07 percent
of the total units of enterprises in this sector2. MSMEs can absorb
more than 18 million workers while large enterprises only absorb 373
thousands (Soekarwo, 2018). This shows the importance of the MSME
sector in sustaining economic growth, particularly in East Java.

Although more than 56 million MSMEs are employing some 99.3
percent of the total labour force, their contribution to the economic
growth remains relatively small compared to medium and large en-
terprises. This shows that the quality of growth and development of
their business is low and hence there is a need to identify the factors
that prevent them from expanding their business. Financing issues,
capital management and risk management are among issues that may
prevent MSMEs from expanding their business. This chapter attempts
to examine the extent of MSMEs’ accessibility to their financing in
the current situation.

Microenterprises refer to micro-business which tend to be smaller
than small enterprises. However, this definition may differ depending
on the development stage and policy objectives in a country (Ahmed,
2002). The enterprises usually involve one or two workers or less than
five workers including unpaid family members. They have no busi-
ness licences and other legal requirements including lack of account-
ing procedures and lack of official operational locations. The other
characteristics of microenterprises include labour intensive industries
consisting of women and young workers.
According to Ahmed (2002), microenterprises can be identified
into three broad categories, namely, production, trading, and services.
Agricultural or non-agricultural activities are included in the produc-
tion category, meanwhile, shop-keeping, small business, and selling
specific items like vegetables, and fish, are identified as trading activi-
ties, and rickshaws, boats, or motor vehicles used as taxis are
categorised as transport services (Ahmed, 2002).
Meanwhile, Schreiner and Leon (2002) state that microenterprises
are larger than income generating activities (IGAs) which employ only

93
the entrepreneurs and have less than USD500 in assets and have less
than ten employees. Additionally, according to the Indonesian Gov-
ernment Act no 20/2008 as stated by Sembiring (2008), micro, small
and medium enterprises could be defined as follows:
a. Microenterprises are the enterprises which have net assets (exclud-
ing land and buildings) less than IDR 50million (USD 5,556) and
have less than IDR 300 million (USD 33,334) in total annual sales.
b. Small enterprises are enterprises which have net assets (excluding
land and buildings) between IDR 50million and IDR 500 million
(USD 5,556 and USD 55,556) with total annual sales between IDR
300million and IDR 2.5 billion (USD 33,334 – USD 277,778);
and
c. Medium-sized enterprises are enterprises which have net assets
(excluding land and buildings) between IDR 500 million and IDR
10 billion (USD 55,556 – USD 1,111,111) with total annual sales
between IDR 2.5 billion and IDR 50 billion (USD 277,778 - USD
5,555,556).
TABLE 5. 1 THE PROFILE OF MSMES IN 2013
Criteria MSMEs Employments GDP Export

Share Share Share IDR in Share
In units Worker IDR in Billion
(%) (%) (%) billion (%)
Micro 57,189,393 98.77 104,624,466 88.90 3,326,564.8 36.90 15,989.5 1.38
Small 654,222 1.13 5,570,231 4.73 876,385.3 9.72 32,051.8 2.76
Medium 52,106 0.09 3,949,385 3.36 1,237,057.8 13.72 134,071.4 11.54
Large 5,066 0.01 3,537,162 3.01 3,574,943.3 39.66 979,214.8 84.32
Total 57,900,787 117,681,244 9,014,951.2 1,161,327.5
Source: Kementerian Koperasi dan UMKM (2017), www.depkop.go.id, accessed April 2017
Table 1 highlights the importance of MSMEs in sustaining and its

contribution to the Indonesian national economy. There are more
than 56.8 million units of MSMEs which means that around 99.9
percent of the total number of enterprises is dominated by MSMEs.

The rest are large companies which account for only 0.01 percent of
the total number of enterprises. Among the MSMEs, microenterprises
seem to be more dominant compared to small and medium enter-
prises. It covers about 98.7 percent while small and medium enter-
prises represent only about 1.13 percent and 0.09 percent, respec-
tively.
In terms of employment, MSMEs absorb over 114 million work-
ers which means about 97 percent of the labour force is working for
MSMEs. Among the MSME sector, microenterprises have the high-
est number of workers which account for about 104 million and 88.90
percent of the total number of MSME workers. The workforce in the
small and medium enterprises recorded about 4 percent and 3 per-
cent respectively. Table 1 also shows the role of MSMEs in the GDP
and exports. While they contribute about 60 percent of GDP and
around 16 percent of their exports, large enterprises show 40 percent
contribution to GDP and 84 percent of their exports. However, it
does not mean that MSMEs’ productivity is higher than large enter-
prises, but it is mainly due to the large number of MSMEs (Tambunan,
2009).
Beck and Demirguc-Kunt (2006) stated that microenterprises that
have less access to external finance would be more constrained in
their operations and growth. Moreover, Beck et al. (2006) found that
older and larger firms reported having lower financing obstacles. Fi-
nancial obstacles experienced by small firms usually arise due to the
financial market imperfections. Financial imperfections, such as in-
formation asymmetries and transaction costs, are likely to be espe-
cially tied to the poor and micro and small enterprises that experi-
ence lack of collateral, credit histories, and connections (Demirguc-
Kunt et al., 2008).
In the case of Indonesia, a survey by Bank Indonesia in 2005 found

95
that most MSMEs face three main issues in relation to having access
to finance, that is, lack of document issues, lack of physical collateral
that do not meet bank requirements, and relatively high interest rates
(World Bank, 2011). This result is confirmed by an interview con-
ducted by the bank in East Java who asserted that they prefer to focus
more on corporate credit rather than microcredit (REDI Report,
2010). A large investment requirement and high overhead costs in-
curred are the main factors behind the reluctance of banks to enter
the microcredit market, or even if they are involved in the microcredit
market, they would impose higher interest rates for micro-lending to
trade-off their high investment and overhead costs.
Meanwhile, survey results of Statistics Indonesia on micro, small
and medium enterprises (MSMEs) in the manufacturing industry re-
vealed that the majority of respondents’ constraints are lack of capi-
tal and marketing difficulties (Tambunan, 2011). With respect to their
financial constraints, the majority of MSMEs, especially those which
are located in the rural areas, have never received credit from formal
financial services. Instead, MSMEs rely heavily on their savings, money
from relatives, and credit from informal lenders for financing their
daily business operations (Tambunan, 2011). In addition, Tambunan
(2014) found that micro and small enterprises are reluctant to access
credit from banks because they have no sufficient collaterals, no knowl-
edge about the procedure and the procedure given is too complex.
Moreover, the higher cost of getting the loan, higher default risks
from MSMEs and the lack of knowledge on the part of MSMEs on
the procedures and processes for obtaining credit are also several fac-
tors behind the limited access to finance faced by MSMEs in East
Java (World Bank, 2011). Overall, access to finance for MSMEs is still
a big issue requiring support from the government and financial insti-
tutions in building financial inclusion.

3.0. DATA AND METHODOLOGY
Quantitative approach was used as the research design to achieve
the objectives of the study. According to Ross (1999), quantitative
research refers to an organized empirical investigation that is statisti-
cal, mathematical or information that can simply be changed into
numbers. The advantage of the quantitative technique is that its
methods are capable of ensuring authenticity and reliability of the
data. In addition, quantitative method helps to find accurate data
and are based on empirical phenomena and can be measured.
The data collection technique used was the survey method using a
questionnaire administered to MSMEs owners in East Java who were
categorized into three sectors, namely, restaurants, retail and trans-
portation. The technique of sampling used in the study was stratified
random sampling. The benefits of using stratified random sampling
is that it is more representative in accordance with the basis of its
classification units, thus reducing diversity.
Prior to collecting the actual data, a pilot test was conducted to
ensure the questions in the instruments were implicit and appropri-
ate (Sekaran, 2003). The pilot study was conducted on MSMEs around
Ponorogo and Madiun. Their feedbacks were incorporated, and the
questionnaire was revised accordingly. Data collection was completed
in six months (July 2018 – December 2018) with usable responses of
250 from the total of 400 questionnaires that were distributed (62
percent response rate).
4.0. RESULTS ANALYSIS

The data obtained was run and analyzed using SPSS version 22.
Two sections (demographic information and financing form) of the
questionnaires are discussed based on descriptive analysis.

97
4.1 Demographic
Most respondents (53.2 percent, N=133) are owners of the
MSMEs, followed by the owner-managers (26.4 percent, N=66), and
only managers (19.6 percent, N=49). In terms of gender, most of
them are females (50.8 percent, N=127), followed by males (48.2 per-
cent, N=123). Most respondents are already married (81.6 percent,
N=204) while the singles accounted for 17.6 (N=44).
Age range of 40-49 years dominated the owners of surveyed SMEs
who accounted for 37.6 percent (N=94), followed by age range of 30-
39 years with 33.6 percent (N=84). In terms of educational level,
62.8 percent (N=157) hold secondary school certificates, and the re-
maining 16.8 percent (N=42) and 14 percent (N=35) possess primary
school and first degree qualifications, respectively. The remaining 3.6
percent (N=9) are diploma holders and 1.6 percent (N=4) possess
masters degree. As for having business expertise prior to opening their
own business, most respondents have business experience (52.8 per-
cent, N=132) with an average of 5 years of experience followed by
respondents with no experience (47.2 percent, N = 118). All of the
respondents are Muslims (100 percent, N=250). In terms of the num-
ber of family members working, most ranged from 1-5 family mem-
bers working full time in their business (95.2 percent, N=238) with
2.26 as the average.
Regarding total sales, ranges less than 300 million documented by
205 respondents (81.6 percent), indicating categorized as
microenterprises, then ranging from 300 milling to 2.5 billion recorded
by 42 respondents (16.8 percent), indicating categorized as small en-
terprises and ranging from 2.5 billion to 50 billion accounted by 4
respondents (1.6 percent), indicating classified as medium enterprises.
In terms of assets, this study accounts a various size of assets (ranging
between Rp1 million and Rp10 billion) with an average of Rp 455

million. Specifically, it records that 67.2 percent (N=167) have assets
between Rp1 million and Rp 50 million and 25.2 percent (N=63)
have assets between Rp50 million and Rp500 milllion. About 7.6
percent (N=19) have assets between Rp 500 million and Rp 10 bil-
lion. Table 2 describes the demographic of the SMEs.
TABLE 5. 2 DEMOGRAPHIC
Items Frequency Percent
Status of the respondents Pemilik 133 53.2
Manajer 49 19.6
Pemilik sekaligus manajer 66 26.4
Lainya 2 .8
Gender Male 123 49.2
Female 127 50.8
Marital Status Single 44 17.6
Married 204 81.6
Others 2 .8
Age 20-29 45 18.0
30-39 84 33.6
40-49 94 37.6
50 > 27 10.8
Education Non-Formal Education 3 1.2
Primary School 42 16.8
Diploma 9 3.6
First Degree 35 14.0
Postgraduate 4 1.6
Religion Islam 250 100.0
Do you have business expertise prior to Yes 132 52.8
opening your own business?
No 118 47.2
If yes, how many years? 1 -5 years 188 75.2
5-10 Years 29 16.8
11-15 years 20 8.0
16-20 years 6 4.4
21> 7 2.8
Number of family members working full 1-5 238 95.2
time* in your business
6-19 9 3.6
20-99 3 1.2
Total Sales Turnover per year <300jt 205 81.6
300Jt-2.5M 42 16.8
2.5M-50M 4 1.6
Total Assen per year (in Rupiahs) <50 million 168 67.2
50-500 million 63 25.2
500 million - 10 billion 19 7.6

99
4.2. MSMEs financing form
The following sub-sections discuss the MSMEs’ financing in terms
of the awareness of the differences between Islamic and conventional
financing, type of funds, intention to use Islamic financing, usage of
financing sources and accessibility to sources of financial capital and
familiarity with Islamic finance products.
The study found that about 140 MSMEs of the MSMEs surveyed
(65 percent) are not, or least aware of the differences between Islamic
and conventional financing, and only 36 of the MSMEs (14.6 per-
cent) are aware about this difference. Table 3 provides the degree of
awareness of the differences between Islamic and conventional fi-
nancing for the MSMEs surveyed.
TABLE 5. 3 DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL FINANCING

Frequency Percent
1 (Not aware) 81 32.4
2 59 23.6
3 74 29.6
4 16 6.4
5 (Aware) 20 8.0
TABLE 5. 4 TYPES OF FUNDING

Frequency Percent
Islamic 62 24.8
Conventional 188 75.2
The MSMEs sourced most of their funds from conventional fi-

nancing (75.2 percent, N = 188), and the rest were sourced from Is-
lamic financing (24.8 percent, N = 62). Specifically, during the initial
period, the main sources for conventional financing were from per-
sonal savings, loans from relatives, registered money lenders, coop-
eratives and bank loans. Currently, the sources of their funds are largely
from personal savings, bank loans, cooperatives, loans from relatives
and NGOs. In the future, bank loans, personal savings, microfinance,

and cooperatives will be deemed as main sources of their funds for
their MSMEs. Table 4 shows the details of the types of funding for
the MSMEs surveyed.
The study describes the types of debt financing offered by the
MSMEs surveyed, and whether it is conventional debt or Islamic fi-
nancing. As shown in Table 4, this study shows that conventional fi-
nancing is preferred to Islamic financing. This finding is similar to the
finding in the study by Masyita and Ahmed (2013) which revealed
that the preference for conventional debt financing over Islamic fi-
nancing is due to the fact that conventional debt financing is easier to
understand with respect to the process of financing.
The sources of funds are classified as internal and external financ-
ing. Internal sources of funds consist of personal sources of fund,
while the external sources of funds are diverse and come from indi-
viduals, cooperatives and financial institutions. Initially, personal sav-
ings recorded the largest source of funds for the SME surveyed in
East Java (16.4 percent, N=41), followed by funds from loan from
relatives (15.2 percent, N=38), and funds from registered money lend-
ers (12 percent, N=13). Although only the internal source of funds
for MSMEs, personal savings showed the largest portion compared
to the external sources (loan from relatives, cooperatives, financial
institutions, NGOs and others). Loans from relatives and bank loans
are deemed as the largest sources of funds for MSMEs surveyed in
the category of external funds. Similar to initial time, personal sav-
ings consistently show the biggest source of funds in current time
(28.8 percent, N=72). This is followed by funds from bank loans (17.2
percent, N=43), cooperative loans (4.8 percent, N=12), loans from
relatives (4.4 percent, N = 11) and loans from NGOs (2.4 percent, N
= 6). Meanwhile, personal savings (15.2 percent, N = 38) is still docu-
mented as the largest source of funds for MSMEs, which are followed

101
TABLE 5. 5 SOURCES OF FUNDING AMONG MSMES
Sources of funds Response Initial Current Future
Frequency Percent Frequency Percent Frequency Percent
Bank Loans Not Accessible 51 20.4 39 15.6 28 11.2
Can Be Accessed 87 34.8 17 6.8
Neutral 100 40.0 151 60.4 197 78.8
Accessible 12 4.8 33 13.2 23 9.2
Satisfied with accessibility 0 0.0 10 4.0 2 .8
Cooperative Not Accessible 40 16.0 37 14.8 26 10.4
Can Be Accessed 43 17.2 42 16.8 5 2.0
Neutral 158 63.2 159 63.6 212 84.8
Accessible 7 2.8 6 2.4 5 2.0
Satisfied with accessibility 2 .8 6 2.4 2 .8
Crowdfunding Not Accessible 43 17.2 46 18.4 32 12.8
Can Be Accessed 52 20.8 35 14.0 5 2.0
Neutral 152 60.8 164 65.6 205 82.0
Accessible 3 1.2 5 2.0 2 .8
Satisfied with accessibility 6 2.4
Loan from relatives Not Accessible 39 15.6 54 21.6 23 9.2
Can Be Accessed 24 9.6 51 20.4 4 1.6
Neutral 149 59.6 134 53.6 213 85.2
Accessible 35 14.0 11 4.4 10 4.0
MFIs Not Accessible 50 20.0 29 11.6 26 10.4
Neutral 159 63.6 178 71.2 216 86.4
Accessible 3 1.2 10 4.0 2 .8
NGO Not Accessible 37 14.8 35 14.0 31 12.4
Can Be Accessed 33 13.2 43 17.2 3 1.2
Neutral 175 70.0 166 66.4 213 85.2
Accessible 5 2.0 3 1.2 3 1.2
Personal Savings Not Accessible 95 38.0 70 28.0 68 27.2
Can Be Accessed 37 14.8 35 14.0 2 .8
Neutral 77 30.8 73 29.2 142 56.8
Accessible 26 10.4 49 19.6 31 12.4
Satisfied with accessibility 15 6.0 23 9.2 7 2.8
Registered money Not Accessible 40 16.0 35 14.0 29 11.6
lenders
Neutral 157 62.8 165 66.0 214 85.6
Accessible 25 10.0 3 1.2 5 2.0
Satisfied with accessibility 5 2.0 2 .8
Rotating credit Not Accessible 32 12.8 41 16.4 26 10.4
scheme
Neutral 179 71.6 159 63.6 221 88.4
Accessible 10 4.0 6 2.4 3 1.2
Satisfied with accessibility 2 .8
Unregistered money Not Accessible 42 16.8 64 25.6 29 11.6
lenders
Neutral 172 68.8 155 62.0 221 88.4
Accessible 9 3.6 3 1.2
Others Not Accessible 30 12.0 24 9.6 24 9.6
Neutral 187 74.8 157 62.8 226 90.4
Accessible

by bank loans (10 percent, N=25), microfinance (3.2 percent, N = 8)
and cooperatives (2.8 percent, N=7).
In terms of accessibility to sources of financial capital, most re-
spondents mentioned that bank loans are the most accessible (44.4
percent, N=111), followed by personal savings (44.4 percent, N =
110), and finally, loans from relatives (7.2 percent, N=18). Table 6
summarizes details of accessibility to sources of financial capital.
TABLE 5. 6 ACCESSIBILITY TO SOURCE OF FINANCIAL CAPITAL.

Sources of Response Accessibilities Sources of Response Accessibilities
funds Frequency Percent funds Frequency Percent
Bank Loans Not Accessible 30 12.0 Personal Not Accessible 18 7.2
Less accessible 12 4.8 Savings Less accessible 22 8.8
Neutral 97 38.8 Neutral 99 39.6
Accessible 92 36.8 Accessible 51 20.4
Satisfied with accessibility 19 7.6 Satisfied with 60 24.0
accessibility
Cooperative Not Accessible 39 15.6 Registered Not Accessible 67 26.8
Less accessible 23 9.2 money Less accessible 13 5.2
Neutral 174 69.6 lenders Neutral 165 66.0
Satisfied with accessibility 2 .8 Satisfied with 2 .8
accessibility
Crowdfunding Not Accessible 45 18.0 Rotating Not Accessible 48 19.2
Less accessible 35 14.0 credit scheme Less accessible 32 12.8
Accessible 2 .8 Accessible 14 5.6
Satisfied with accessibility 3 1.2 Satisfied with
accessibility
Loan from Not Accessible 54 21.6 Unregistered Not Accessible 45 18.0
relatives Less accessible 10 4.0 money Less accessible 11 4.4
Neutral 168 67.2 lenders Neutral 188 75.2
Satisfied with accessibility 7 2.8 Satisfied with
accessibility
MFIs Not Accessible 35 14.0 Others Not Accessible 38 15.2
Less accessible 9 3.6 Less accessible 47 18.8
Accessible 11 4.4 Accessible 2 .8
Satisfied with accessibility Satisfied with
accessibility
NGO Not Accessible 48 19.2
Less accessible 131 52.4
Neutral 71 28.4
Accessible
Satisfied with accessibility
This chapter also highlights the MSMEs surveyed that are cur-
rently not using Islamic finance. The respondents were also asked
whether they intended to use Islamic financing in the near future.

103
TABLE 5. 7 USING ISLAMIC FINANCE IN NEAR FUTURE
Frequency Percent
Definitely no 29 11.6
No 57 22.8
Not Sure 98 39.2
Yes 54 21.6
Definitely Yes 12 4.8
As presented in Table 7, most MSME owners (39.2 percent, N =

98) mentioned that they were not sure whether they will subscribe to
Islamic financing. Around 57 respondents (22.8 percent) stated that
they will not use Islamic financing. However, of the MSMEs surveyed,
about 54 respondents (21. Percent) indicated that they will use Is-
lamic financing. The study indicated that most of the respondents
may not use Islamic financing because Islamic product characteris-
tics are more complicated compared to the characteristics of the con-
ventional products.
The study then sought to identify the level of familiarity of the
respondents with any of the Islamic finance products. As expected,
the majority of the MSMEs owners under study (96.3 percent, N=242)
were not familiar with any of the Islamic finance products and only
3.2 percent (N=8) of the owners were familiar with them. Table 8
presents details of familiarity with the Islamic finance products.
TABLE 5. 8 FAMILIARITY WITH ANY OF ISLAMIC FINANCE PRODUCTS.

Frequency Percent
Yes 8 3.2
No 242 96.8
5.0 CONCLUSION
This chapter examined the extent to which MSMEs currently have
accessibility to their financing. In terms of the types of financing, this
study found that conventional financing is preferred to Islamic financ-
ing. This indicates that preference for conventional debt financing
over Islamic financing is due to the fact that conventional debt fi-

nancing is easier understand with respect to the process of financing.
The study also revealed that personal savings, categorised as internal
financing, is indicated as the largest source of funds for MSMEs sur-
veyed in initial, current and future time. This indicates that MSMEs
depend highly on their savings for financing their daily business op-
erations. However, the study also indicates that bank loans or exter-
nal funding are considered to be most accessible, followed by per-
sonal savings and loans from relatives. The findings suggest that mas-
sive socialization on Islamic financial literacy is really needed to en-
hance the awareness of MSMEs owners on Islamic financing prod-
ucts. Moreover, the study indicates that bank transparency, flexible
collaterals and education on the knowledge and procedures that are
easy need to be enhanced.
ENDNOTES
1
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2
http://118.97.221.219/berita-146- Kementerian Koperasi dan UMKM
industri-kecil-di-jawa-timur-tumbuh- (2017), www.depkop.go.id
pesat.html Masyita, D and Ahmed, H. (2013). Why
is Growth of Islamic Microfinance
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06
C H A P T E R
CAPACITY BUILDING FOR SMEs:

Realizing the Training Gap Amongst
SMEs in Malaysia
Moha Asri Abdullah, Dzuljastri Abdul Razak, Md. Siddique E Azam,
Winarsih, Taufik Akhbar
ABSTRACT
Small and medium enterprises (SMEs) contribute a significant portion to
the economic pie both in the developed and developing countries. The devel-
opment and growth of SMEs in Malaysia has significant impact on social
development, boosting productivity and increasing employment. Training is
one of the issues and challenges faced by SMEs studied by previous research-
ers. Studies also find training as one of the potential tools for capacity build-
ing of SMEs. Hence, to ensure the sustainability of the SMEs, an understand-
ing of their training status is worth studying. This chapter identifies the back-
ground of SMEs in Malaysia, provides an indicator on the training require-
ments and the type of training received by SMEs in different fields. The survey
was conducted using structured questionnaire that involved questions re-
garding the type of training received and needed by SMEs in different fields
of business. A total of 344 respondents were surveyed and then analyzed
using descriptive statistics as well as SPSS software. More than half of the
respondents did not have any prior business experience. Training gap was
measured by looking into the differences between the training received and
the training requirements of SMEs. From the analysis and observation, a sig-
nificant training gap was revealed among the SMEs in terms of what they
have received and what they require currently as well as in the future. This

107
difference was further confirmed by ‘t-test’. A significant correlation was found
between the training received and the training requirements of SMEs. Higher
training requirements were associated with higher training received. The
majority of the respondents required training in all the mentioned fields in
both current and future times. It was also found that there was an increase in
the training requirements compared to what they received. This finding sup-
ports the training gap and correlation realized in this chapter.
KEYWORDS: Capacity, Training, Gap, SMEs
1.0. INTRODUCTION:
Small and medium enterprises (SMEs) contribute a significant
portion to the economic pie both in the developed and developing
countries in terms of employment and GDP, and as well as economic
growth. The development and growth of SMEs in Malaysia has sig-
nificant impact on social development, boosting productivity and in-
creasing employment in national, regional and global markets. Ac-
cording to a report by Bank Negara Malaysia, Feb 2016, SMEs and
Micro SMEs contributed to 43.5 percent of total employment and
are responsible for 57.8 percent of total new jobs created. In Asia, 98
percent of the business establishments are SMEs with a total of 62
percent employment and 42 percent GDP contribution. The sector is
an important economic agent for most of the economies, based on its
GDP contribution, share of total employment and share of total ex-
ports. The government of Malaysia has implemented several assis-
tance programmes for SMEs to establish themselves and has pro-
vided them a conducive environment. This layout of assistance by
the government includes many training programmes for SMEs build-
ing their capacity to contribute more to the economy of the country.
The study by Bowen et. al. 2009 conducted in Nairobi, Kenya shows
that about 60 percent of the SMEs experience failure within a few

years of their operation because of not having training in different
fields of business. This finding was also found in an earlier study by
Longenecker (2006). Training requirement is one of the factors re-
sponsible for SMEs’ success. The SME Masterplan 2012-2020 em-
phasized on training programme to develop human skills in entre-
preneurship to better adapt to changes in the economy and technol-
ogy. The report stated three shortcomings in the Malaysian SMEs in
terms of their human capital development. These include a mismatch
between supply and demand of human resources and lack of indus-
try perspective in the curriculum, low utilization of existing training,
and non-competitive rewards and benefits.
There are great financial benefits for firms if their employees are
competent in their jobs. To achieve this goal, training is an important
activity. From the literature review many studies have been found that
emphasize the importance of training for the employees as well as
managers for any business organization including SMEs. A number
of studies were also found focusing on the factors that affect or influ-
ence SMEs which have received training and their business perfor-
mance. However, no study has investigated the training gap amongst
the SMEs in terms of what they require and what they receive. It is
important to realize the level of gap to know if the training demand
has been met by the existing training programmes provided by differ-
ent institutions in Malaysia. Measuring this gap will also determine
the efficiency and quality of the training programmes. The objec-
tives of the chapter are to identify the type of training received by
SMEs, investigate the training requirements in different fields of SMEs,
realize the training gap among the SMEs, and to recommend policies
that would address the training gap strengthening the capacity build-
ing of SMEs.
The following research questions were formulated for this particu-

109
lar study. If the respondents (SMEs) had received training from any
private sector, 1) What type of training they did receive? 2) What are
the different fields of business they received training for? 3) What are
their current and future training requirements in the different fields?,
4) What are the training gaps in terms of receiving training and train-
ing requirements? and 5) Is there any relationship between the vari-
ables?
The following sections of this paper include the literature review
on challenges in training and training as capacity building for SMEs
followed by the development of a research framework. Then it states
the methodology used in this chapter followed by the presentation
and explanation of the findings. After that there is a brief discussion
on the findings. Finally, the paper concludes the results providing
recommendations and scope for future research and for policy mak-
ers.
2.0. CHALLENGES IN TRAINING CONFRONTED BY SMES

Issues and challenges faced by SMEs have been studied by many
researchers and more studies being conducted across the world. It is
crucial to identify the challenges faced by SMEs as they have a signifi-
cant contribution to the economy of many countries. According to a
report by the Asian Development Bank Institute 2015, 19 percent of
the GDP in Malaysia and about 54 percent in Japan was contributed
by SMEs. This contribution was significant in other Asian countries
as well. (Figure-1).
To solve the challenges faced by SMEs, it is important to under-
stand the real contributing factors to local SMEs’ excellent perfor-
mance. According to Daisy K. M. H. (2011), SMEs face challenges in
developing potentially powerful strategies for them to set a successful
future direction. Developing training programmes by looking into the

business through the lens of entrepreneurs can help them to face such
challenges. The chapter also found that despite the existence of nu-
merous government assistance programmes, SMEs still encounter a
variety of problems in their operations. The Generalized System of
Preferences (GSP) is insufficient and is not delivering enough towards
developing and strengthening local SMEs in Malaysia.
Innovation is a big challenge for entrepreneurs and also essential
to be competitive in the to improve competitive advantage and create
more opportunities. Several factors including ‘learning by training’
was found to have the highest impact on the degree of novelty of
innovation by established SMEs (Amara, Landry, Becheikh, & Ouimet,
2008).
FIGURE 6. 1 SMES CONTRIBUTION TO GDP (%) IN SELECTED ASIAN COUNTRIES
Source: SMEs Internationalization and Finance in Asia, Asian Development Bank Institute, 2015
The challenge is also faced by policy makers and training insti-

tutes while provisioning training for SMEs. One of the many barriers
towards the provision of training is the negative attitude of the own-
ers found by Panagiotakopoulos (2011). Similar finding was reported
by earlier studies (Kotey and Slade 2005, Matlay 1999) where train-
ing was found to be perceived by the SME managers as an unaffordable

111
luxury, subsidiary business activity, and non-profitable investment in
short-term.
In general, problems encountered by SMEs are caused by the in-
ternal and external environments, such as lack of capabilities and
resources, poor management, low technology, competition, econom-
ics, technology, socio-cultural, and international factors (Hashim,
2000). This finding was supported by an earlier study where, in addi-
tion to the internal and external factors, the economic crisis was men-
tioned as a big challenge to business operation (Ghosh and Kwan,
1996). The chapter also found poor skills and economic crisis adding
to the difficulties in assessing financial assistance or funding to over-
come the shortage of capital in expanding businesses of SMEs. Proper
training in respective fields can be an effective method for capacity
building of SMEs to overcome such issues.
While reviewing issues of training in different fields of business
faced by SMEs, the field of e-commerce (ICT) has attracted the at-
tention of many researchers. To cope up with the world of technol-
ogy and remain competitive, being technology savvy is a must for
SMEs. However, SMEs also face many challenges in ICT. For ex-
ample, Internet security has been regarded as the key to e-commerce
diffusion (Alam et al. 2004; Mukti 2000; Udo 2001). A number of
studies (Limthongchai and Speece 2003; Kendall et. al. 2001) have
also found security issue as one of the major barriers in developing E-
commerce. To adopt E-commerce information safety, it is essential
for the company to have integrity of the entire system (Alam et al.
2004). A similar study conducted by Beale (1999) revealed that the
reluctance among many consumers to embrace e-commerce is basi-
cally centered on the concerns over security issues and lack of confi-
dence in the current set-up of e-commerce.
Education provides knowledge and plays a significant role as it

helps the SMEs know the many aspects of management such as fi-
nance, marketing, accounting and other disciplines and their impor-
tance in business. Chee (1986) and Moha Asri (1996), in their study
found that most of the SMEs do not have higher levels of education
in Malaysia.
3.0. A REVIEW OF TRAINING AS CAPACITY BUILDING FOR

SMES
Training and development are important aspects for any organi-
zation to accelerate skills, knowledge and efficiency of human re-
sources through certain initiatives and policies (Marchington and
Wilkinson, 2012). There are great financial benefits for firms if their
employees are competent in their jobs. To achieve this goal, training
is an important activity. Therefore, it is important to know how to
implement and monitor the right training which is vital to any SME
business. The study, “Benchmarking Training Best Practices of Ma-
laysia SMEs (2012)” explains the significance of training for capacity
building of SMEs that includes business benefits of improving the
staff ’s skills, staying competitive, improving employees’ core employ-
ability skills, and new business opportunities. The study also explains
33 best practices that could be applied to improve core skills and how
it can fit into the business strategy, and training programmes pro-
vided by the government. Training is also required because skill short-
age is a mismatch between the supply of people with particular skills
and the demand for people with those skills (Malaysia Masterplan
2012-2020).
Training employees in business has also been found to be effective
in capacity building in many studies. For example, Baron (2003) in his
study found many SMEs have experienced downfall because of hav-
ing a workforce that has poor skills, and limited training that are not

113
managed effectively. Similar findings show that SMEs also lack train-
ing in human resource management (HRM) because they have poor
understanding on the importance of HRM practices (Hornsby and
Kuratko, 2003; Saleh and Ndubisi, 2006; Ahmed et al, 2011).
Training is one of the ways in which firms, in particular the SMEs,
can build the competency and skills needed to overcome their weak-
nesses and disadvantages. According to a study, “Benchmarking Train-
ing Best Practices of Malaysia SMEs”, published by the Ministry of
Human Resources Malaysia (2012), it is more difficult for the SMEs
to recruit and retain good quality employees as the larger firms at-
tract the talents away with higher salary, incentive performance pay
and perks. Smaller firms and enterprises are thus at a disadvantage
when dealing with these challenges. The study highlighted the need
to manage training in a systematic manner for capacity building of
SMEs.
The study also recommends that training must be tailored to real
needs and working environments. Delivery must be flexible in terms
of content, timing and form of delivery. The standard framework
should be able to be broken into units with short periods of instruc-
tion (SME Corporation Malaysia).
Boseli et.al. (2001) has reviewed a number of findings pertaining
to training and capacity building of human resources. He notes that
training has a positive impact on the relationship between manage-
ment and the other employees. More importantly, investment in train-
ing resulted in higher profits (Kalleberg and Moody, 1994). Mean-
while Delaney and Huselid (1996) found that training practices affect
perceived organizational performance positively. Similar result was
found by Harel and Tzafrir, 1999. Training was also found to be posi-
tively related to perceived profits, market share and investments in
the near future (Verburg, 1998).

For an organization to be successful, Ayadurai and Ahmad (2006)
believe that the entrepreneur must possess characteristics which are:
innovative, creative, farsighted, right attitude in business dealing, never
give up attitude, having knowledge in business, business-minded, able
to work long hours, having good networking and a host of contacts,
independent, as well as resilient.
Improving such characteristics can increase the capacity of SMEs
which can be possible by providing proper training. Rose, Kumar,
and Yen (2006) in their study suggested some similar success factors
such as personal initiative, promotion of products and services, un-
derstanding market needs, and examining customer feedback. Be-
sides that, innovation was also indicated as one of the key elements of
success (Sinha, 2003) and there is significant relationship between dis-
tinctive capabilities and innovativeness on the performances of SMEs
(Man & Wafa, 2007).
SMEs need training for flexible solutions in terms of local deliv-
ery, duration and timeliness to encourage both business and their
employees to undertake training activities (Johnson and Gubbins, 1992;
Beaver and Lashley, 1998).
Training requirements by SMEs in different fields of business was
also addressed by Khalique et. al., (2011). They found that SMEs in
Malaysia lack skills in marketing techniques, exporting, branding,
customer loyalty, and they also lack good contacts with other local
and international enterprises.
In line with the concern for training needs of SMEs, Moha Asri
(1996), in his study, states that the reason for management problems
among SMEs is mainly because of not having good knowledge and
professional training. Most SMEs do not engage in R & D activities.
Even though there are several tax incentives to support R & D activi-
ties, only a small fraction operates using the technological frontier.

115
3.1. Existing Training Programmes for SMEs in Ma-
laysia
Training programmes for SMEs have been made available in many
agencies by different ministries in Malaysia. Some of the policy agen-
cies provide training for SMEs in Malaysia and this includes SME
Corporation Malaysia (SME Corp. Malaysia) which was established to
meet the need for a specialized agency that provides technical and
advisory support to promote further development of SMEs. The
National Productivity Center (NPC) is another agency that provides
training on supervising skills, management, and development of en-
trepreneurs.
Bumiputras (the indigenous people of Malaysia) received special
attention of the government of Malaysia. A center named the Ma-
laysian Entrepreneurial Development Center (MEDEC) was estab-
lished in 1975 so that they can start their own business ventures.
Bumiputras can also receive training on entrepreneurship, counsel-
ling and advisory services from Majlis Amanah Rakyat (MARA) es-
tablished in 1960.
Training for the SMEs in the agricultural business and the farm-
ers are provided by the Small Business Development Center (SMDC)
at University Putra Malaysia (UPM) which is also the Agriculture
University of Malaysia.
The Entrepreneur and Skills Development Center (ESDC) was
established by the Federation of Malaysian Manufacturers (FMM) in
1991 to provide training on knowledge and technical skills for mem-
ber companies. Other agencies that provide technical skill programmes
are- The Center for Instructor and Advanced Skills Training (CIAST),
Forest Research Institute Malaysia (FRIM), Palm Oil Research Insti-
tute Malaysia (PORIM), Food Technology Division (FTD), Youth
Training Centers (YTCs), and Institute of Training Institutions (ITIs).

3.2. Research Framework:
From the literature review it was observed that many studies had
addressed the issues and challenges faced by SMEs regarding train-
ing. The essence of training was also realized from previous studies,
and the existing training programs in Malaysia was identified as well.
To achieve the objectives of the chapter the following research frame-
work was conceptualized.
TRAINING
RECEIVED
REALIZING
THE TRAINING GAP
TRAINING
REQUIRED
POLICY
RECOMMENDATIONS
FIGURE 6. 2: CONCEPTUAL FRAMEWORK OF THE STUDY
4.0. METHODOLOGY:
This research employs quantitative research with limited quanti-
tative techniques. Before this is realized, secondary information from
relevant literature review was used. In addition, primary data of the
research was made available from a face to face questionnaire survey.
The respondents were basically SME owners/managers in the area
of Klang Valley, Malaysia. In this relation, a random sampling tech-
nique was used to obtain this part of the data. The questionnaire was
designed in such a way to comply with the objectives of the chapter.
It has a number of components relating to the profiles of owners/
managers and SMEs in addition to specific capacity building ques-
tions. A total of 344 respondents’ data was collected. Six enumera-
tors were appointed to conduct the survey and the whole survey was

117
monitored periodically to maintain the accuracy and validity of data
collection. In order to practically realize this, a set of questionnaires
was designed which were then administered to respondents in Ma-
laysia. Data collected were then analyzed using descriptive statistics
as well as the SPSS software. Some abbreviations used in presenting
the findings are TR (Training Received), CTR (Current Training
Requirement), and FTR (Future Training Requirement). A reliabil-
ity test was done to see the internal consistency of the data.
TABLE 6. 1: BACKGROUND OF THE RESPONDENTS

FREQUENCY PERCENT (%)
1. Gender:
Male 229 66.6
Female 115 33.4
Total= 344 100.0
2. Marital Status
Single 78 22.5
Married 258 75.0
Others 8 1.5
Total= 344 100.0
3. Age Frequency Percent (%)
20-29 Years 71 22.6
30-39 Years 115 33.4
40-49 Years 111 32.3
Total= 344 100
4. Education: Frequency Percent (%)
Non-formal education 3 .9
Diploma 72 20.9
Total= 343 99.7
5.0. FINDINGS AND DISCUSSION:

To achieve the objectives of the chapter, the findings are divided
into four categories. Firstly, the background of SMEs was understood
by looking into their personal characteristics and business backgrounds.
Secondly, the training status of SMEs was realized by observing a few
aspects, which are, - whether they had received training from any

private sector, type of training they received, the different fields of
business they received training for, and their current and future train-
ing requirements in the different fields. The third category of find-
ings was to reflect the third objective of the chapter which is to realize
the training gap. This was presented by comparing the finding found
in terms of training received and the training requirements. And fi-
nally, the findings of reliability test were presented followed by the
results of ‘t-test’ and ‘linear correlation statistics’.
5.1. BACKGROUND OF SMES

To find out the personal characteristics of the respondents, the
following background information was elicited from the respondents:
gender, marital status, age and education. From Table 1 it can be
observed that about 67 percent of the respondents were male, and 75
percent of the respondents were married. The age categories of 30-
39 and 40-49 years old constituted 32 and 33 percent respectively
and the respondents who were 50 years and above comprised 13.7
percent only. The results also showed that only 27 percent of the
respondents had a first degree/equivalent certificate. However, 6.1
percent of the respondents also had a postgraduate degree.
Information on the business background is important and this in-
formation was elicited by asking the respondents about their business
expertise, years of establishment, and if there was any family mem-
ber in the business working on a full-time basis. Table 2 shows that
about 55.0 percent of the respondents did not have any prior busi-
ness expertise. The number of years of business expertise possessed
by those who had this expertise ranged from 1 to 5 years. Number of
years in business by SMEs was found from 0 to 55 years and about 75
percent of them have been in business from 1 to 15 years. On aver-
age, respondents had 2 of their family members working as full-time
staff in their business with a maximum number being ‘7’.

119
TABLE 6. 2: BUSINESS BACKGROUND OF THE SMES
Prior to Business Expertise
Frequen- Percent Mean Maxi- Mini- Std.
cy (%) mum mum Dev.
Had experience 153 44.5
Did not have 190 55.2 5
1.57 1 year 0.676
experience Years
Total= 343 99.7
Number of Years in Business
Less than 1 year 2 .6
1 to 15 years 258 75.0
16 o 30 years 74 21.5
9.93 55 0 9.27
31 to 40 years 7 2.0
More than 40 years 3 .9
Total= 344 100.0
Number of family members working full time in your business
Minimum Maximum Mean Std.
Dev.
0 7 2 1.31
5.2. TRAINING STATUS OF SMES

Training status of SMEs was observed to understand the capacity
level of the SMEs in the market by investigating if they have received
training from any private sector. The type of training received (voca-
tional, on the job, training college, and others) was also investigated
for the SMEs which said that they received training from the private
sector. Training status was further investigated to measure the capac-
ity of SMEs by looking into the different fields of business (account-
ing, finance, business plan, technology etc.) in which they received
training. Finally, to improve this capacity of SMEs, an investigation
was done to see if there is any training gap. To measure this gap, it
was needed to look into the current and future training needs of the
respondents.
5.2.1. Training Received by SMEs:

When SMEs were asked if they had received training from any
private sector, about 60 percent of them responded positively. The
SMEs which received training from any private sector was further
investigated by asking them about the type of training they received.

It was found that about 63 percent of them received on the job train-
ing. The rest had vocational, training in college, and other types of
training. See Table 6.3.
TABLE 6. 3: TRAINING BY THE PRIVATE SECTOR * TYPE OF TRAINING RECEIVED CROSSTABULATION

Type of training received Total
Vocational On the Job Training Others
Training Training College
Received by
private Frequency 43 130 16 18 207
sectors 60.1% of
Percentage 20.8% 62.8% 7.7% 8.7% total 344
respondents
TABLE 6. 4: FIELDS OF TRAINING RECEIVED BY THE RESPONDENTS

STD
TYPE OF TRAINING FREQUENCY PERCENTAGE MEAN
DEVIATION
1. Accounting 101 31.3%
2. Motivation 147 45.5%
3. Business plan 214 66.3%
4. Feasibility Study 111 34.4%
5. Finance 173 53.6%
6. HRM 119 36.8%
7. ICT 147 45.5% 1.55 0.306
8. Leadership 136 42.1%
9. Marketing &
202 62.5%
Promotion
10. Operation/
201 62.2%
Manufacturing
11. R&D 81 25.1%
5.2.2. Fields of training received by the respondents:

The SMEs were asked about the 11 different fields of business
pertaining to the training received. More than 60 percent of the re-
spondents reported that they had training on business plan, market-
ing and promotion, and operations/manufacturing. Table 4 also shows
that the percentage of the respondents who received training on
motivation, leadership, ICT, was around 45 percent. The lowest per-
centage of training the SMEs received was below 30 for accounting
and R&D. However, about 54 percent of the SMEs stated that they
received training in finance.

121
5.2.3. Training requirements by SMEs:
Requirements for training in different fields by SMEs was observed
in two different phases. Firstly, the requirement during the survey i.e.
current requirements. Secondly, training requirements in the same
fields, but in the future, i.e. future training requirements.
Current Requirements:
Table 5 shows that around 60 percent of the respondents had a
current requirement in all categories except training on sustainability
and green technology. The other respondents were either not sure
about their requirements or did not have any current training re-
quirements.
TABLE 6. 5: CURRENT TRAINING REQUIREMENT
Std.
Current Training Requirements Frequency Percent Mean
Deviation
1. Finance 186 59.6% 3.279 1.1894

2. Human Resource 192 61.5% 3.326 1.0927
3. Information Technology 172 55.1% 3.358 1.1543
4. Marketing& International Business 183 58.7% 3.451 1.0402
5. New Product Developments 194 62.2% 3.461 .9989
6. Operational Management 197 63.1% 3.483 1.112
7. Quality Development 205 65.7% 3.576 .9353
8. Research, Development& Innovation 192 61.5% 3.535 .8996
9. Sustainability and Green Technology 149 47.8% 3.387 .8037
10. Accounting 195 62.5% 3.549 .8692
Future Requirements:
An increase in the percentage of the respondents was observed in
terms of their training requirements from current to future. More
than 70 percent of the respondents had future training requirements
on all categories except Sustainability and Green technology. How-
ever, the percentage of respondents increased from 47 percent to about
62 percent for training on sustainability. The other respondents did
not have any future training requirements, or they were not sure (see
Table 6).

TABLE 6. 6: FUTURE TRAINING REQUIREMENT
Future Training Requirements Frequency Percent Mean Std. Deviation
1. Finance 207 75.8% 3.245 1.4941

2. Human Resource 205 75.1% 3.254 1.4110
3. Information Technology 211 77.3% 3.303 1.4754
4. Marketing& International Business 215 78.8% 3.422 1.2569
5. New Product Developments 197 72.2% 3.378 1.2132
6. Operational Management 214 78.4% 3.390 1.3312
7. Quality Development 192 70.3% 3.462 1.0574
8. Research, Development&
197 72.2% 3.483 1.0186
Innovation
9. Sustainability and Green
169 61.9% 3.443 .8730
Technology
5.3. REALIZING THE TRAINING GAP:

Training gap was measured by comparing the two sets of data.
Firstly, future requirements of the SMEs which received or did not
receive training from any private sector. The cross-tabulation analy-
sis presented in Table 7 shows that about 73 percent of the respon-
dents who received training from different private sectors, required
training in the future. On the other hand, more than 58 percent of
the respondents who did not receive training, also required training
in the future. Almost all the respondents were reasonably sure if they
require or do not require training in the future.
The second way of realizing the training gap was by comparing
both the current and future training requirements of SMEs in the
five fields of training where they had already received training in. It
was found that more than 50 percent of the respondents who re-
ceived or did not receive training in the above-mentioned fields, re-
quired training in the same field both currently and in the future.
The maximum requirement was in HRM, OM, and R & D in which
around 70 percent of the respondents received training and around
50 percent of those who did not receive training in the respective
fields. See Tables 8 & 9.

123
From Tables7, 8 & 9 it can be seen that there is a difference be-
tween training received and training requirements of SMEs as the
percentage of training requirement is much higher than the percent-
age of training received by them.
A reliability test analysis was run against all scaled items of the
questionnaire. The minimum acceptable value for Cronbach's alpha
is 0.70. However, the findings show that the minimum values were
0.850 and 0.949 for training received and training requirement re-
spectively. The findings presented in Table 10 indicates a high level
of internal consistency for the scale used in this chapter.
TABLE 6. 10: RELIABILITY STATISTICS

Research questions Particulars Cronbach's Items
Alpha
What are the training Training received by the .850 11
requirments and type of respondents
training received by SMEs? Current and future .949 21
training requirements by
the respondents
Before looking into the relationship between the variables used in

the study, a paired sample t-test (Table 11) was run to confirm that
the differences found from Table 7, 8 and Table 9 were significant.
From the analysis it was found that there is a significant average dif-
ference between training received (TR) and current training require-
ment (CTR), and also between TR and future training requirement
(FTR). In both cases the p value found was less than 0.05 and the
calculated t-value was much higher than the tabulated t-value. How-
ever, there was no significant average difference between CTR and
FTR. This finding implies that SMEs needed the same amount of
training currently as well as in the future which was significantly dif-
ferent from the training they received.

TABLE 6. 7: TRAINING RECEIVED AND FUTURE TRAINING REQUIREMENT
Training by Private Future training requirement
Total
sector Did not require Required
40 106 146
Training received
27.4% 72.6% 100.0%
Did not receive 79 116 198
training 39.9% 58.6% 100.0%
119 222 344
Total
34.6% 64.5% 100.0%
TABLE 6. 8: CROSSTABULATION BETWEEN RECEIVED TRAINING AND CURRENT TRAINING REQUIRE-

MENTS IN DIFFERENT FIELDS
Fields of training Current Training Requirement
Frequency Percent
Finance Received 99 57.7
Did not receive 87 50.9
Human Resource Received 81 68.1
Management (HRM) Did not receive 111 49.3
ICT Application Received 79 53.7
Operation Management Received 129 64.2
(OM)
Research and Development Received 57 70.4
(R&D)
TABLE 6. 9: CROSSTABULATION BETWEEN TRAINING RECEIVED AND FUTURE TRAINING REQUIRE-

MENTS IN DIFFERENT FIELDS
Fields of training Future Training Requirement
Frequency Percent
Finance Received 109 63.4
Human Resource Received 87 73.7
Management (HRM) Did not receive 118 52.4
ICT Application Received 88 60.3
Operation Management Received 133 66.2
(OM)
Research and Development Received 58 71.6
(R&D)

125
TABLE 6. 11: PAIRED SAMPLES TEST
Paired Differences t df Sig. (2-

Mean Std. tailed)
Deviation
1 Training Received (TR) and 1.80 1.126 29.6 343 .000
Future Training Requirement
(FTR)
2 Current Training Requirement .056 .829 1.2 343 .208
(CTR) and Future Training
Requirement (FTR)
3 Training Received (TR) and 1.85 .852 40.4 343 .000
Current Training Requirement
(CTR)
Finally, to see if there is any correlation between company back-

ground and their capacity building, Pearson correlation statistics were
used. A significant but moderate or below moderate correlation was
found between education and training received, current training re-
quirements, and future training requirements. It was also realized that
there is a significant correlation between future training requirements
and training received, and current training requirements at 1 percent
level of significance. Education and the number of years in business
showed a negative significant correlation with training received which
means they tend to decrease together.
TABLE 6. 12: CORRELATION
Education Years in TR FTR
business
Pearson Value -.454** -.228** 1 -.190**
TR
Sig. .000 .000 .000
Pearson Value .349** -.297** .597**
CTR
Sig. .000 .000 .000
Pearson Value .260** 1
FTR
Sig. .000
**. Correlation is significant at the 0.01 level (2-tailed).
5.4. DISCUSSION
The majority of the respondents, almost 70 percent, were male
which indicates a low level of women involvement in entrepreneur-
ship. Most of the employees in SMEs did not have higher level of
education (degree and postgraduate) which showed a significant rela-

tionship between their received training and requirements of train-
ing. Education can play a significant role to influence SMEs receiving
training and deciding their training requirements. This finding is in-
line with the study by Chee (1986), and Moha Asri (1993). All SMEs,
regardless of their background and company size, required and re-
ceived training in their business as company background and size did
not show any significant relationship with training received and train-
ing requirements. The essence of training, which was significant, can
be observed by looking into the future training requirement of both
the respondents who received and did not receive training. SMEs
needed training in all the fields to strengthen their capacity as entre-
preneurs. This increased training requirement in different fields found
in this chapter justifies the literatures reviewed on training as capac-
ity building for SMEs. The most demanded trainings were marketing
and international business, operation management, ICT, and R&D.
This finding also supports the studies by Khalique et. al. (2011), Moha
Asri (1996) and Alam et al. 2004. As the SMEs lack skills in effective
HRM (Saleh and Ndubisi, 2006; Ahmed et al, 2011) and many of
them have experienced downfall for this (Baron, 2003), an increasing
demand in HRM training has been observed in this chapter as well.
The necessity of building capacity of SMEs was realized by observ-
ing the gap between training received and training requirements where
requirements increased significantly.
6.0. CONCLUSION:
The study was conducted in the greater Klang valley in the state
of Selangor in Malaysia involving 344 respondents. From the profiles
of the SMEs a low level of women involvement was found where
more than half of the respondents did not have any prior business
expertise. Education was found to be an important factor to deter-

127
mine both training received and training requirements of SMEs. Most
of the employees in the SMEs did not have higher level of education
which showed a negative correlation with training received. To achieve
second objective of the study, it was realized that more than 60 per-
cent of the respondents received training from the private sector and
the majority of them received the type of 'on the job training'. The
reasons for not having much training from other sources should be
investigated. There should be more training on Accounting and R&D
and they should be made available for the SMEs, since the SMEs
reported these two areas as the lowest type of training received. A
higher training demand by SMEs implies their need for training in all
categories as future requirements. It was also found that the type of
training received by the SMEs was significantly associated with train-
ing requirements. This finding from this study implies that there is a
need to develop and provide more training programs for SMEs to
identify their appropriate training requirements. Further study can
be conducted in other states of Malaysia on broader aspects. The
main objective of the study was achieved by identifying a significant
gap between training receives and training requirements. It was ob-
served that SMEs still need training in the fields they have already
received training. In fact, the requirement increased for both the cur-
rent and future needs. Thus, the increased demand in training can be
realized by observing the gap between training received and the train-
ing requirements. There could be two reasons. Firstly, SMEs found
training very effective for their business and required more training
or most of the respondents had new employees who required train-
ing in different fields. Secondly, the training received by the SMEs
was not effective or good enough which made them to demand more
training in the same fields. Training is one of the most effective tools
and widely used method for capacity building of an organization.

The government of Malaysia and other private agencies have imple-
mented several training programs for SMEs in Malaysia. The train-
ing gap found in this chapter implies that the existing training pro-
grams could not meet the requirements of SMEs. Or, the programs
are not effectively implemented. Another reason for increased require-
ment could be inaccessibility to existing training programs. Further
study should be conducted to investigate all these reasons to define
the training gap found in this chapter appropriately. More training
programs should be developed by the policy makers and implemented.
Policy makers should focus on the most required training areas of
SMEs and develop training programs and policies accordingly.
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07
C H A P T E R
Training Needs: How SMEs Increase

Their Competitiveness Study from
Small Medium Enterprises in the
Yogyakarta Special Region”
Taufik Akhbar, Susilo Nur Aji Coko Darsono, Mohamed Asmy Bin Mohd
Thas Thaker, Hendar, and Fajar Surya
ABSTRACT
This chapter aims to describe the readiness of SMEs in Yogyakarta Special
Region Province facing global challenge in business in the future. Training is
one method to ensure that business players of SMEs are ready to increase
competitiveness. This chapter used qualitative research design and utilized
questionnaire. Data for Small Medium Enterprises in Yogyakarta were col-
lected from Small Medium and Enterprise Bureau. The findings of this chap-
ter showed that in today’s prevailing conditions, SMEs mostly need training
in management aspects because of the lack of knowledge in management.
Most of the business players realize the need for training to increase their
competitiveness in the future, not only in the management aspects for busi-
ness processes, but also for the improvement of quality and the application
of green technology in facing the Industrial Revolution.
KEYWORDS: training, competitiveness, small medium enterprises
1. INTRODUCTION
The growth of Small Medium Enterprises (SMEs) in Indonesia
has increased dramatically. This fabulous trend has been predicted to
continue to increase for another year. Based on the data, 99 percent
of all enterprises took part in the growth of the economy in Indone-
sia. SMEs in Indonesia is divided into three categories based on the
Bank of Indonesia rule: (1) Micro Enterprise (2) Small Enterprise
and (3) Medium Enterprise.
Sutrisno (2015) said that many challenges faced by SMEs in Indo-
nesia are not only financial, but also non-financial. Non-financial prob-
lems faced by SMEs such as the unconducive economic conditions,
bad business environment and the level of competitiveness to deliver
SME in Indonesia need to be overcome to make huge improvements
to survive in the competitive market. Enhancing the performance of
management is also needed to strengthen competitiveness (Khalique,
Isa, Shaari, & Ageel, 2011). Business players of SME must quickly
adapt to the changes in the industry today. Meanwhile, financial prob-
lems faced by SMEs is still about financial literacy which makes them
difficult to access capital from financial institutions.
SMEs in Indonesia still face many difficulties such as low produc-
tivity, capital shortage, and lack of ability to produce good quality
products. Besides that, the failure to capture big markets has still be-
come the main weakness due to stiff competition among business
players in Indonesia. Competing in this Industrial Revolution 4.0 has
forced them to devise strategies to ensure efficiency in their produc-
tion, create good quality products and services and apply technologi-
cal and information system in their business processes. All of these
obligations have many consequences for SMEs such as their readi-
ness to face stiff competition in the market, making innovations in
their business in order to create unique value compared to other com-
petitors. There are still hurdles since many SMEs choose to impose
limit on themselves with all of the changes which should be adapted
by them. Business players in SME still retain their traditional ways to

133
do business. Staying in the comfort zone makes them difficult to grow
and compete with others competitors.
One of the areas in Indonesia which has a high number of busi-
ness players in SMEs is the Yogyakarta Special Region Province which
is located in southern Java. Based on statistics of the Bureau of
Yogyakarta Province, the number of SMEs increased approximately
17% in the first quarter of 2017, and in 2018 its growth increased to
almost 6%. SMEs in Yogyakarta face problems in their readiness to
compete in the industrial revolution. Most of the micro enterprises in
Yogyakarta are in the creative sector such as handicrafts, fashion, toys
and consumer industry such as food. Problems faced by the business
players are also influenced by the lack of knowledge in business man-
agement. For example, from the aspect of financial management, most
of the SMEs in Yogyakarta do not have books to record their transac-
tions, and meanwhile their money is not only used for business needs
but also for their families. This factor causes problems in their work-
ing capital.
Lack of knowledge in management faced by small businesses in
Yogyakarta, for example, will lead to a decrease in the quality of prod-
ucts and poor management control. Business players in micro enter-
prises always feel it is difficult to capture the potential market because
of the swift changes in the industry. Their readiness in market com-
petition should be followed by training programmes in management.
Training gives them insights and creative thinking to devise strategies
to face their competitors. By design, create training makes micro en-
terprise learn something new to develop their business by adapted
technology which is very important in industrial revolution era
Competition among SMEs is still the main issue in some coun-

tries. Generally, SMEs face problems related to their readiness to com-
pete in the midst of the global competition. Based on the definition,
Small Medium Enterprise is a company which is commonly mea-
sured by the number of its assets and revenue (Harif, 2010). In other
countries, the definition of an SME maybe different because differ-
ent standards are used in determining the size of a company. Gener-
ally, among the countries refers the definition of SME on Asia Pacific
Economic Corporation (APEC).
The problems faced by businesses in the rest of the world are simi-
lar. Most of the SMEs have problems such as difficulties to access
financial institution, lack of managerial skills, and low levels of finan-
cial inclusion (Yoshino & Hesary, 2016). Further, those problems have
become a hurdle for SMEs to develop their business. In the long term,
many SMEs have low level in competitiveness because of the low
managerial skills and global knowledge.
According to Poufinas, Galanos, & Papadimitriou (2018), the low
of competitiveness faced by SMEs is because of the slow pace of
SMEs in adapting to changes in the business environment. Sensitivity
of SMEs is very high when economic environments change. For this
reason, SMEs should increase their awareness about the potential
exposure due to the global environment. One of the solutions to miti-
gate these problems is training programme in the management as-
pect of their business process (Yoshino & Hesary, 2016).
Training in the management aspect has a positive impact in in-
creasing the level of competitiveness among business players of SMEs
(Yahya, Othman, & Shamsuri, 2012). Further, the research examined
the factors which influence SMEs’ success and found that it depends
on the conditions found in every country. Generally, it is agreed that
success factors can be divided into two factors. One is external such
as the condition of the economy and another is internal such as mana-

135
gerial skills. Training also has influence in the growth of the business
(Jones, 2004). Training in managerial skills, especially in management
aspects such as finance, marketing, operation and human resources
will lead to increased capability of the manager to control the com-
pany. Training in management aspects is also useful for setting the
strategy of competition because managers understand about market
conditions due to increasing awareness.
Furthermore, another research (Ahmedova, 2015) stated about the
importance of the competitiveness level in some firms. Competitive-
ness is the most important condition for business prosperity
(Ahmedova, 2015). It indicates that SMEs must struggle with compe-
tition because of the change in the business environment. This is the
challenge for SMEs since many of them have difficulties adapting to
changes.
Meanwhile, the core of competitiveness in SMEs is usually related
to issues such as management of company, marketing plan, company
products or services and their exposure to the international market
(Manole, Nisipeanu, & Decuseara, 2014). Their research explains that
these three issues are the key to developing competitiveness among
SMEs. They suggest conducting training to create good management,
training in innovation to produce good quality products and training
about preparation to expand their products to the international mar-
ket.
3. METHODOLOGY
Qualitative method was used in this research. The output of this
research will describe about the training needs for Micro Enterprises
in Yogyakarta. The data collection method was used to collect both
primary and secondary data. Primary data was used to find data from
respondents relating to training needs. The survey method was also

used to distribute questionnaires to the respondents. It was compul-
sory for the respondents to answer some items in the questionnaire
relating to aspects in management such as feasibility of business,
marketing, human resource, finance and operation. All of these as-
pects led to measuring aspect that were most needed by business players
of SME in Yogyakarta. Besides that, the questionnaire also elicited
basic information of respondents such as gender, age, ownership sta-
tus, establishment, and level of education.
Meanwhile, secondary data was also used to support the analysis.
Secondary data was also used to identify the number of SMEs in
Yogyakarta. The secondary data used came from websites and the
database of Small and Medium Enterprise Bureau in Yogyakarta.
From the secondary data, information relating to 287 business play-
ers from micro enterprises, small enterprises and medium enterprises
in Yogyakarta were collected.
Descriptive analysis was used to explain the results. The analysis
also elaborated on the training needs for micro enterprises in
Yogyakarta. This helped to identify the training most needed by the
business players of micro enterprises in Yogyakarta. Data analysis
also provided details about issues that support training in micro en-
terprises and describe the conditions of micro enterprises at that time.
4. FINDINGS AND DISCUSSION

4.1 Results from Descriptive Statistics
Getting from tabulation in figure 1 resulted proportion of gender
in SME Yogyakarta showed between male and female do not has
different number. From the total of respondents 54.2% are males
and 45.8 are females. As shown in Figure 1, the SMEs in Yogyakarta
are still managed by men usually in the creative industry while fe-
males deal with consumer products. The figure also shows that most

137
of the respondents are more than 50 years old and comprise 37.2%
of the total respondents. An interesting finding in this category is that
many of the older people in Yogyakarta are still productive and run
their own businesses with their families and most of them have al-
ready passed on their businesses to their sons. Meanwhile, respon-
dents between 40-49 years old comprised 23.2% and this is of similar
percentage to younger people between 20-29 years old (23.8%). The
age group 30-39 comprised the lowest percentage (15.8%) of all the
groups.
FIGURE 7. 1 COMPOSITION OF GENDER AND AGE OF RESPONDENT
Meanwhile figure 2 show the ownership status and level of educa-

tion. Figure 2 shows the ownership status of SMEs in Yogyakarta. As
shown, of the total respondents, 71.2% or 210 of the respondents are
owners in their business. Meanwhile, 19% or 21 of the respondents
are assigned as managers and owners. This finding means that the
owners have two roles. They control all of the business processes in
their business and also manage them to reach the goal. The others
have the role only as managers and this comprise 7.1% of the total
respondents or 21 people. This means that these people are chosen
by the owners to manage their business processes and the owners

only apply the control mechanism to value the performance of man-
agers. The education profile of the respondents showed that most of
the respondents have received secondary school and this comprised
53.2% of the total respondents. Of the remaining, 18.3% have first
degree, 13.9% have primary school education, and 9.8% have diplo-
mas. Those with postgraduate education and non-formal education
comprise 2% and 2.7% respectively.
FIGURE 7. 2 STATUS OF OWNERSHIP AND LEVEL OF EDUCATION
4.2. RESULTS AND DISCUSSION

There are still difficulties in increasing the competitiveness among
SMEs in the Yogyakarta Special Region. Information from the pro-
files of respondents showed that most of the business players of SMEs
in Yogyakarta have secondary education. The consequence of hav-
ing lower education is that the players would lack knowledge espe-
cially in business management. It is common to find business players
in SMEs in Yogyakarta in micro enterprises. Many of them run their
businesses using traditional management practices which sometimes
lead to business failures. Business players of SMEs in Yogyakarta also
still resist change and do not adapt to the new business environment.
They are afraid that when they make changes in business manage-

139
ment, it can influence their revenue, because they realise that making
changes in business management is costly. Besides, one reason is that
approximately 37% of the respondents are more than 50 years old.
This condition indicates the resistance of business players to develop
their business in facing competition.
Facing stiff competition among SMEs in the Yogyakarta Special
Region is not only about how to manage the business but also about
the speed with which to adapt to the new business environment and
making it efficient and minimising cost. The government of
Yogyakarta Province through Small Medium and Enterprise Bureau
has created programmes to train all of the business players of SMEs
in Yogyakarta. Most of the training material focused on how SMEs
in Yogyakarta manage their business. This training has to be improved
and make adjustments to meet the needs because the business players
of SMEs in Yogyakarta have different problems.
TABLE 7. 1 TYPE OF TRAINING NEEDS RELATED TO BUSINESS PROCESS

Field of Training Frequency Percentage (%)
Accounting 50 17.7
Motivation Training 58 20.4
Business Plan 61 21.6
Business Feasibility 71 25.3
Finance 67 23.5
Human Resources 59 20.6
IT 57 20.1
Leadership 63 22.3
Marketing 88 31
Operation 51 18.1
R&D 55 19.5
Table 7.1 presents the frequency and percentages of the type of

training needs related to the business process. As presented in the
table, only 50 respondents (17.7%) and 67 respondents (23.5%) need

training in accounting and finance respectively. The results show that
the business players do not need to follow training in accounting and
finance. This situation is in contrast with the reality of the situation
where many business players of SMEs always encounter difficulties
in managing their financial affairs. Most of them have problems in
managing the working capital. Managing the working capital is very
important to maintain the sustainability of a business (Brigham &
Houston, 2018). Most of the business players of SMEs in Yogyakarta
complained about capital adequacy in fulfilling their daily needs for
their business.. An analysis of the survey data reveals that the main
cause of the financial problems faced by businesses is due to the fail-
ure to keep good records of the business. They mix money which
comes from its operation with their daily needs for living. This causes
confusion and it makes it difficult for business owners to calculate the
actual revenue from the business. Training in accounting is very use-
ful in overcoming these problems. In accounting training participants
usually will be taught the method to record transactions, and also
how to prepare simple financial statements in order to control their
operating income. Unfortunately, the results of the survey showed
that only 50 people wanted training in accounting. This indicates that
training in accounting has still not become a priority for business play-
ers of SMEs in Yogyakarta. This could also be because some of them
already had knowledge of accounting and felt that such training was
not necessary.
Training in financial literacy is also important as it will lead to an
increase in accessibility to financial institutions to raise funds
(Bayrakgaroglu & San’a , 2014). Financial literacy has become a gen-
eral problem in many SMEs. Most of the staff in SMEs in Yogyakarta
also possess low level of financial literacy, especially in Sharia finan-
cial institutions. They are also not familiar with sharia products. This

141
is interesting because sharia products can become an option for rais-
ing funds. Besides that, the low level of financial literacy is caused by
lack of knowledge about financial institutions.
Meanwhile, training needs in marketing still dominated among
the business players of SMEs. The results presented in table 1 shows
that 88 people or 31% of the total respondents still need training in
marketing. Training in marketing is usually related to marketing mix.
Devising strategies through marketing has become a strategic plan
among SMEs (Sheetal, Sangeeta, & Kumar, 2012). Many SMEs rely
on their marketing strategies to expand their market. Unfortunately,
business players in SMEs still use traditional methods of marketing
and most of their strategic marketing cannot create added value be-
cause their business is conducted only locally. Marketing mix consist
of price, product, place and promotion (Kottler & Keller, 2016).Train-
ing in promotion is still the needs of the majority. Business players of
SMEs in Yogyakarta always need promotion to expand their market
for their products. The method of promotion they use today still utilises
traditional ways using direct selling and word of mouth. The techno-
logical system through online marketing can be used as a promotion
strategy to broaden the market. The survey results also showed that
only a few business players of SMEs use IT for their marketing. This
is reflected in the survey where only 20.1% said they need training in
IT. Due to the problem of age, sometimes problems are encountered
in training in IT. To overcome this problem, the owners ask their
children or another member of the family to follow the training.
However, problems exist especially on how to manage online market-
ing since the owners cannot rely on their family members. One of the
advantages of online marketing is that usually it can be used to ex-
pand the market and in this way many people can access the prod-
ucts. The expansion of the market should be followed by quality prod-

ucts and interesting package. These features can be used to compete
with competitors, and business players of SMEs must create unique-
ness and create differentiation and innovation of products. Unique-
ness and innovation will create added value for business and
sustainability for business will be well-maintained.
Interestingly, some business players of SMEs need training in pre-
paring business plans and business feasibility and the proportion who
indicated they need these are 21.6% and 25.3% respectively. This
finding is interesting since it is very rare for business players of SMEs
to write business plans for their business because many of them are
micro enterprises. Yet, this finding shows that that business players
realise the importance of making business plans. Osterwalder () said
that business plans can be used for mapping strategies. This is be-
cause business plan is made from business model which contain rev-
enue stream, cost stream and value proposition offered by enterprises.
These components can also be used to devise strategies for facing
competitors. Meanwhile, business feasibility is needed to ensure that
SMEs is a going concern and exist for long periods and gives good
profitability.
The other fields of training such as human resources are needed
for 59 people or 23.5%. Human resources is also important since one
problem in SMEs in the lack of managerial skills (Priyanath, 2006).
Lack of managerial skills has become a barrier to compete in the
industry. As shown in the table, the need for leadership training was
indicated by 22.3% of the respondents. Human resource training will
help the business players of SMEs to allocate resources especially for
labour which they need. The SMEs in Yogyakarta are mostly micro
enterprises and not labour-intensive enterprises and as such micro
enterprise training in human resources should focus on managerial
skills to improve their business. Small and medium enterprises have

143
started using human resources not only for managerial skills but also
to allocate workload among labour for cost efficiency. The survey
showed that motivation training is needed by 58 people or 20.4% of
the respondents and this is usually held by the government, and the
university through community service. Motivation training is useful
to build the spirit of entrepreneurship and help to give new insights
for proposing ideas.
TABLE 7. 2 TYPE OF TRAINING NEED WANTED BY SMES IN THE FUTURE
Field of Training Frequecy %
Finance 143 49.1
Human Resource 131 45.5
IT 114 39.6
Marketing 136 47.4
Product Development 128 44.6
Operation 140 48.1
Quality 115 39.9
R&D and Innovation 96 33.7
Green Technology 32 15.3
Table 7.2 presents the type of training needed by SMEs in the

future in the aspect of management. Among business players have
seen that they will face tight competitiveness in the future. They need
to make preparations especially to develop the management aspect
of the business. Contrasted from table 1 which financial training is
only needed by 50 people from rest of respondent, in the future among
business player realized the important to create good financial man-
agement. Creating good financial practices give benefit to allocate
resource effectively and make enterprise has lower cost. This can be-
come a tool for enterprises to compete with other business players
through efficiency, lower cost, and good financial performance. It will
raise the value of the company in the future. Other aspects such as
human resources were also indicated by the 131 respondents. Lack

of managerial skills acts as a motivation for business players to sharpen
their knowledge about managerial skills. They will compete directly
with other competitors. It is crucial for them to devise business strat-
egies to compete in the market. The management should have long
term vision to ensure the business continues to improve. Meanwhile,
the needs for training in IT also increased and this was indicated by
by 114 respondents. This finding is in line with the trends of the in-
dustrial revolution which has underlined the need to adapt technol-
ogy and the information system in their business processes. The use
of IT can contribute to the delivery of effective business processes
though it needs high investment cost. IT can influence all of the as-
pects in management and it can cause massive changes in all of the
processes. So, SMEs must be prepared to face this massive changes
from now if they want to sustain in the middle of the competition.
Interestingly, R&D and innovation are needed by 96 people, or
roughly 33.7%, of the respondents. One of the interesting findings
with respect to R&D and Innovation is that increasing SMEs’ com-
petitiveness through innovation is one of the best options. Innovation
will make the difference between one business player and another.
Green technology has also become a consideration among the busi-
ness players of SMEs. Green technology consideration is also part of
the industrial revolution trend with the combination of three bottom
line of the business which are not only about people and profit but
also the planet. The application of green technology will lead to de-
livering good quality products and most of the business players of
SMEs realise this condition to increase their competitiveness. The
business players of SMEs in Yogyakarta have also begun to think
about quality. As shown in table 2, 115 respondents said that training
in quality improvement is needed to maintain future sustainability of
business.

145
5. CONCLUSION
In facing competition among business players of SMEs in
Yogyakarta, training in the management aspect is very much needed.
The SMEs in Yogyakarta today, which still apply traditional manage-
ment, must make changes in order to survive in the competition. Many
training programmes needed for SMEs in Yogyakarta such as in fi-
nancial marketing and business motivation have been done by the
government, and many higher education institutions have also taken
the initiative to train business players of SMEs.
Improvements in technology and information forced business play-
ers of SMEs in Yogyakarta to adapt to changes swiftly. They cannot
rely on traditional management which they have done. To expand
the market and increase the competitiveness among business players
of SMEs in Yogyakarta need a lot of training. Findings from survey
showed that in the future business players need training not only about
the management aspects but also training in the improvement of
quality and applying green technology to face the industrial revolu-
tion. The goal of this training is to increase competitiveness among
the business players of SMEs in Yogyakarta so that they are able to
face the global changes in the business process in the future.
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08
C H A P T E R
A GAP ANALYSIS OF SMEs’ TRAINING

NEEDS AND KNOWLEDGE OF CHAL-
LENGES TO ENTER THE GLOBAL
MARKET”
Olivia Fachrunnisa, Ardian Adhiatma
Rizal Yaya, Rahma Yudi, and
Norhayati Mohd Alwi
ABSTRACT
This chapter aims to assess the perceptions of SME on their own training
needs by measuring whether gaps exist between the perceived state of train-
ing (the current situation) and the perceived future situation. Additionally,
this chapter also identifies the knowledge needed to enter the global market.
Data were collected from 374 SMEs by using questionnaire and analysed by
using descriptive statistics. The overall findings of the study suggest that train-
ing providers should focus more on the specific situations of the enterprise
while designing the programs such as Financial Management, ICT Facilities
and usages, market-oriented and product quality development. The ‘one-
size-fits-all’ theory will not be a suitable philosophy for SME training. The
findings of the positive relationship between enterprise characteristics and
perception of training need becomes of special relevance for designing con-
text-specific programs for SMEs, especially with regard to knowledge of chal-
lenges to enter the global market. In fact, this is a field that calls for a lot of
creativity and innovation on the part of the designers of training programs
for SMEs.
KEYWORDS: training need analysis, SMEs, context-specific program of train-
ing
1. INTRODUCTION
The availability of SMEs in developing countries has been argued
as the main pillar for their economic growth. With the increased at-
tention from governments, efforts to encourage SMEs in running their
businesses have become a key to improving the living standards of a
nation such as Indonesia. This is because the SMEs have supported
jobs availability and income source for the community (Manimala &
Kumar, 2012). Through the empowerment of SMEs, poverty and
unemployment can be reduced because each UKM absorbs 3-4 work-
ers. But there are still some weaknesses in these small companies and
one of these weaknesses is that they have not been able to compete in
the global market (Moeuf, Tamayo, Lamouri, Pellerin, & Lelievre,
2016). The competitiveness is caused by SMEs that still have limited
knowledge access in order to increase capacity and access to global
markets. For example, it is difficult to obtain raw materials at com-
petitive prices with good quality, limited access to marketing, and lim-
ited financial access. Therefore, to strengthen the competitiveness of
SMEs in order to survive in the long run, a strategy that is unique in
terms of training design is needed. One of the keys to succeed in the
training design is the availability of Training Needs Analysis (TNA).
This chapter will contribute to efforts to maintain the sustainability
of SMEs by conducting training needs analysis. Training needs analysis
is an analysis to identify the current and future skills, knowledge, and
abilities (SKA) (Onkelinx, Manolova, & Edelman, 2016). In this chap-
ter, the training needs analysis is oriented towards SKA that is needed
to scale up the business. Research by Badini, Hajjar, & Kozak (2018),
Ezzahra, Mohamed, Omar, & Mohamed (2014), Fraser (2013) and
Holladay & Quinones (2008) explain that some skills that must be
possessed by SMEs consist of: skills in managing products or services,
pricing strategies, selection of place or target market, promotion skills,

149
and managing people (managerial skills). Through product and ser-
vice innovation, SMEs would be able to meet quality equivalent to
global market standards. Pricing skills as a strategy for determining
selling prices becomes an important thing to compete in the global
market. A place strategy skills for selecting market locations is needed
to determine target markets. Promotion skills are needed to compete
in the global market through promotions (online & offline) while mana-
gerial skills (managing people) such as the selection of human re-
sources who have the competence to manage competent/superior
products and services are also needed. Then, it is supported by the
right financial management skills (planning, budgeting, control, man-
age, audit/inspection, access to capital disbursement and financial
storage). Performers of SMEs are required to have the skills in order
to increase the innovation and creativity to compete in the global
market, increase the competency and technology of HR, and also
market contribute to expansion. In addition, in order to improve glo-
bal market accessibility, SMEs must identify what kind of knowledge
is needed.
Research (Dominguez & Mayrhofer, 2017) shows that SMEs have
difficulties to access the global market due to lack of knowledge about
product and service innovation, improving financial management, and
access to capital, HRM training and development (lack of manage-
ment skills and training), ITC application (application of appropriate
technology), and also market expansion (how to access international
markets). Therefore, this chapter also conducts assessments on the
extent to which SMEs have knowledge about the challenges of enter-
ing the global market. This research becomes urgent because the re-
sults of TNA on SKA to increase business capacity and knowledge
about the challenges of entering the global market is expected to help
the government or stakeholders in designing training programs in the

future. Moreover, research on TNA in SMEs mostly focused on trainer
requirements, timing and duration and the increase of knowledge of
employees (Alvarez, Zamanillo, & Cilleruelo, 2016; Ezzahra et al.,
2014; Holladay & Quinones, 2008; Kalinic & Forza, 2012), whereas
in this chapter, we focus on the development of TNA to analyse which
course content gaps exist and why they exist.
Hence, the research questions are as follows: (1) Which gaps exist
between the current needs and the future needs of training? (2) What
kind of knowledge is needed to enter the global market? The con-
structs under investigation include the content of training, which re-
fer to accounting, achievement needs, business plan, financial, hu-
man resources, ICT usage, leadership, marketing, manufacture, re-
search, and career development. The research constructs also include
the existing educational qualifications, gender, organizational tenure,
and family ownership. The rest of the paper is organized as follows.
Section 2 reviews the literature regarding training needs analysis and
the challenges to access global market. Section 3 explains the research
method. Section 4 presents and discusses the findings while conclu-
sion and recommendation are provided in section 5.
2.1 Training for SMEs
Training refers to a series of formal and informal learning pro-
cesses or transfer practice and knowledge related to skills needed by
prospective workers, and new and old workers, to improve their per-
formance in completing work tasks (Fraser, 2013; Koh, Gunasekaran,
& Cooper, 2009). For SMEs, they need special training such as form-
ing business models that are in line with global market dynamics,
mastery and application of technology, increasing the competency of
SMEs performers and workers, access and financial management, so

151
that they can simultaneously improve performance and competitive
advantage in the global market. Research (Kato & Charoenrat, 2018;
Pati, Nandakumar, & Ghobadian, 2017) proves that training for SMEs
helps improve the performance of SMEs and makes them creative
and innovative, better prepared and able to compete in the global
market, able to implement business knowledge continuously through
sharing knowledge and learning by doing.
The study by Li, Wang, Jaarsveld, Lee, & Ma (2018) describe hu-
man resource management practice through training in the form of
high involvement work systems to generate innovation by involving
participants to interact collectively in exchanging experiences and
sharing knowledge. Research results by Johnson (2016) shows that
various training conducted on SMEs such as training on market ori-
entation, networking or collaboration, risk-taking or risk management,
problem-solving skills, learning organizations have a positive effect
on improving the innovation ability of SMEs in order to improve
their competitiveness in global markets. Rakićevi'c, Omerbegović-
Bijelović, & Le?cić-Cvetković (2015) explained that the supply chain
management training for SMEs had an impact on the readiness and
capacity of applying technology, and subsequently helped increase
market share. Training on SMEs’ performers had an effect on the
growth of market share, expanding business partners, relations and
prospects towards prospective customers through the SMEs commu-
nity (Oparaocha, 2015). Garcia-Perez-de-Lema, Madrid-Guijarro, &
Martin (2017) in their study related to university training on SMEs
through collaboration found that the training was able to shape tech-
nological knowledge transfer, encourage innovation and performance,
and motivate SMEs to engage more actively in finding solutions to
various problems faced in business competition. So, with these vari-
ous combinations of training materials, this will lead SMEs to be ca-

pable in facing environmental dynamics.
2.2 Training needs analysis

Training needs analysis refers to the initial stage carried out before
training is implemented, and it is a form of an integrated training
framework with the purpose of knowing the overall illustration of
materials, the purpose of delivery or allocation, the time of delivery
of each material, and learning strategy which can then be applied in
training, so that the training provides benefits to all training partici-
pants. Gebert, Buengeler, & Heinitz (2017) also explain that training
needs analysis becomes a constructive method used in the analysis
that is useful for identifying various efforts made to improve perfor-
mance or strategies needed for utilizing appropriate technology.
Training needs analysis has several objectives, such as to collect
information about skills, knowledge and comfort feeling for partici-
pants in always wanting to improve innovation, and face the chang-
ing dynamics of the global market. Stouten, Rousseau, & Cremer
(2018) compiled information related to the performance standards
that will be needed and the performance of real standards that exist
today and these variety of information is transformed into opera-
tional details, such as knowledge acquisition and application of tech-
nology. Alkhoraif & McLaughlin (2018) encouraged the involvement
and support from stakeholders (Rakićevi'c et al., 2015) and helped
provide data needed for planning the training activities.
Research conducted by Buckley (2016) showed that training in
SMEs has a positive effect on increasing creativity, development, and
sustainability of SMEs. Meanwhile, Raffie & Coff (2016) showed that
training needs analysis contributes to the growth of entrepreneurial
skills by increasing the competitive advantage in the international
market. Meanwhile, Putra & Cho (2018) in their research on several

153
small businesses (small restaurants and small hospitality businesses)
found that the existence of training needs analysis had an impact on
leaders and employees’ perspective, in the form of unique operational
strategies, such as communication, delegation of tasks, and sharing
experiences more effectively. Furthermore, the research findings of
Giotopoulosa, Kontolaimou, Korra, & Tsakanikas (2017) proved that
training needss analysis in SMEs helps to identify any ICT needs that
are relevant to be adopted and applied as a strategy to enter the inter-
national market. Research on personal training initiatives by Frese,
Hass, & Friedrich (2016) also found that training needs analysis in
SMEs will contribute to the identification of profiles, the training that
is needed, skills training methods that are in line with the competency
fields of SMEs, especially readiness in facing global markets, rapid
change of business environment, taking risk, and the importance of
fostering a spirit for teamwork, and forming proactive behavior (in
innovation activities, planning, time management and goal-setting).
The training needs analysis helps the SMEs to improve the basic
skills needed in order to apply knowledge and technology, and also
produce product and service innovations that have more value in the
global competitive market (Al-Awlagi, Aamer, & Habtoor, 2018).
Through the introduction of training needs, SMEs performers are
aware of the importance of knowledge to accelerate the growth of
competitiveness. SMEs owners can always innovate through continu-
ous improvement, increase the sharing knowledge and experience,
and also skills (e.g. reducing waste time and training costs) so as to be
able to penetrate the global market expansion.
2.3 Knowledge about Global Market

Various challenges of SMEs in dealing with global markets in-
clude the need to develop creativity and innovation of products and

services, training and development in HRM and ICT, and market
expansion. As a result of the increase in the competitiveness of SMEs
in Indonesia they face various problems including infrastructure and
government access to business licenses, and bureaucracy that have
not supported SMEs. Although SMEs are considered capable of sur-
viving in the face of the global crisis, the actual conditions faced are
more severe. Other problems faced by SMEs include the existence of
trade liberalization, AFTA, MEA, and the ASEAN Community. with-
out prior consideration of the readiness of SMEs to have competitive
advantage in these conditions.
To sustain in the global market, the performers of SMEs are re-
quired to have several abilities. The SMEs’ capability needed to enter
the global market is creative and innovative skills, and to produce
export-oriented products and services. Performers of SMEs must be
skilled at making direct marketing strategies abroad, and establishing
networking or collaborations among suppliers, SMEs, and exporters.
Furthermore, SMEs must also have the skills to establish networking
with international quality product or service designers. In addition, it
also requires unique packaging and branding skills, fostering global
quality of human resources and, of course, knowledge management
to adopt appropriate ICT for SMEs (to improve the quality of prod-
ucts and services/e-commerce for market expansion).
Knowledge of cognitive skills and business people skills, especially
in SMEs, are needed to be ready to compete in the global market.
Knowledge becomes important to support communication and es-
tablish relationships with business partners, prospective buyers, and
customers, and providers of goods and services (Giuri, Torrisi, &
Zinovyeva, 2008). The importance of knowledge about international
marketing is needed by SMEs as a tool that allows SMEs to engage
and interact in teamwork (Alvarez et al., 2016). Moreover, the ability

155
for knowledge sharing and the use of ICT are needed so that they are
able to manage their business and increase their market share in the
dynamics of the global business environment. It can be said that knowl-
edge is a strategic point that supports SMEs to achieve competitive
advantage through creating value through innovation (Kmieciak,
Michna, & Meczynska, 2012). Therefore, it is very necessary to have
a match between the material in the training session and the knowl-
edge needs of the SMEs.
The content of training course and knowledge acquisition, in the
form of training provided in work assignments, both interactive and
non-interactive, can help employees to improve performance. Through
knowledge acquisition, expertise will shape the readiness for changes
in work assignment completion (Tamm, 2018). The study conducted
by Grant & Baden-Fuller (2018) described the training course from
the strategic aspect, which focuses on developing competencies through
the implementation of knowledge needed such as managerial plan-
ning, financial, leadership, research and career development.
Lahneman (2013) states that training courses emphasize more on the
motivation of applying management standards to improve business
reputation towards stakeholders and increase market share. In his
study of lean manufacturing, Manei, Salonitis, & Xu (2017) focuses
on Lean, which is related to knowledge acquisition in ICT usage such
as socio-technical system, to achieve output desired with the input
used (less time, less space, less human effort, less machinery, less ma-
terial, and less cost). This is in line with the research of Kumar &
Kumar (2014) that explained training with more emphasis on appli-
cations from lean manufacturing through several levels, namely, mana-
gerial, resource, knowledge, problems, employment/workers, finan-
cial management and best experience. Hence, SMEs that are able to
map training needs to enter the global market will have the knowl-

edge needed to enter the global market. They will tend to be able to
do training needs analysis, understand the shortcomings and poten-
tial that allows them to enter the global market.
2.4 Enterprise demography and perceived training

needs
ORGANIZATIONAL TENURE / ENTERPRISE TENURE AND PERCEIVED
TRAINING NEEDS
Research on enterprises demographic on perceived training needs,
(Gerpott, Lehmann-Willenbrock, & Voelpel, 2017) concludes that age
of enterprises determines the level of experience, skills, experts, prac-
tical, and knowledge exchange to sustain their competitive advan-
tages. So that intergenerational learning is needed by specific knowl-
edge content, adapt to the training method. Studies (Mubarik,
Chandran, & Dvadason, 2018; Panagiotakopoulos, 2011; Raffie &
Coff, 2016) have described the longer tenure of SMEs which affect
the increase of awareness of training needs for its members. Examples
of the increase in awareness are relevance of work experience, tools
to create innovation, ideal competence, employee commitment and
satisfaction, growth in professional skills, problem-solving skills, and
employees’ work engagement. It can be said that the longer the SMEs
stand, the more they will affect their understanding of mapping the
training needed in the face of global market competition.
GENDER OF ENTERPRISE OWNERS AND PERCEIVED TRAINING NEEDS

Gender of enterprise owners determines the organizational suc-
cess through leadership style, and male and female leadership style
skills, to achieve higher performance (Dwivedi, Joshi, & Misangyi,
2018). Various views of the frequent failure of female CEOs make
them more aware of the need for training to meet the expectations of
being more effective leaders. Male entrepreneur owners' leadership

157
is more oriented to competitiveness, freedom, and power (Javalgi &
Todd, 2011) whereas female owners’ leadership is oriented towards
enterprise-based collaboration, compassion, thoughtfulness, and
warmth (Orser, Riding, & Weeks, 2018; Williams & Gurtoo, 2011).
Formal and non-formal training are needed to survive in their busi-
ness, and also to access institutional credit and business communities’
support.
FAMILY-OWNED OF ENTERPRISE AND PERCEIVED TRAINING NEEDS

Research by Saxena (2013) shows that family enterprises in India
understand the need to improve their skills, education, and survival
training in business to face the rapid change in global markets. There-
fore, the family-owned enterprises realise the training needs related
to special knowledge and skills (knowledge acquisition, knowledge
transfer, competitive advantage, tacit to explicit knowledge, etc). Stud-
ies on several family businesses in Canada (Konopaski, Jack, &
Hamilton, 2014) show that the owners of family business learn about
sustainability in their business to survive in the global market chal-
lenges, and training forms are needed to deal with the past, present,
and future challenges and opportunities. Training needs assessment,
such as creating and developing future goods and services, operation
process effectiveness, managerial capability for enhancing human
capital, financial capital, and network relationships strongly affect the
capability for entering the international business ecosystem (Padachi
& Bhiwajee, 2016; Sciascia, Mazzola, Astrachan, & Pieper, 2012).
EDUCATION QUALIFICATIONS AND PERCEIVED TRAINING NEEDS

Research on the SMEs in the agricultural sector (Sandhu, Hussain,
& Matlay, 2012) found that the educational background of SMEs
performers is a determining factor for entrepreneurship education

and training needs. The educational levels of the SMEs performers
influence their motivation to develop theories that they understand
related to design, setting goals, adapting to the application of knowl-
edge and ICT, how to do something better in practical work systems
(transforming knowledge becomes easier to apply; learning by doing;
focus on practical actions in completing tasks) through action-based
training (Gielnik et al., 2015). Coaching or training course forms are
the determining factors in building a business ecosystem with increased
knowledge creation needed in the global market competition. The
educational qualifications possessed by SMEs, for example, in busi-
ness management, shows that they are increasingly able to under-
stand the importance of the course and development of business skills,
finance, management skills, business strategies and HRM skills (Basu,
2014). Research on business management education conducted by
SMEs performers (Duh & Belak, 2008; Mellish, 2016) influences the
perceptions of SMEs on the importance of training needs for its mem-
bers.
3. METHODOLOGY
3.1. Measurement
The main research instrument used in collecting primary data for
this study was survey questionnaire. Most SMEs operating in Central
Java, Indonesia has much family-owned businesses. The authors with
the help of research assistants mostly made use of personal contacts
to approach owner managers who became the main participants in
the study. It can thus be said that convenience sampling was used for
this study whereby those who were willing to give information were
invited to fill in the questionnaire.
Samples from 374 SMEs owners were selected using accidental
sampling and 510 questionnaires were distributed directly to respon-

159
dents who were selected by officers who had been trained first. 425
answers were received or had a response rate of around 83.33%. On
the evaluation of the validity of the data, it was found that 374 were
valid and reliable and were used as the basis of analysis (around 73.33
percent). This might be considered a good response rate given the
sensitive nature of the topic, the nature of the problem under study,
and the barriers the management might have regarding the survey.
The main construction of the marketing challenge for this study was
measured by a Likert type scale with 5 point scales ranging from very
low (score 1) to very high (score 5).
Section A dealt with the general background of the business con-
cern and consisted mostly of multiple choice questions where owner
managers as respondents were called upon to choose the alternative
which best described the characteristics of the business concern such
as gender, educational level, organizational tenure, and number of
staff. The information mostly pertained to training needs, type of
training that they have attended, current needs of training, and fu-
ture needs of training.
Section B attempted to gauge the perception that owner mangers
had with respect to the knowledge needed to enter the global market
together with an in-depth investigation of the barriers that they face
with respect to being global. The parameters investigated were in
line with the existing literature as previously discussed. Except two
open-ended questions, the sections gauged the knowledge on the chal-
lenges to enter the global market through a five-point Likert scale
rating (very low-very high).
As Panagiotakopoulos (2011) attributed the different needs of train-
ing in SMEs to bare ignorance among owner managers of such busi-
nesses, the first heading had to do with assessing the current needs of
training and future needs of training. The second heading thus gauged

the extent to which SMEs found that entering the global market need
adequate knowledge which they may not have from such training
they attended. Third, SMEs are known to evolve in difficult environ-
ments where they struggle to keep pace with the fast changing market
conditions (Kerr and McDougall, 1998; Saru, 2007). The last part of
this section thus assessed the presence of any formal training analysis
among SMEs.
3.1 Data analysis techniques

Given the nature of the survey data, this chapter used exclusively
non-parametric tests to analyze the main needs of training content
among the Indonesian SMEs. The perceptions to training are gener-
ally viewed as positive where the workforce will become more pro-
ductive and also produce quality products and services. First, the analy-
sis section attempted to analyse the current needs of training and
future needs of training among the Indonesian SMEs by using de-
scriptive statistics. To facilitate the descriptive analysis, respondents'
answers were categorized in the "no" category (accommodation from
"no" and "definitely no"), not sure, and "yes" category (accommoda-
tion from "yes" and "definitely yes").
4. FINDINGS AND DISCUSSION

4.1. Nature of business, workforce and legal entity
From the 374 respondents, 20 percent were from the manufactur-
ing sector, while the service sector represented 80 percent of the
sample. This overrepresentation of the service sector is in line with
the national statistics and SMEs tended to concentrate on the tradi-
tional markets. Forty-one (41) percent of the respondents were own-
ers of SMEs and would thus benefit if they also ensured that they
attended training to improve their skills.

161
Overall, 87.1 percent of the sample of SMEs was organized as
family-owned business, while 8.6 and 4.3 percent were established as
partnerships and companies, respectively. As expected, family-owned
business tended to employ fewer employees, and as employment is a
proxy for size, it may be concluded that this form of business entity
tended to remain small. All of the samples engaged less than 25 em-
ployees. Previous studies have shown that they are the ones that ne-
glect the best business practices and training becomes part of them
(xx). Summary of the results is presented in Table 1
TABLE 8. 1 TABLE 1 DEMOGRAPHIC OF RESPONDENTS
Gender Male Female Total

212 162 374
% 56.7 43.3 100
Education Non-formal Primary Secondary Diploma First Post 0
Degree Degree
2 28 201 35 98 10 374
% 0.5 7.5 53.7 9.4 26.2 2.7 100
Organizational 0-5 6-10 years 11-20 years > 20 0
Tenure years
183 125 12 78 374
% 48.9 33.4 3.2 20.9 150
Status Owner Owner & Manager Other 0
Manager
155 171 32 16 374
% 41.4 45.7 8.6 4.3 100

TABLE 8. 2 TYPE OF SECTOR
TYPE OF SECTOR Number Percentage Manufacture Service Total
Consumer 97 25.94
Constructions 2 0.535
Hotel and Tourism 3 0.802 102
Industrial 64 17.11
Mining 0 0
Plantation 10 2.674 74
Properties 7 1.872
Technology 3 0.802
Trading/Services 177 47.33
Transportation 11 2.941
0 0 198
TOTAL 374 100 74 300 374
Manufacture (%) 19.79
Service (%) 80.21
4.2 Attended training

The survey result shows that all of the respondents have attended
certain type of training; 15 percent on vocational, 62 percent on the
job training, and 23 percent on training college. Hence, during their
tenure, the owners of SMEs had attended such training through vari-
ous methods.
TABLE 8. 3 TYPE OF ATTENDED TRAINING

Course Content Number Percentage
1 Vocational 57 1&2 15
2 On the job Training 233 2&3 62
3 Training College 84 23
4 Others 0
5 Not give response
TOTAL 374 1 1 100

163
4.3 Training Needs Analysis
Training needs analysis is an attempt to get information about what
content or topic they need currently and in the future. As reported in
table 4, it is interesting to note that more than 79 percent of the re-
spondents need training on finance. An attempt is made to establish
whether there is a positive relationship among those who attended
training, the current needs of training, and the future needs of train-
ing.
TABLE 8. 4 COMPARISON BETWEEN CURRENT NEEDS AND FUTURE NEEDS OF TRAINING

Course of Content Category No Not Sure Category Yes
(%) (%) (%)
Needs CN FN CN FN CN FN
Finance 10.2 8.56 12.83 12.3 77.01 79.14
Human Resource 12 9.63 16.04 14.4 71.93 75.94
Information Technology 11 9.36 14.97 12.6 74.06 78.07

Marketing 14.4 13.6 23.26 17.1 62.3 69.25
Product Development 11.8 11 15.24 13.6 72.99 75.4
Operational Management 12 11.5 18.45 15 69.52 73.53
Quality Development 9.63 9.89 14.17 12.3 76.2 77.81
Research and Development 10.7 11.5 18.98 15 70.32 73.53
Sustainability 11.5 14.2 23.8 18.7 64.71 67.11
*)
CN: Current Needs
*)
FN: Future Needs
From all of the respondents' answers, it can be said that the course
content, according to most of the SMEs performers, is current needs
training about finance (77.01 percent), followed by quality develop-
ment, information technology, product development, and human re-
source management. While for future needs respondent, the content
of training about finance is also the highest needed for future train-
ing needs, namely 79.14 percent, it is then followed by information
technology and quality development.

4.4 Knowledge about entering global market
Based on the 374 responses, 33.42 percent argued that they need
knowledge about competition and working capital to be confident in
entering the global market. To support this strategy, it is an undeni-
able fact that training about competition and working capital is a
prerequisite for SMEs to go global.
TABLE 8. 5 KNOWLEDGE ON CHALLENGE TO ENTER GLOBAL MARKET

Highest
Knowledge Lowest (1) 2 3 4 TOTAL
(5)
Opportunity 58 46 130 82 58 374

Competition 71 39 119 83 62 374
Marketing Channel 42 63 136 79 54 374
Market Research 55 60 123 78 58 374
Working Capital 58 52 121 80 63 374
Management Commitment 54 51 125 86 58 374
Meeting Importers 54 53 139 69 59 374
Adapt Products 54 48 137 80 55 374
Market System 37 51 149 93 44 374
Culture & Language 55 40 141 84 54 374
Export Procedure 57 41 133 91 52 374
Promotion & Assistance 41 47 156 79 51 374
Knowledge of ICT 27 50 166 87 44 374
ICT Facilities 28 44 155 93 54 374

165
TABLE 8. 6 RANK OF KNOWLEDGE NEEDED TO ENTER GLOBAL MARKET
Rank
Knowledge %
1
ICT Facilities 39.30
2
Promotion & Assistance 38.77
3
Market Research 38.50
4
Adapt Products 38.24
5
Export Procedure 38.24
6
Meeting Importers 37.43
7
Working Capital 36.90
8
Opportunity 36.63
9
Marketing Channel 36.36
10
Culture & Language 36.10
11
Knowledge of ICT 35.56
12
Competition 35.03
13
Management Commitment 34.76
14
Market System 34.22
Table 6 shows some levels of knowledge needed by respondents to

enter the global market. If we combine scales 4 and 5 (which we
categorized as highest), the categories of knowledge needed by re-
spondents to enter the global market are ICT facilities, promotion,
assistance, market research, adapting products and meeting import-
ers. So, if it is further compiled, then SMEs want to get training in
finance, marketing, and ICT in order to be able to enter the global
market.
TABLE 8. 7 TABLE 6 SUMMARY OF FINDINGS

Course of Content Knowledge to enter global market
CN FN
1 Finance Finance 1 ICT Facilities
2 Quality Dev Information Technology 2 Promotion and assistance
3 Information Technology Quality Development 3 Market Research
4 Product Development Human Resource Management 4 Adapt Products
5 Human Resource Management Product Development 4 Export Procedure
6 Research and Development Research and Development 4 Meeting Importers
6 Operational Management Operational Management 5 Working Capital
7 Sustainability Marketing 6 Opportunity
8 Marketing Sustainability 6 Marketing Channel

Based on table 6 above, it can be concluded that at present or in
the next five years, the need for current training content is on Finan-
cial Management while to be confident to enter the global market,
SMEs need knowledge of ICT and marketing management. There is
no significant gap in the types of training material needs in the present
and future. The five major topics that are needed by SMEs are Fi-
nance, ICT Usages, Marketing Management (including market re-
search, meeting importers, promotion and assistance) and product
quality development.
FIGURE 8. 1 KNOWLEDGE AND TRAINING NEEDS TO ENTER GLOBAL MARKET
5. CONCLUSION
Most of the SMEs in Central Java Indonesia perceive that the
training needs of Financial Management are urgent both now and in
the future. This becomes a reason why SMEs usually simply carry
out financial activities. Moreover, limitations on the ability to con-
duct financial management well and neatly become one of the rea-
sons why the level of access to finance is low. The next training mate-
rials that become a necessity for SMEs are ICT and Product Quality
improvement. This is certainly in line with the increasing pressure of

167
globalization and the information era that requires that SMEs have
ICT capabilities and improve product quality to compete in the glo-
bal market. In order to support their intention to enter the global
market, SMEs need to strengthen knowledge in the fields of ICT
facilities, marketing management, and product development. Hence,
this result has an impact on the managerial aspects for the govern-
ment and parties who are concerned with improving the quality of
SMEs, namely, designing the training with financial management
content, ICT, and marketing.
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09
C H A P T E R
Examining Issues and Challenges in

Integrating SMEs Into Global Value
Chains: Malaysia Evidence”
Khairunisah Ibrahim, Moha Asri Abdullah, Maliah Sulaiman, Ardian
Adhiatma, and Royyan Ramdani Djayus
ABSTRACT
Small and medium enterprises (SMEs) are considered as the engine of
economic growth as they make a huge portion in the economic pie both in
the developed and developing markets and in terms of employment and
intergenerational sustainability, as well as economic growth. The develop-
ment and growth of SMEs in Malaysia has significant impact in boosting
productivity and increasing employment at national, regional and global
markets. Increasingly globalized links in production networks or global value
chain provide opportunities for SMEs to upscale their business models and to
grow across borders. This chapter aims to examine the issues and challenges
faced by SMEs in Malaysia in becoming more competitive and expanding
their businesses into the international market. The survey was conducted us-
ing structured questionnaire that involved two sections of 18 and 16 ques-
tions in each section respectively in terms of issues in business and challenges
in the global trade market. Data collected from 344 respondents were then
analyzed based on descriptive statistics using SPSS software. Findings shows
that Malaysian entrepreneurs are highly concerned with the future economic
and cost uncertainties as well as the rapid technological changes around the
world, including digital economy, e-commerce, and digital trade zone. In
competing globally, SMEs in Malaysia are experiencing challenges in having
adequate knowledge and information pertaining to international ventures,
including knowledge on the international market opportunities, information
on the marketing channels and networks, foreign market system as well as
adaptation of products to foreign markets. Discrepancies in feedbacks are
also identified with regards to the distinct personalities and demographics of
the SMEs. This chapter provides crucial information to regulators, policy makers
and SMEs in Malaysia in enhancing SMEs participation in the global value
chains.
KEYWORDS: Global Value Chains, Internationalization of SMEs, Issues and
Challenges, Demographic factors, Malaysia, Survey
1.0. INTRODUCTION
The development and growth of SMEs in Malaysia has signifi-
cant impact in boosting productivity and increasing employment in
national, regional and global markets. Increasingly globalized links
in production networks or global value chain provide opportunities
for SMEs to upscale their business models and to grow across bor-
ders. Recently, in Malaysia, the introduction of the e-fulfillment hub
and e-services platform is set to change e-commerce activities. The
world’s first Digital Free Trade Zone (DFTZ) will facilitate SMEs to
capitalize on the convergence of exponential growth of the internet
economy and cross-border trade. DFTZ is also expected to increase
the SMEs goods exports to USD38 billion, create over 60,000 jobs
and support US$65 billion worth of goods moving through DFTZ by
2025. This is the primary purpose of DFTZ. It is simplifying e-com-
merce by bringing together government agencies, e-marketplaces,
logistics and payment providers all on one platform.
Despite the continuous initiatives and encouragement given by
the regulators in Malaysia, the country is still encountering various
issues and challenges pertaining to trading in the global markets. The
government of Malaysia always encourages SMEs to go global by

173
providing assistance such as financing and training, but these govern-
mental assistances are not accessed by all SMEs. One of the main
reasons was identified as having limited or no knowledge and aware-
ness of those assistance programmes, and the application procedure
for such facilities (Tambunan, 2009). Similarly, Damuri (2006) identi-
fied several issues faced by those export-ready SMEs such as getting a
license for importing, tax and tariff, payment of fees, procedures for
inspection and release of goods at custom department.
As Asia’s production network grows, products traded in the inter-
national markets have shifted from capital and final goods to parts
and components. This is a new paradigm for the SMEs to be involved
actively. Expanding production networks across the borders will en-
courage SMEs especially those in the related industries such as parts
supplies. Hence it is crucial for the export ready SMEs in Malaysia to
look beyond exporting finished products, but to capitalise on the glo-
bal supply chain and production networks.
Apart from the external challenges, it is also crucial for SMEs to
identify their own strengths and weaknesses in the global value chains
and have awareness and understanding of the structure and dynam-
ics in venturing into the global market. Unfortunately, this awareness
and understanding of SMEs are insufficient and as a result the ma-
jority of them fail to identify their competitive strengths within the
global market. Consequently, the SMEs are unable to define their
business model effectively to achieve the firm’s competitiveness.
In line with this, this chapter aims to examine the issues and chal-
lenges faced by Malaysian SMEs in, general, as well as the challenges
faced in becoming more competitive and expanding their businesses
into the international market, specifically. This chapter will provide
crucial information to regulators, policy makers and SMEs in Malay-
sia in enhancing SMEs participation in the global value chains.

Debates on the issues and challenges faced by SMEs around the
world are common in the literature, though the extent and nature of
the challenges may differ across countries. Ahmad and Seet (2009)
stated that the failure rate of SMEs in Malaysia is more that 60 per-
cent which implies that the SMEs in Malaysia are facing severe issues
and challenges. Social barrier has been observed as the main barrier
to achieve competitive advantages by SMEs in a study by Alam et. al.
(2011). Saleh and Ndubisi (2006), in their study, mentioned that one
of the key challenges faced by Malaysian SMEs is high levels of inter-
national competition due to globalization including competition from
AFTA member countries, and from MNCs or rapidly developing new
competitors (e.g. enterprises from China and India).
Access to financing is considered as the most commonly discussed
challenge experienced by most SMEs around the world. Smit and
Watkins (2012), in their study, mention lack of access to credit as the
most discussed challenges in the previous literature. It has been ar-
gued by Teoh and Chong (2008) that the major obstacles to entrepre-
neurship development are access to finance, access to formal business
and social networks (see Khalique et. al., 2011). Difficulty in obtain-
ing funds from financial institutions as well as from the government
was identified as one of the key problems faced by Malaysian SMEs
(Saleh and Ndubisi, 2006).
Apart from the competition and access to financing, having ad-
equate knowledge and relevant skills are also being persistently pointed
out by many researchers. According to the research by Salikin, Wahab
and Muhammad (2013), SMEs are facing non-financial constraints
more than financial constraints. SMEs often ignore management skills
because they feel so confident in their experience and just rely on it.
However, in this chapter, management skills is considered as general

175
in some specific areas and not in detail. From previous studies it has
been found that small organizations fail to develop skills, knowledge
and competencies among workers in the organizations (Omar,
Arokiasamy & Ismail, 2009). Marketing skills and various issues in
marketing is a challenge for SMEs which has been found responsible
for many of SMEs failure (Scheers, 2011). Other studies also showed
that there is a high failure rate among SME owners while extending
their products and at the same time to sustaining in terms of prod-
uct/service quality (Arasti, Zandi and Bahmani, 2014). Moreover,
Dato’ Hafsah Hashim, the CEO of SME Corp. Malaysia (2015), high-
lighted the need for SMEs to restructure their financial systems, im-
prove management skills and emphasize on high quality products/
services to ensure SME survival.
Moreover, the complex financial issues faced by SMEs are also
due to their insufficient knowledge related to business management
which includes developing good business plans. Financers find it dif-
ficult in grading the SMEs in terms of their credit-risks as most of the
SMEs lack information on enterprise (Berry, Goto & Taylor, Sweeting,
2002). It is also important to prepare some expertise in management
to ensure the growth of SMEs. It has also been argued that if the
business is managed properly even without adequate financial sources,
SME owners can convince banks in acquiring business funds (Islam,
Khan, Obaidullah & Alam, 2011). In some of the Asian countries,
short term objectives and investment have been identified as man-
agement issues among SMEs and the issues are perceived as cost by
the management, whereas, they should find the issues as opportuni-
ties (Thaker & Mohammed, 2013).
In today’s world the digital platform has become essential for SMEs
in developing and establishing networks, contacts, and channels in
the field of marketing. Access to digital platform is also a challenge

for SMEs to enter the Global Value Chain (GVC). The local SMEs
can explore the opportunities to learn and upgrade industries through
the rapid innovation of their products and their short life cycle when
they play a role in the digital world of GVC (Sturgeon and Kawakami,
2010). Hashim and Wafa (2002), in their study, found that the main
problems faced by SMEs in Malaysia are the lack of knowledge re-
garding marketing techniques, branding, customer loyalty, and also,
the lack of good contacts with other local and international enter-
prises (Khalique et. al., 2011). Earlier in 2006, Saleh and Ndubisi
identified limited access to better technology and ICT as one of the
key challenges faced by the Malaysian SMEs. While trading prod-
ucts, it is essential to ensure the quality and technical requirements of
the market where the products are to be exported. These require-
ments include packaging and labelling, style, taste, durability, adapta-
tion to the market, and quality. Product problems have been found to
be related to the aspects while trading in the global market (Scheers,
2011). Two main export problems faced by SMEs have been found to
be lack of information and knowledge in marketing. The reason be-
hind these problems involves competition in the global market, man-
agement expertise to generate sales in foreign markets, insufficient
business practice and poor knowledge in the export markets.
Economic factors also have influence on the performance of SMEs
and is one of the issues for them as well. It is likely to observe more
product innovations during a recession than in a boom (Aghion and
Saint Paul 1993) as a way of effectively innovating out of recession.
Empirical research by Geroski and Gregg (1997) implies that a large
number of firms bring forward investments in R&D, and product
innovations, though investments in all forms of capital typically falls
during recessions. In a study conducted in Lithuania, Europe, it was
found that macroeconomic indicators such as inflation, average wages,

177
the number of enterprises, or the monetary base are not statistically
significant and have no strong correlation with corporate profitabil-
ity. On the other hand, unemployment, taxes, companies’ number,
VILIBOR rate, wages and inflation have a strong negative correla-
tion with corporate profitability (Rokas, B. 2012).
Many literatures have been found to discuss on the factors that
influence a firm’s decision to globally fragment their business pro-
duction as well as the various challenges facing SMEs in a globalized
environment (e.g. Rugman and Verbeke, 2004; Kimura, 2006;
Baldwin, 2011; Muhammad et al., (2010); Saleh and Ndubisi (2006);
Samad (2007); Abu Bakar et al. (2006); Aris (2006); Harvie (2004);
Wang (2003); Stuti (2005); Wafa et al. (2005); Ritchie & Brindley (2000);
Decker et al. (2006); Foon (2006) and SMIDEC (2007)). Some factors
have been identified as influencing a country in the Global Value
Chains (GVCs), including tax and incentives, infrastructure availabil-
ity, trade agreements between countries, the legal requirements of
respective countries, and other related costs (Bhattacharya and
Moazzem, 2013). Similarly, study conducted by Masato Abe, Marc
Proksch, (2017) found several challenges for SMEs in the global mar-
ket. They identified lack of strong access to international markets by
SMEs, misinterpretation of agricultural markets and lack of infor-
mation on global markets as significant market challenges. (Please
check that my interpretation of the original sentence is correct.)
Barrios et al. (2005) showed that the timing of entry into a com-
petitive market is another important consideration in entering the
global market especially to foresee the impact of competition and the
development of the local industry. It is also important to consider the
size of a firm because entering a new market implies that the firm has
enough resources to bear the significant amount of costs (Erramilli et
al., 1997; Roza et al., 2011). Moreover, it has also been found that, in

some cases, larger firms may have less capacity to adapt to market
changes (Aldrich, 2008). Decision on entry mode can also be affected
by the prior experience of the business, as international involvement
increases the likelihood of choosing between wholly owned or shared
entry modes (Cho and Padmanabhan, 2005; Morschett et al., 2010).
3.0. METHODOLOGY
This chapter utilizes a self-administered questionnaire to deter-
mine the issues and challenges perceived by the Malaysian SMEs to
be faced in the next three years of their business activities as well as
the factors and challenges that have significant influence on SMEs
participation in the global markets, as shown in Table 1 below.
TABLE 9. 1: LEVEL OF CHALLENGES ON BUSINESS FUTURE AND GLOBAL TRADING BY MALAYSIAN

SMES
Challenges in Next Three Years Challenges in Trading Global
Competition Knowledge on International
Opportunities
Economic Fluctuations Knowledge on International
Competition
Environmental Issues Marketing Channels and Networks
Finance Difficulties Financial resources for Market Research
Foreign Product Competition Working Capital for Export Activities
ICT Development Management Commitment
Knowledge and Skills in Finance and Importers Quality Standards
Accounting
Knowledge and Skills in Marketing Product Adaptation to Foreign Markets
Knowledge and Skills in Technology Knowledge on Market System
Knowledge and Skills in Research and Culture and Language Barrier
Development
Net Profit Information on Export Procedures
Operational Cost Government Assistance
Online Sales Knowledge on ICT
Product Cost ICT facilities and Infrastructures
Recruiting Staff Environmental legislations
Retaining Staff
Uncertainty of Market Direction
The issues and challenges pertaining to trading in the global mar-

kets are classified into two broad categories in general, i.e. internal
barriers and external barriers. Internal barriers include company

179
barriers (marketing knowledge, financial and human resource) and
product barriers (quality and technical adaptation), whereas external
barriers comprise of industry barriers (industry structure and com-
petition), market barriers (customer and procedural) and macro envi-
ronmental barriers (direct and indirect export).
A total of 344 valid responses were obtained within a period of
three months of data collection. The findings were obtained and ana-
lyzed using descriptive analysis to provide useful insights on the chal-
lenges perceived in doing business and in venturing into the interna-
tional market by the Malaysian SMEs.
4.0. FINDINGS AND DISCUSSION

Table 2 below indicates that about 67 percent of the respondents
were male, 33 percent female and 75 percent of the respondents were
married. The age categories of 30-39 and 40-49 years old constitute
32 and 33 percent respectively and made up the majority of the re-
spondents and those 50 years and above comprise of 13.7 percent
only. About 42 percent of the respondents are with secondary school
academic qualifications, and about 48 percent have either diploma
or first-degree equivalent qualifications. This indicates that there are
two main groups of academic qualifications amongst the respondents.
In terms of religion, Muslim leads by 78.5 percent, followed by Bud-
dhism 14 percent and Hinduism 4.7 percent.
Table 2 also shows that about 60.0 percent of the respondents did
not have any prior business experience. Those who reported to have
some experience ranged from about 0 to 43 years with an average of
3.90 years’ experience. On average, the respondents had 2 of their
family members working full-time in their business with a maximum
of 7 family members. The total sales turnover and total assets turn-
over per year ranged from RM0 to RM23 million, and RM0 to RM50
million respectively.

TABLE 9. 2: PERSONAL AND BUSINESS CHARACTERISTICS OF SMES
Variable Frequency Percent
Gender Male 229 66.6
Female 115 33.4
Marital Status Single 78 22.5
Married 258 75.0
Others 8 1.5
Age 20-29 Years 71 22.6
30-39 Years 115 33.4
40-49 Years 111 32.3
Education Non-formal education 3 0.9
Diploma 72 20.9
Religion Buddhism 48 14.0
Christianity 3 0.9
Hinduism 16 4.7
Islam 270 78.5
Others 7 2.0
Prior Business Experience Having prior experience 153 44.5
Not having prior 190 55.2
experience
Mean experience 3.90 years
Number of Family Maximum 7
Members in Business Minimum 0
Mean 2
Total Sales Turnover Maximum RM23,000,000
Per Year Minimum 0
Mean RM382,475.23
Total Asset Turnover Maximum RM50,000,000
Per Year Minimum 0
Mean RM627,306.15
Table 3 and Table 4 above provide mean rank of the important

challenges pertaining to future business activities and trading in the
global markets by Malaysian SMEs respectively. In terms of the per-
ceived challenges to be faced by the SMEs in the next three years of
their business operations (Table 3), product cost, economic fluctua-
tions, operational cost and ICT development were stated as the most
important challenges by the respondents of this study. Interestingly,
knowledge and skills related challenges have not received much at-
tention of the SMEs as their future challenges. Table 4 ranks SMEs
concern on the challenges that they faced in participating in the in-

181
ternational market. Having adequate knowledge and information are
among the highest challenge for the Malaysian SMEs in going glo-
bal, especially knowledge on the international market opportunities,
information on the marketing channels and networks, foreign market
system, adaptation of products to foreign markets as well as securing
timely working capital to finance related export activities.
TABLE 9. 3 LEVEL OF CHALLENGES PERCEIVED TO BE FACED BY MALAYSIAN SMES IN THE NEXT 3

YEARS
Challenges in Next Three Years N Mean Standard
Dev.
Product Cost 343 3.671 .6347
Economic Fluctuations 344 3.669 .7486
Operational Cost 344 3.488 .7162
ICT Development 344 3.433 .8338
Competition 344 3.408 .7617
Net Profit 344 3.395 .7127
Finance Difficulties 344 3.378 .8169
Knowledge and Skills in Technology 344 3.328 .7440
Knowledge and Skills in Marketing 344 3.302 .7454
Recruiting Staff 343 3.283 .7326
Retaining Staff 344 3.253 .7423
Knowledge and Skills in Research and Dev. 343 3.251 .7617
Knowledge and Skills in Finance and Accounting 344 3.233 .7391
Online Sales 344 3.230 .9551
Environmental Issues 344 3.227 .8194
Foreign Product Competition 343 3.190 .8797
Uncertainty of Market Direction 344 3.015 .7461
TABLE 9. 4: LEVEL OF CHALLENGES FACED BY MALAYSIAN SMES IN THE GLOBAL MARKET

Challenges in Trading Global N Mean Standard Dev.
Knowledge on International Opportunities 343 3.653 .9108
Information on Marketing Networks 343 3.653 .9076
Working Capital for Export Activities 343 3.536 .8874
Knowledge on Market System 343 3.516 .8087
Product Adaptation to Foreign Markets 343 3.443 .8527
Knowledge on Government Assistance 343 3.408 .7664
Knowledge on International Competition 343 3.382 .8702
Importers Quality Standards 343 3.356 .8492
Knowledge on ICT 343 3.338 .7390
ICT facilities and Infrastructures 343 3.335 .7423
Information on Export Procedures 343 3.286 .7375
Culture and Language Barrier 343 3.224 .7831
Management Commitment 343 3.207 .8452
Environmental Legislations 343 3.166 .6787
Financial Resources for Market Research 343 3.122 .9062

In better understanding the behavioral and demographic aspects
of the Malaysian SMEs, this chapter provides further investigation
into examining those responses from 344 respondents across their
personal characteristics including gender, marital status, age, academic
qualification as well as religion (Table 5 and Table 6). The tables pro-
vide information on the personality that provides the highest rank
(Likert score of 4 and 5) to each of the issues and challenges listed. It
is apparent from the two tables that follow that the three major per-
sonal characteristics that influence distinct responses are the educa-
tional level of the SME owners, their age group as well as gender.
This information is highly crucial especially in ensuring that strategic
plan and relevant assistance for the SMEs in the future could be ap-
propriately and strategically structured according to their behavioral
and personality differences.
TABLE 9. 5: HIGHEST RATING (LIKERT SCORE OF 4 AND 5) ON CHALLENGES PERCEIVED TO BE FACED

BY MALAYSIAN SMES IN THE NEXT 3 YEARS ACROSS DEMOGRAPHIC CHARACTERISTICS
Challenges in Next Three Years Gender Status Age Education Religion
Product Cost Male Married 30 – 39 Degree Islam
Economic Fluctuations Male Married 20 – 29 Degree Islam
Operational Cost Male Married Same Degree Islam
ICT Development Male Married 40 – 49 Diploma Islam
Competition Male Married 40 – 49 Degree Islam
Net Profit Female Married 20 – 29 Diploma Islam
Finance Difficulties Male Married 20 – 29 Secondary Islam
Knowledge and Skills in Tech Female Married 40 – 49 Degree Islam
Knowledge and Skills in Marketing Male Married 20 – 29 Degree Islam
Recruiting Staff Same Married 30 – 39 Degree Islam
Retaining Staff Same Married 30 – 39 Degree Islam
Knowledge and Skills in R&D. Male Married 20 – 29 Diploma Islam
Knowledge and Skills in Fin & Acctg Female Married 20 – 29 Degree Islam
Online Sales Male Married 40 – 49 Secondary Islam
Environmental Issues Male Married 20 – 29 Diploma Islam
Foreign Product Competition Male Married 40 – 49 Degree Islam
Uncertainty of Market Direction Female Married 20 – 29 Degree Islam
As shown in Table 5 above, for the perceived future business chal-

lenges in the next three years, degree holders portray greater concern
as compared to those with secondary education who made up the
majority of the respondents. The younger generation, within the age

183
range of 20 – 29, regards challenges related to economic fluctua-
tions, profit margin, financial difficulties as more important as com-
pared to their matured counterparts (age within 40 – 49), who seem
to be more concerned with technology-related matters and future
competition. Male respondents dominate the list of highest challenges
against the female respondents except on matters related to net profit
margin, financial difficulties as well as technology-related knowledge
and skills.
TABLE 9. 6: HIGHEST RATING (LIKERT SCORE OF 4 AND 5) ON THE LEVEL OF CHALLENGES FACED BY
MALAYSIAN SMES IN THE GLOBAL MARKET ACROSS DEMOGRAPHIC CHARACTERISTICS
Challenges in Trading Global Gender Status Age Education Religion

Knowledge on Int. Male Married 30 – 39 Secondary Islam
Opportunities
Information on Marketing Male Married 20 – 29 Secondary Islam
Networks
Working Capital for Export Male Married 20 – 29 Secondary Islam
Activities
Knowledge on Market System Male Married 20 – 29 Secondary Islam
Product Adapt to Foreign Male Married 40 – 49 Degree Islam
Markets
Knowledge on Govt. Assistance Female Married 30 – 39 Secondary Islam
Knowledge on Int. Competition Male Married 30 – 39 Secondary Islam
Importers Quality Standards Male Married 40 – 49 Secondary Islam
Knowledge on ICT Female Married 40 – 49 Secondary Islam
ICT facilities and Infrastructures Female Married 40 – 49 Secondary Islam
Information on Export Male Married 40 – 49 Degree Islam
Procedures
Culture and Language Barrier Male Married 40 – 49 Secondary Islam
Management Commitment Female Married 20 – 29 Degree Islam
Environmental Legislations Female Married 40 – 49 Secondary Islam
Financial for Market Research Male Married 40 – 49 Degree Islam
Similarly, several important differences are marked from the re-

spondents’ feedback on the challenges that they faced in going glo-
bal, based on their distinct personality and demographic backgrounds
(Table 6). Unlike the responses towards future business challenges, as
discussed earlier, those respondents with secondary academic back-

ground indicate greater concern for the challenges in the global mar-
kets, in almost all the issues mentioned in this chapter. They are also
amongst the matured SME owners who have greater concern on is-
sues pertaining to product adaptation to foreign markets, knowledge
on quality standards and ICT as well as export procedures. The fe-
male respondents have greater consideration towards ICT-related
knowledge and infrastructures, government assistance, management
commitment and legislations. However, marital status and religion
seem not to be providing significant differences in terms of their re-
sponses towards the issues and challenges pertaining to future activi-
ties of the business as well as in venturing into the international mar-
ket.
5.0. CONCLUSIONS
Despite the continuous efforts taken by the regulators in Malaysia,
the country is still experiencing various issues and challenges pertain-
ing to trading in the global markets. Accordingly, this chapter exam-
ined the perceived challenges to be faced in the future by those SMEs
as well as the challenges faced in becoming more competitive and
expanding their businesses into the international market.
Several issues such as product cost, economic fluctuations, opera-
tional cost and ICT development were perceived to be the most cru-
cial future business challenges by the respondents of this study. This
shows that Malaysian entrepreneurs are very much concerned with
the future economic and cost uncertainties as well as the rapid tech-
nological changes around the world, including digital economy, e-
commerce, and digital trade zone. Examining these responses across
the personality and demographic characteristics, this chapter finds
that degree holders indicate greater concern as compared to those
with secondary education who made up the majority of the respon-

185
dents. This could be associated to lack of practical business knowl-
edge amongst the degree holders, hence elevating their perceptions
on future challenges, as compared to those with lower academic quali-
fications but who have more practical experiences. Apart from the
educational discrepancies, this chapter also discovers generation gaps
with regards to perceptions on future business challenges. The younger
generation indicates greater concern over economic, profitability and
financial uncertainties as compared to the matured entrepreneurs who
foresee greater challenges with regard to technological advances and
greater competition. Gender differences also being noticed where the
female entrepreneurs are having more thought on matters related to
net profit margin, finance difficulties as well as technolog- related
knowledge and skills.
Interestingly, knowledge and skills related challenges have not re-
ceived much attention of the SMEs as their future challenges. Per-
haps, the entrepreneurs are well equipped with relevant knowledge
as a significant number of the respondents are either degree or di-
ploma holders. This factor can also be associated to the success of
various initiatives of the government and agencies in Malaysia with
regards to continuous training and skills development programmes
provided for the SMEs.
In contrast to the above feedbacks, having adequate knowledge
and information pertaining to international ventures are stated as the
highest challenges faced by the SMEs in going global. This includes
knowledge on the international market opportunities, information on
the marketing channels and networks, foreign market system, adap-
tation of products to foreign markets as well as securing timely work-
ing capital to finance related export activities. Perhaps, this could be
considered seriously by the regulators in Malaysia, especially those
units that are specifically concerned with the global ventures of SMEs

such as MITI and MATRADE.
With regards to the personality differences, those with secondary
academic background, matured and female respondents indicate
greater concern for the challenges in the global market, in almost all
the issues mentioned in this study. Specifically, they are concerned
with the challenges related to product adaptation to foreign markets,
knowledge on quality standards, ICT-related knowledge and infra-
structures, export procedures, government assistance, management
commitment and legislations.
Besides examining the issues and challenges perceived by the SMEs
in Malaysia for their future business activities and going global, this
chapter strengthens the arguments by cross checking those responses
with the behavioral aspects of the entrepreneurs. Three major per-
sonal characteristics dominate the differences in the responses on is-
sues and challenges, namely, the educational level of the SME own-
ers, their age group as well as gender. This information is highly cru-
cial especially in ensuring that strategic plan and relevant assistance
for the SMEs in the future could be appropriately and strategically
structured according to their behavioral and personality differences.
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10
C H A P T E R
Determinants of Small Medium Enter-

prises (SMEs) Competitiveness in The
Global Market”
Susilo Nur Aji Cokro Darsono, Taufik Akhbar, Khairunisah Ibrahim,
Dhika Amalia, and Hendar
ABSTRACT
The challenges faced by Small medium enterprises (SMEs) are growing
rapidly and pushing the firms to improve their competitiveness to enhance
the levels of productivity and the existence in international markets. Global
challenges, open market competition and information technology develop-
ment are the barriers and opportunities they may take advantage of, to be
winners in the dynamic global markets. To that end, a survey was carried out
in Yogyakarta Province, Indonesia. This chapter aims to identify the key suc-
cess factors that influence the competitiveness of SMEs in the globalization
era through the challenges that will be faced in the near future. Principle
Component Analysis was applied to determine the structure of relationships
between many variables in the form of components. Components formed
are random quantities that previously cannot be observed, measured and
determined directly. This chapter contributes to the theoretical and manage-
rial implications on SMEs competitiveness. The main results found that the
three components which determined the SMEs competitiveness are Knowl-
edge Based Resources, Business Performance, and Operational Effectiveness
and Innovations.
KEYWORDS: Competitiveness, Global Market, Principle Component Analysis
(PCA), Small Medium Enterprises (SMEs)
INTRODUCTION
The challenges faced by small medium enterprises (SMEs) to com-
pete in the global market are growing and changing rapidly. As open
market and digital platforms become highly pervasive and powerful
for companies to export and import the products and raw materials
with low prices. While, in the midst of domestic competition pro-
tected by the government, SMEs must be dealing with global compe-
tition in the form of market integration across countries with mini-
mum restriction. (the 1st sentence is not complete, something is miss-
ing, the 2nd sentence is also not complete) Many regional or multilat-
eral economic collaborations, such as the ASEAN Economic Com-
munity (AEC), the Asia-Pacific Economic Cooperation (APEC) and
the Organisation of Islamic Cooperation (OIC) and have been grow-
ing so fast and pushing the economy to be more open (Rahadi, 2016).
On the other hand, the development strategies for SMEs are still con-
fronted with small value added for products and the quality of ser-
vices and also for the contribution towards export. Hence, the com-
petitiveness of SMEs should be the main concern for improvement
as successful improvement will lead SMEs to enhance the levels of
productivity and the existence in the international markets (Sultan,
2014).
Regional and multilateral economic collaborations become a threat
if SMEs in Indonesia are not ready to compete with producers from
other countries, and hence many SMEs will be in bankruptcy due to
inefficiency, lower quality of the products and unskilled human re-
sources (Egbu, Hari, & Renukappa, 2005; Peña-Vinces, Acedo, &
Roldán, 2014). This issue becomes of particular concern due to the
biggest number of people in the middle class income in Indonesia as
the potential customers for foreign markets. In line with the rise of
Indonesian GDP per capita, currently there are more than 50 million

191
people categorized as middle class income (Setiawan, 2017). The
middle-income class is continuously growing every year, which cre-
ates high demand for goods and services.
SMEs are confronted with challenges to be the leader in the do-
mestic market in the midst of abundant competitors from overseas.
Consequently, SMEs must be capable business of becoming entities
with high competitiveness by solving all particular issues, such as lim-
ited capital, technology, and skilled and innovative human resources
(Sultan, 2014). Enhancing the quality of products may become the
owner’s consideration to maintain business performance (Hsu, Chang,
& Luo, 2017). Otherwise, those challenges will be turned into a threat
if SMEs in Indonesia are not be able to fulfil the market needs and
will be eliminated from the contest arena, namely free market com-
petition.
The increase in competitiveness is not only supported by physical
infrastructures, financial capital and high technology development,
but also the knowledge capital. Knowledge will not be depleted when
it is used, but it is expanded and open to further growth, refinement
and marketability (Egbu et al., 2005). In the dynamic market era,
SMEs are required to explore new opportunities to adapt to the glo-
bal changes that may occur in the near future while exploiting their
abilities to meet current demands (Valaei, Rezaei, Khairuzzaman, &
Ismail, 2017). SMEs are innovation drivers and shrewd companies
that represents the basic economy of developed countries. In addi-
tion, SMEs have a high growth effect on developing countries be-
cause of the high levels of flexibility and agility to practise learning
strategies more easily (Singh, Garg, & Deshmukh, 2009).
Besides, the trend in online shopping can be a threat to SMEs’
products in Yogyakarta as the technology grows more rapidly. The
online business does not need large spaces, production areas, and many

employees because of drop shipping method which they use. So, they
only need computer or mobile phone to sell their products. Based on
the scenario of challenges and opportunities for SMEs to compete
globally, this chapter aimed to address the following research ques-
tions: What are the key success factors of SMEs competitiveness in
the global market? However, there is dearth of literature on the de-
terminants of SMEs competitiveness to compete in the global mar-
ket. This chapter aims to identify the key success factors that influ-
ence the competitiveness of SMEs in the globalization era through
the challenges that will be faced in the near future.
The rest of the paper is organized as follows. The next section
reviews the literature in the field. The third section describes the data
and the methodology applied to analyse the data. Results are pro-
vided in section four. Further implications, conclusions and future
research opportunities appear in the final section.
SMALL MEDIUM ENTERPRISES COMPETITIVENESS

Small medium enterprises (SMEs) have an important role on eco-
nomic growth in developing countries (Aboelmaged, Administration,
& Emirates, 2018; Gonçalves, Ferreira, Ferreira, & Farinha, 2018;
Kurniawati & Yuliando, 2015; Olawale & Garwe, 2010). SMEs con-
tribute to creating more job opportunities, social impact and stabili-
zation of an economy. The contribution of SMEs is difficult to sus-
tain in this VUCA era (Vulnerability, Uncertainty, Complexity and
Ambiguity) without high competitiveness. Competitiveness of SMEs
consists of many aspects that are related to performance, knowledge
management, human resources, financial capital, technology, social
aspects and the environment (Egbu et al., 2005; Hsu et al., 2017;
Joensuu-salo, 2018; Singh et al., 2009; Yoshino & Taghizadeh-hesary,
2016).

193
Improving the performances of SMEs can be recognized through
the internationalization process. The ability to be global firms has
become a competitive necessity for many SMEs. The SMEs’ interna-
tionalization strategy has become an important issue, since usually
SMEs are having limited resources and lack international experience
(Joensuu-salo, 2018). A. Solano Acosta et al (2018) stated that SMEs
must be proactive in making visits abroad and establishing contacts
with suppliers and customers in international markets, as a way to
improve business performance. Beside internationalization, the effi-
ciency in the use of resources and the value creation can be done
through cost reduction and this has an impact on social and environ-
ment (not clear) (Jaca, Ormazabal, & Prieto-sandoval, 2018).
Structurally, most of the SMEs are typically informal organisational
structures that are often weak in terms of financing, training, plan-
ning and learning due to limited resources whereas those aspects were
very important for improving the competitiveness. The learning pro-
cess and applying the knowledge for the business are hard to realized.
Egbu et al. (2005) stated that knowledge must be identified, captured,
stored, mapped, disseminated, created and used effectively to create
many benefits for the business. Valaei et al. (2017) also found that
knowledge, learning, and the related process had relationship with
the innovation process in a SMEs business process. Firms need to be
an active learner on economy, market conditions, technology and oth-
ers (not clear) to survive in competitive markets. Learning facilities
and the environment need to be provided for all management and
employees (Did you mean ‘management employees’?) that will stimu-
late timely knowledge creation, assimilation and knowledge transfer.
The performance of SMEs may depend on how effectively SMEs
allocate their scarce resources and use their network to speed up the
business cycles. According to Lin et al. (2016), network relationship

has a positive impact on firm performance. The behaviour of the
network is task-orientation and seeks to deepen the relationship. In
addition, Hsu et.al (2017) stated that the improvement of SMEs’ com-
petitiveness can be done through creating effectiveness in the busi-
ness process by incorporating the management performance. Thus,
based on this finding, manufacturing SMEs are able to develop effec-
tive strategies to achieve a sustainable company.
Innovations must be done by the firms in order to be sustained.
SMEs need to have appropriate methods and implement new inno-
vations to drive the growth of survival acts and create the competitive
advantage, as well as create high competitiveness (Phuangrod,
Lerkiatbundit, & Aujiraponpan, 2017; Radziwon & Bogers, 2018).
Commitment to learn, to meet new customers, knowledge transfer
and supporting new staff are having positive relations with innova-
tions. The interactions in small markets which are not dominated by
foreign firms provides SMEs with limited exposure to outside innova-
tions (Odlin, 2018). Then, firms should favour innovativeness, be open
minded with new experiments and support new ideas and practices,
including the entrance into new markets.
DATA AND METHODOLOGY

Research on SMEs’ competitiveness was conducted through the
collection of primary data in Yogyakarta from January 2018 to June
2018. The sample size for this research is 300 respondents from the
owner/manager of Small Medium Enterprises in many sectors, cat-
egories and regions in the Yogyakarta province. Three sources of SMEs
covering Sleman, Bantul, Kulon Progo and the City of Yogyakarta
were used to determine the sample size. The instrument used in this
research was the questionnaire that consisted of 17 questions. The
questionnaire comprised structured questions that used a five-point

195
Likert scale questions which enabled respondents to indicate their
opinions on various challenges of SMEs to compete in the global
market in the near future.
ln this chapter, we applied principal component analysis (PCA) to
identify the structure of relationships between many variables in the
form of component or latent variables. Components formed are ran-
dom quantities that previously cannot be observed or determined di-
rectly. The principal component analysis is often used to overcome
the unobserved components by grouping variables that are highly
correlated into principal components. These grouping must satisfy
certain mathematical and statistical conditions (Mackiewicz &
Ratajczak, 1993; Zhu, 1998).
TABLE 10. 1 CORRESPONDING QUESTIONS ABOUT CHALLENGES FACED BY SMES REGARDING

GLOBAL MARKET COMPETITION AND COLLECTED VARIABLES
No Challenges of SMEs Variables

1 Creating competitive advantage X1 CompetitiveAdv
2 Economic Fluctuations X2 EconFluct
3 Environmental concern X3 EnvironConcern
4 Finance difficulties X4 FinDifficulties
5 Foreign product competition X5 ForeignCompt
6 Lack of Information Communication and Technology X6 ICTDev
(ICT) Development
7 Lack of Knowledge and skills in finance and X7 KnskFinAcc
accounting
8 Lack of Knowledge and skills in marketing X8 KnskMarketing
9 Lack of Knowledge and skills in technology X9 KnskTech
10 Lack of Knowledge and skills in research & X10 KnskResearchDev
development
11 Maintaining margins (Profit) X11 Margins
12 Operational Cost X12 OpCost
13 Online sales competition X13 OnlineComp
14 Production cost X14 ProdCost
15 Recruiting staff X15 RecrStaff
16 Retaining Staff X16 RetainStaff
17 Uncertainty of market direction X17 UncertainMarket

RESULTS
Small Medium Enterprises in Yogyakarta
Small Medium Enterprises are growing rapidly in the millennium
era compared to the previous era. Based on the field research in
Yogyakarta, we found that 194 SMEs was established in the year 2001
– 2016, 69 businesses in the year 1990 – 2000 and 32 SMEs were
established in the year 1940 – 1988. The SMEs in Yogyakarta con-
sists of various sectors, such as construction, industrial, plantation,
property, technology, trading and services, consumer goods and trans-
portation. Consumer goods, and trading and services sectors were
sectors that had the highest number of SMEs with 40.8 % and 39.8%
respectively. The legal form of SMEs in Yogyakarta was mostly in the
form of sole proprietorship with 93.9% from total respondents of
SMEs in Yogyakarta, while partnership, cooperative and private lim-
ited companies only comprised of 3.2%, 1.1% and 1.1% respectively.
This means that production, marketing and distribution in SMEs were
mostly done by themselves and not in a big team. The data also shows
that only 2% of the SMEs have 6-15 full-time employees, while 67.6%
of the SMEs have 1-5 employees and around 30.5% of the SMEs did
not have any full-time employee.
Principle Component Analysis

An exploratory Factor Analysis or Principle Component Analysis
(PCA) was employed to analyze the interrelationships among the ques-
tions that were used to characterize the determinants of the SMEs’
competitiveness. Each question was added as a new variable, as pre-
sented in Table 1.
TABLE 10. 2. KMO AND BARTLETT’S TEST FOR GLOBAL CHALLENGES TO SMES COMPETITIVENESS.
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .900
df 91
Sig. .000

197
TABLE 10. 3. TOTAL VARIANCE EXPLAINED
Total Variance Explained
Initial Eigenvalues Rotation Sums of Squared Loadings
Comp % of
Total % of Variance Cumulative % Total Cumulative %
Variance
1 6.438 45.984 45.984 3.704 26.455 26.455

2 1.308 9.340 55.324 2.846 20.327 46.783
3 1.099 7.849 63.173 2.295 16.391 63.173
4 .828 5.915 69.089
5 .714 5.100 74.188
6 .559 3.993 78.181
7 .529 3.776 81.958
8 .493 3.523 85.481
9 .461 3.291 88.772
10 .402 2.869 91.641
11 .366 2.616 94.256
12 .343 2.447 96.703
13 .257 1.835 98.538
14 .205 1.462 100.000
Extraction Method: Principal Component Analysis.
The Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy

to examine the appropriateness of factor analysis compares the lin-
ear correlations between variables with their corresponding partial
correlations. It can be used to determine the factorability of the ma-
trix as a whole. Thus, fulfilling the minimum required score between
0.5 and 1.0 for conducting an appropriate Factor Analysis. Barlett’s
test of large and significant sphericity. (Please check these 2 sentences.)
To ensure the use of PCA, the Barlett test of Sphrecity and KMO
test of appropriateness were carried out accordingly (Table 2). The
results of the KMO measure of sampling adequacy was 0.900 which
indicates that there are sufficient items for each component. The re-
sult of Barletts’s test at 1952.18 with the significant level at 0.000

indicates that the data were appropriate for the aim of PCA. These
two tests support the appropriateness of the principal component
analysis technique.
Extraction Method: Principal Component Analysis.

To extract the factors, Principal Component Analysis (PCA) was
adopted using the Kaiser criterion for factor retention. This criterion
establishes that only components with an eigenvalue above 1 must be
retained in the final solution since they explain many variables. As
Table 3 (Eigenvalues and cumulative variance associated to principal
components) clearly shows, this decision led to the utilization of three
components that have eigenvalue scores greater than one account for
63.173% of the total variance. These three main components were
constructed by 14 significant variables. Based on the rule of PCA
only components that have Eigen values greater than one should be
in the model. Each component constructed from the variables which
explained by the factor solution (average of communalities) that must
be above 0.5. So, a variable that has average of communalities score
below 0.5 was deducted from the model. There were three variables
that were out of the model and these variables were Environmental
Concern (X3), Recruiting Staff (X15) and Uncertainty of Market
Directions (X17).
The Varimax algorithm was used to perform an orthogonal rota-
tion to transform the components into factors that envisaged the im-
provement of factor interpretation. Table 4 shows that the rotated
component matrix allocating variables to factors is overall straight-
forward. The first component has an Eigen value of 6.438 and the
percentage of variance is 45.984%. Component one consist of four
variables as follows: Finance & Accounting knowledge and skills (X7),
Technology, Research & Development knowledge and skills (X9),

199
Marketing knowledge and skills (X8) and Information Communica-
tion and Technology development (X6). The variables that has the
highest loading factor is Finance & Accounting knowledge and skills
with a score of 0.808 while the other variables include Technology,
Research & Development knowledge and skills (X9) 0.803, Market-
ing knowledge and skills (X8) 0.756 and Information Communica-
tion and Technology development (X6) 0.723, respectively. The com-
mon pattern of the variables characterizes this component, since the
variables are associated with knowledge, which come from the most
ability needs to compete in global market. (Not clear) Hence, it can
be said that component 1 is a global representation of Knowledge
Based Resources.
TABLE 10. 4 COMPONENT MATRIX AFTER ORTHOGONAL ROTATION

Rotated Component Matrix
Variables Component
1 2 3
X7 KnskFinAcc 0.808 0.062 0.286

X9 KnskTech 0.803 0.301 0.077
X8 KnskMarketing 0.756 0.295 0.213
X6 ICTDev 0.723 0.219 0.258
X14 ProdCost 0.588 0.455 -0.050
X12 OpCost 0.507 0.477 0.170
X2 EconFluct 0.111 0.813 0.115
X4 FinDifficulties 0.365 0.710 0.137
X1 CompetitiveAdv 0.199 0.664 0.384
X5 ForeignCompt 0.395 0.623 0.308
X16 RetainStaff -0.061 0.168 0.756
X10 KnskResearchDev 0.272 0.041 0.732
X13 OnlineComp 0.303 0.306 0.629
X11 Margins 0.444 0.252 0.537
The second component has an Eigen value of 1.308 and variance

of 9.340%. Component 2 consists of 6 variables, with Economic fluc-
tuations (X2) having the highest loading factor (0.813). This is fol-
lowed by financial difficulties (X4) with loading factor of 0.710, com-
petitive advantage (X1) 0.664, foreign product competition (X5) 0.623,

operational cost (X12) 0.477 and production cost (X14) 0.455. These
variables are related to the internal and external economic factors of
SMEs challenges. Therefore, this component is called Business Per-
formances
The last component has Eigen value of 1.099 and variance of
7.849%. There are four variables that construct component 3, and
they are Retaining Staff (X16), Research & Development knowledge
and skills (X10), Online sales (X13) and Margins (X11). The vari-
ables with the highest loading factor is Retaining staff (0.756) and
followed by others 0.732 (X10), 0.629 (X13) and 0.537 (X11), respec-
tively. Fierce competition forces SMEs to be more innovative, cre-
ative and effective in running their businesses to survive and win in
the global market competition. Therefore, one can say that these vari-
ables associated with the Operational Effectiveness and Innovations.
Furthermore, this research found that there are three main com-
ponents which determined SMEs’ competitiveness in the global mar-
ket and they are (1) Knowledge Based Resources, (2) Business Perfor-
mances and (3) Operational Effectiveness and Innovations (see in Table
5).
TABLE 10. 5. COMPONENTS ASSOCIATED WITH SMES COMPETITIVENESS
Component Name Construct Variables
1 Knowledge Finance & Accounting Knowledge & skills
Based Technology Knowledge & skills
Resources Marketing Knowledge & skills
Information Communication and Technology
Development
2 Business Production Cost

Performance Operational Cost
Economic Fluctuations
Financial Difficulties
Competitive Advantages
Foreign Competitions
3 Operational Retaining Staff

Effectiveness Research & Development Knowledge & Skills
and Online Sales Competition
Innovations Margins

201
IMPLICATIONS
Theoretical Implications
The relationship of these challenges to competitiveness is estab-
lished via Principal Component Analysis set out in Table 4. There
are 14 variables which significantly construct the three principle com-
ponents of SMEs’ competitiveness. These three principal components
are Knowledge based resources, Business performances and Opera-
tional effectiveness & innovations
Knowledge based resources is the most important component of
SMEs’ competitiveness. Lack of knowledge in finance, accounting,
marketing, technology, global market and will have negative effect on
competitiveness. In this era of industrial revolution, there is rapid
development of knowledge, and transfer of knowledge can be done
from everywhere and there are many ways to access free education
and training. Therefore, in order to improve SMEs’ competitiveness,
Indonesian SMEs should give serious attention to knowledge devel-
opment at all different levels. Investment in self-development should
not be overlooked as it is also important like the physical investment.
The use of knowledge and skills in advanced technology will lead to
better business performance than the non-users in the global market.
The automation of processes and market research are top ranking
priorities in terms of investment for the Indian auto components sec-
tor (Singh et al., 2009). However, development of knowledge and
skills in many sectors are very crucial for SMEs in order to improve
their competitiveness in the global market competition. The amount
of money spent on investment in knowledge development will not
depreciate in value but, in fact, will expand further opportunities and
business escalation (Egbu et al., 2005). Firms must always learn new
things and update their knowledge because learning is the proper
response to uncertainty.

Business performances is the second component of SMEs’ com-
petitiveness. It is constructed by economic fluctuations, financial dif-
ficulties, competitive advantages, foreign competition, production cost
and operational cost variables. Facing the vulnerability, uncertainty,
complexity and ambiguity (VUCA) conditions, make SMEs to struggle
to maintain and also increase their business performances. Some vari-
ables such as economic fluctuations and foreign competition are ex-
ternal variables that cannot be controlled by the business while other
variables such as financial difficulties, creating competitive advantages,
reducing production and operational cost are internal variables that
can be controlled. However, in real situations, it is also difficult to
control the internal variables because it might be affected by external
variables (Hsu et al., 2017). Hence, in increasing business performance,
SMEs need to prioritise on the improvement of internal business per-
formances variables.
Operational effectiveness and innovations is the last component
that constructs the competitiveness of SMEs to survive in its business
in the rapidly changing global market and its fluctuations. In creating
margins to get high profits, firms are not able to sell the products at
very high prices because the imported goods will replace them with
affordable prices. Thus, firms need to be more effective at the opera-
tional level and always innovate to create efficient products. Innova-
tions become the main agenda for SMEs to survive, and firms must
do many innovations in many sectors, not only in production and
operation, but also in the distribution and sales. However, to gain the
best ideas on innovations, firms must do research and development
process that cannot be ignored. However, to foster creativity and in-
novation, SMEs also have opportunities to use their learning capa-
bilities to remain competitive.

203
Managerial Implications
Financial & Accounting (X7), Technology (X9), Marketing (X8)
and ICT Development (X6) are the critical variables that construct
Knowledge based resource component. In fact, the firms have to deal
with uneasy challenges, particularly when they are confronted with
globalization and the digital era. On the other hand, the world has
been changing as we enter new situations full of volatility, uncertainty,
complexity, and ambiguity (VUCA). This condition takes place due
to rapid technological growth in the world nowadays, which may have
impact on SMEs. Thus, the only appropriate way to face this condi-
tion is by learning and updating knowledge and skills on financial
aspects and accounting to manage the cash flows and create good
financial management. Having good skills in technology is the value
added for SMEs to compete with millennial firms. Applying appro-
priate advance technology creates high efficiency and leads to better
business performance. An excellent marketing knowledge and skills
has high impact and gains more customers and earns more income.
In the following three years, business owners think that the hardest
challenge for entrepreneurs of SMEs in Yogyakarta are financial dif-
ficulties (X2) and economic fluctuations (X4) both in the domestic
and the global markets. Therefore, to reduce the financial difficulties
SMEs need more financial capital through credit from banks or fresh
funding from investors. However, it is not easy, and SMEs must have
good performances in business and financial records.
Retaining staff (X16) is another important variable for SMEs. This
relates to how to keep well performing employees while confronted
with final products from overseas in the context of free trade policy
with regional and multilateral economic agreements. It is plausible
that well performing employees will move to other workplaces with
higher salaries. Considerable inflows of goods from Malaysia, Thai-

land, and Vietnam also have impact on more variations for consumer
choice with lower prices. This condition must be having impact on
strict competition with products from SMEs’ entrepreneurs, particu-
larly in terms of price and quality, which in turn reduces the sales of
business firms. Hence, the owners of SMEs must be concerned with
the welfare of their staff. Having a loyal staff is not easy, but loyal
staff facilitate business.
CONCLUSIONS
SMEs play a significant role in economic development in develop-
ing countries. They create more job opportunities, generate income
for the society and increase more creativity. Accordingly, in the midst
of global economic situations that is full of VUCA and the Internet
of Things era, SMEs must fight to show its existence and become
sustainable business. Therefore, this research has conducted the sur-
vey on challenges faced by SMEs in Yogyakarta in the near future.
(Did you mean ‘recently’?) The challenges were transformed into vari-
ables to construct the main components of SMEs’ competitiveness
that will assist the firms to survive and compete in the dynamic open
markets.
This chapter has provided the theoretical contribution in terms of
the determinants of SMEs’ competitiveness which consists of three
main components, namely, Knowledge Based Resources, Business
Performances and Operational Effectiveness and Innovations. Thus,
based on this finding, SMEs are able to develop effective strategies to
improve their competitiveness. Learning new skills and updating
knowledge as part of the important components in effectiveness will
result in high performance in business.
Another contribution is with respect to the managerial contribu-
tion. SMEs should be concerned with improving the knowledge and

205
skills in finance and accounting to create good financial management.
Firms also must learn and apply appropriate advanced technology to
gain high efficiency in business performances. Research and develop-
ment in SMEs’ business cycle must be initiated from now on to give
rise to such aspects as innovation in products, management, and tech-
nology.
Furthermore, SMEs need to establish an institutional framework
and organizational capacity that reflect SMEs’ variations and feed-
back to enforce the implementation of competitiveness components.
Great prospects are expected from the competitiveness.
Despite all the efforts developed by the research team, as a conse-
quence of some missing answers, the sample size obtained was still
sufficient to perform Principle Component Analysis technique. In fact,
this seemed to be a proper decision, but still need to be upgraded,
since it cannot see the weight of its relationships. Future empirical
studies on the current issue could use Structural Equation Modeling
to get the best results for the factors that influence SMEs’ competi-
tiveness.
ACKNOWLEDGEMENTS
The support of the Universitas Muhammadiyah Yogyakarta, In-
donesia in funding this chapter is gratefully acknowledged. The au-
thors would like to thank the journal’s anonymous reviewers for their
recommendations for improving this paper.
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2217(97)00321-4

11
C H A P T E R
Financial Literacy for SMEs in

Yogyakarta after a Decade of SMEs
Act
Rizal Yaya, Lilies Setiartiti, Susilo Nur Aji Cokro Darsono, Taufik Akbar,
and Norhayati Mohd Alwi
ABSTRACT
The purpose of this chapter is to assess the level of financial literacy for
the MSMEs in Yogyakarta after a decade of the issuance of Act 20-year 2008
on Micro, Small and Medium Enterprises. Data were obtained from survey-
ing 301 MSMEs in Yogyakarta. The results indicated that most of MSMEs
have never used financial statements and accounting information in making
decisions related to their business development and consider that account-
ing information is not important for their business. Overall, this chapter pro-
vides some important insights into Yogyakarta to highlight possible steps for
the policy makers as a reference to formulate policies related to increasing
financial literacy for MSMEs.
KEYWORDS: Financial Literacy, Micro Small Medium Entreprises, Microfinance
1. INTRODUCTION
In 2008, the Indonesian Government issued Act no 20-year 2008
to empower micro, small and medium enterprises (MSME). The
Government expected to have strong MSMEs which can contribute
to local development, job creation, income distribution, economic
development and poverty eradication. The act stated that both the
Central and Local Government would facilitate micro small medium
enterprises in four areas: production and processing; marketing; hu-
man resources; and design and technology.
Financial literacy is also an issue highlighted in the human resource
ability in accessing funds from financial institutions. The act suggested
firms and society to increase their ability in preparing feasibility stud-
ies, improve their knowledge on the credit application procedures and
increase their technical and managerial skills. In addition, the act pro-
motes developing human resources through socializing entrepreneur-
ship; increasing technical and managerial skills; establishing and de-
veloping educational and training institutions to educate, and train
business creativity and create new entrepreneurs.
Indonesian Financial Services Authority (OJK) has taken finan-
cial literacy as a strategic nation-wide program. In 2013, they formu-
lated a national strategy for financial literacy (OJK, 2013). They ex-
pected that through those programs, the public is expected to be liter-
ate in financial matters as well as leverage financial products and ser-
vices to fulfill their financial needs. The national strategy for financial
literacy comprises three pillars: (1) National education and campaign;
(2) Strengthening infrastructure for financial literacy and (3) Devel-
oping financial services and products (OJK 2013).
In their press release in 2017, OJK stated that they have already
continuously held a number of financial education programs such as
community education, training of trainers, outreach programs, gen-
eral lecture, maritime education, public service advertising and edu-
cation expo (OJK, 2017). They have also held innovative ways of
education through mobile theaters, shadow puppets (wayang) plays
and financial education cars. In total there had been 289 financial
activities undertaken by the OJK in 144 cities during 2013 – 2016

(OJK, 2017). The participants of all these programs included women,
homemakers, MSMEs, farmers, fishermen, Indonesian migrant work-
ers (TKI)/ Indonesian migrant worker candidates (CTKI), high school
students, university students, employees and retirees. In order to speed
up financial literacy among students, the OJK has produced a series
of financial literacy books for formal education purpose from elemen-
tary to university level.
This chapter is intended to evaluate financial literacy among Mi-
cro, Small, and Medium Entreprises (MSME) in Yogyakarta, Indo-
nesia. MSMEs are very important in the Indonesian economy. They
contribute 57.9% of GDP and absorb 97% of the workers nation-
wide (Yovanda, 2016). Based on the 2016 census data, of the total
number of businesses amounting to 246,217 business units, the num-
ber of micro, small and medium enterprises (MSMEs) was 235,313
or 98.40% of the total businesses in DIY. Yogyakarta's economic
growth in 2017 was 5.26% (yoy), an increase compared to 2016 which
was recorded at 5.05%, where the share of MSMEs was quite signifi-
cant, which was 95%. Understanding the latest conditions of MSMEs’
financial literacy is important to see whether the existing efforts are
sufficient and to identify the needs that require further attention.
2. RESEARCH METHOD
This research was conducted in the Special Region of Yogyakarta.
Samples for this research included MSMEs’ (Micro, Small and Me-
dium Enterprises) owners throughout the five districts in the Special
Region of Yogyakarta. Apparently, there were 301 respondents as
samples. Data was collected about their ownership status, age, educa-
tion, asset, and number of workers. The financial literacy survey in-
cluded the respondents’ behavior in record keeping, budgeting,
utilisation of accounting information, risk and supervision and re-

211
spondents’ literacy levels. Data were analysed using frequency analy-
sis.
3. RESULTS
The distribution of the characteristics of MSMEs’ respondents by
ownership status can be seen in the table below.
TABLE 11. 1 RESPONDENTS POSITION IN THE COMPANY

Position in the Business Frequency Percent (%)
Owner 210 71.2
Owner & Manager 56 19
Manager 21 7.1
Others 8 2.7
Missing 6 -
Total 301 100
Based on the field report, 71.2 percent of the respondents who

answered about their positions in the business were the owners of the
business firms. Meanwhile, 56 respondents or 19 percent of them
were owners with dual role as managers and owners. Even though
the business scale was MSMEs, the owners did not always have full
control of the business, implying that the business relied on the man-
agers who accounted for 21 respondents or 7.1%. Probably, a type of
business with its operations which relied on the manager is a medium
scale business as general characteristics of such business have better,
more advanced and well-planned management and organization with
clear division of tasks such as finance department, marketing depart-
ment and production department, with skilled and trained human
resources.
In terms of age, 111 of the respondents were above 50 years old
and this was 37.2% of the respondents, while 71 of them or 23.8%
were around 41 to 49-year-old. In contrast, there were many business
firms which were categorised as young which accounted for 23.2%

of the respondents or 69 respondents. Based on the educational lev-
els, 157 respondents or 53.2% of the MSMEs’ owners in the Special
Region of Yogyakarta had secondary education. There were even
business firms owners with primary education and there were 41 re-
spondents (13.9%). In line with the development of the social level of
the society, there are also many business firms with higher education
which accounted for 54 respondents or 18.3%. This statistics is rel-
evant with the previous data as there is a type of business which relies
on managers, and which are not managed by the owners. Most defi-
nitely, a manager should have higher education as one of the criteria.
This situation can be seen in Table 2.
TABLE 11. 2: RESPONDENTS BASED ON AGE AND EDUCATION

Age Frequency Percent Type of Frequency %
(%) Education
20 -29 69 23,2 Non Formal 8 2.7
Education
30-39 47 15,8 Primary 41 13.9
School
40-49 71 23,8 Secondary 157 53.2
School
>50 111 37,2 Diploma 29 9.8
Missing 3 - First Degree 54 18.3
Postgraduate 6 2.0
Missing 6 -
Total 301 100 Total 301 100
The firms in this survey were mainly newly established (36.6%)

with age less than 8 years and there were only 10% of the firms whose
establishment was above 30 years. The data suggests that almost half
of the business firms in Yogyakarta are those with micro scale, and as
stated by the Regulations No. 20 Year 2008, the maximum asset value
for micro scale business is IDR 50 million. The number of respon-
dents doing small scale business was 87 respondents or 28.9%, while
there were 31 respondents or 10.2% in the medium scale business.
These are presented in Table 11.3.

213
TABLE 11. 3: AGE AND TOTAL ASSETS OF SURVEYED FIRMS
Frequency %
AGE
≥30 years 32 10,8
18-29 years 69 23,4
8-17 years 86 29,2
>8 years 108 36,6
Missing 6 -
Total 301 100%
TOTAL ASSET
≤50 million 147 55.5
>50 - <=500 million 87 32.8
> 500 milion 31 11.7
Missing data 36 -
Total 301 100%
TABLE 11. 4: LEGAL FORM AND BUSINESS AREA OF SURVEYED FIRMS

Frequency Percentage
Type of legal form
Co-operative 3 1,1
Private Limited 3 1,1
Partnership 9 3,2
Sole Proprietorship 260 93,9
Missing 26
Business area
Consumer 78 40,8
Trading/Services 76 39,8
Industrial 22 11,5
Construction 4 2,1
Plantation 4 2,1
Properties 3 1,6
Transportation 3 1,6
Technology 1 ,5
Missing 110
One of the formal requirements to run the business is related to

legal issues or permission for business. Legal institutions will protect
the business entities from any claims based on activities of the enter-
prises. The main feature of business entities with legal institution in-
cludes separation between wealth of the owners and the wealth of
the business entities so that the owners are only responsible for the
wealth of the enterprises.
Table 11.4 confirms that almost the entire business firms in
Yogyakarta are in the form of sole proprietorship which account for
93.9% or 260 enterprises, while the rest are private limited, partner-

ship, and co-operatives. This situation makes sense as most of the
business firms in Yogyakarta are micro and small enterprises with
characteristics of sole proprietorship as the business entity. In terms
of business area, the majority of the surveyed firms are in consumer
goods (40.8%) and trading/services (39.8%).
TABLE 11. 5: RECORD KEEPING

Particulars 1 Never 2 Seldom 3 Sometimes 4 Often 5 Always
Freq % Freq % Freq % Freq % Freq %
Record Keeping
Do you separate 155 51,5 40 13,3 28 9,3 25 8,3 50 16,6

records of business
expenses and personal
expenses?
Do you use accounting 147 48,8 55 18,3 32 10,6 21 7 43 14,3
software to manage
your accounting
records?
Do you prepare 140 46,5 43 14,3 42 14 38 12,6 33 11
statement of profit and
loss?
Do you prepare 130 43,2 59 19,6 43 14,3 27 9 37 12,3
Balance Sheet
(Statement of Financial
Position)?
Do you keep records of 62 20,6 68 22,6 71 23,6 69 22,9 27 9
your debtors (credit
sales)?
Who prepares financial Own 110 36,5 Other 29 9,6
statement for your Staff Staff
organization?
4. FINDINGS
4.1. Record-Keeping: In general, there were so many Micro Small
Enterprises (MSEs) doing record keeping for current transaction only.
They only record incoming (purchased) and out-coming (sold) stocks.
This condition makes it difficult to know the net revenue exactly. Thus,
it takes time and there is also the need for accuracy. In the process of
record keeping, there is no separation between business spending and
personal spending. There are several reasons why they are reluctant
to do record keeping. Among the reasons are the availability of facili-

215
ties for record keeping, requirement for particular personnel, unstruc-
tured spending between personal activities and business activities, not
being aware of the discipline of bookkeeping, and additional expenses.
This condition can be seen in Table 5.
From Table 6 it is apparent that most of the MSMEs in Yogyakarta
did not separate business expenses and personal expenses in record
keeping and this was stated by 155 respondents or 51.5% of the re-
spondents. However, there were more respondents who always made
separate records (16.6%) compared to those who sometimes made
separate records, (13.3%). The process of record keeping without any
separation is due to the unavailability of electronic facilities in finan-
cial reporting. Thus, most of the MSMEs’ owners never made any
report and financial document both in the income statements and
balance sheets. The main reason they did this was to avoid complica-
tions with financial discipline. With such practices, it is possibly diffi-
cult to do auditing and this makes it difficult to assess business perfor-
mance.
In relation to electronic software in record keeping, several MSMEs
sometimes or seldom practised this. There were only 43 respondents
or 14% who practised book-keeping with electronic software. Most
of this computerized bookkeeping was done by medium business firms.
Thus, it is easy for medium scale businesses to prepare financial docu-
ments in the form of income statements and balance sheets.
4.2. Budgeting
The main financial characteristic of MSMEs is self-organizing,
and hence, any expense and spending is merely based on instinct. If
there is no direct handling in financial planning, it will be harmful for
their business sustainability. The potential risk from this issue is in-
ability of the business to pay regular and urgent spending, which may

damage their business. Even though there are many pre-orders (PO)
on the paper, most of the MSMEs’ owners never practised financial
planning or budgeting, and those who are in this category are 130
respondents or 43.2% of the total number of respondents.. The re-
maining respondents seldom, or sometimes practised it. In contrast,
there were 37 respondents or 12.3% who always practised financial
planning. Table 6 confirms these situations.
TABLE 11. 6: BUDGETING

Budgeting
Do you prepare yearly 130 43,2 59 19,6 43 14,3 27 9 37 12,3
budget (financial
allocations)?
Do you prepare yearly 115 38,2 50 16,6 48 15,9 36 12 46 15,3
budget?
Do you prepare 32 10,6 12 4 23 7,6 13 4,3 14 4,7
monthly budget?
Do you have a trained 145 48,2 61 20,3 35 11,6 29 9,6 24 8
accountant to prepare
budget for your
company?
As a consequence, respondents who never made any financial plan-

ning are those who never prepared monthly financial planning, and
do not have any financial personnel or accountants to prepare such
planning. For business firms of MSMEs who had prepared financial
planning for their business occasionally, they already had their own
financial personnel to organize financial planning. Likewise, for busi-
ness firms who always made financial planning, regular monthly plan-
ning is always to be done and relied upon their own financial person-
nel.
4.3. Utilisation of Accounting Information

Accounting information can be a strong basis to make decisions in
organizing MSMEs, such as market development, and pricing. It is

217
also necessary to provide accounting information in order to relate
between small enterprises with government and creditors (bank). Ac-
counting information can be used to measure and communicate fi-
nancial information of the enterprise while making decisions to solve
current issues. In fact, there are many small enterprises in Yogyakarta
that do not utilise accounting information while managing their busi-
ness as they do not have any knowledge in accounting, and most of
them do not understand the importance of recording and bookkeep-
ing for their business sustainability. Small enterprises view that it is
not necessary to implement the accounting process.
Table 11.7 depicts the financial literacy level of MSMEs in the
Special Region of Yogyakarta. Based on data processing, it can be
inferred that some business firms had understanding of financial re-
port. In fact, 55 respondents or 18.3% had understood the financial
report very well. There were 88 respondents who possessed adequate
level of understanding on financial reports, while there were 39 re-
spondents or 13% only who did not understand the financial report
at all. Even though not the entire respondents understood the finan-
cial report very well, at least some of the MSMEs’ owners had simple
financial record or bookkeeping.
Table 11.7 also confirms that most of the MSME’s owners in
Yogyakarta never considered that financial management was impor-
tant for the enterprises, and the number in this category is 107 re-
spondents or 35.5%, while there are 53 respondents or 17.6% who
considered that financial management was important in business de-
velopment. The rest considered that financial management was oc-
casionally important for the enterprises.
Based on the field survey, most of the MSMEs’ owners in
Yogyakarta never made use of financial reports while making deci-
sions for business development. They never used information to cal-

culate environmental costs, such as waste or tax or zakat payment.
There are 161 respondents and 152 respondents who never used fi-
nancial report and accounting information while making decisions
regarding their own business development. It is reasonable as these
business firms managed their own financial affairs independently and
considered that accounting process was not important to be imple-
mented in their own business. For these business firms, financial re-
cording matters for themselves only.
However, there were many business firms who occasionally utilised
financial report and accounting information in their own business.
There are 59 respondents and 42 respondents who use financial re-
port while making business decision, while only 18 respondents or
6% who always used financial report in business decision making.
This condition can be seen in Table 11.7.
TABLE 11. 7: UTILIZATON OF ACCOUNTING INFORMATION

How well do you understand financial 39 13 53 17,6 58 19,3 88 29,2 55 18,3
statements from scale 1 – 5?
Do you think financial management is 107 35,5 47 15,6 49 16,3 40 13,3 53 17,6
important for your business?
How useful is the accounting 160 53,2 18 6 26 8,6 17 5,6 30 10
information for your business from
scale 1 – 5?
Do you use financial statement for 161 53,5 59 19,6 42 14 14 4,7 18 6
business decision making?
Do you use accounting information to 152 50,5 65 21,6 40 13,3 17 5,6 20 6,6
calculate environmental cost (e.g.
wastage cost)?
Do you use accounting information for 62 20,6 33 11 49 16,3 63 20,9 88 29,2
tax/zakat computation?
From Table 11.7, it can be inferred that most of the business firms
did not have financial report arrangement, and the respondents in
this category are 161, or 53.5%. This condition possibly occured as
the business firms lacked knowledge in bookkeeping and accounting.
Ironically, even though the business firms had already understood the

219
financial report, 160 respondents or 53.2% perceived that account-
ing information was not necessary for their business, while the re-
maining 30 respondents considered that accounting information was
important for them.
In relation to accounting information usage as consideration for
tax and zakat payment, there were 88 respondents or 29.2% who
always practised it, while the rest never, sometimes, and seldom prac-
tised. The number of respondents who utilised accounting informa-
tion for tax purposes is apparently higher than those who utilised
financial information to calculate environmental cost. Most definitely,
their awareness on the importance of financial information appears
when they need to deal with other institutions which require financial
report or accounting for specific purposes, such as applying loans in
the bank and any activities related to tax payment. Respondents who
consider the importance of financial management for business devel-
opment will always use financial report and accounting information
while making decision for business.
CONCLUSION
This chapter indicated that most of the MSMEs have never used
financial statements and accounting information in making decisions
related to their business development and judge that accounting in-
formation is not important for their business. Overall, this chapter
provided some important insights for Yogyakarta to highlight pos-
sible steps for the policy makers as a reference to formulate policies
related to increasing financial literacy for MSMEs. This study indi-
cated that most of the MSMEs have never used financial statements
and accounting information in making decisions related to their busi-
ness development and judge that accounting information is not im-
portant for their business. Overall, this research has provided some

important insights for Yogyakarta to highlight possible steps for the
policy makers as a reference to formulate policies related to increas-
ing financial literacy for the MSMEs.
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ASIC (2003), “Financial literacy in Mandell, L. (2007). Financial literacy of
schools: ASIC discussion paper”, high school students. In J. J. Xiao
Australian Securities and Investments (Ed.), Handbook of consumer finance
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S. G. (2003). Household financial Policies, OECD, Paris.
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322. Indonesia, Jakarta.
Joo, S. and Grable, J.E. (2000), “Improv- OJK, 2017, Press release OJK announces
ing employee productivity: the role of higher financial literacy and inclusion
financial counselling and education”, indices SP/07/DKNS/OJK/I/2017.
Journal of Employment Counselling, Remund, D. L. (2010). Financial literacy
Vol. 37, pp. 2-15. explicated: The case for a clearer
Kimiyaghalam, F. and Safari M, 2015. definition in an increasingly complex
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financial literacy and its Measure- Affairs, 44(2), 276–295.
ment. SEGi Review Vol.8. pp.81-94. Stango, V. and Zinman, J. (2008), “The
Lusardi, A. and Mitchell, O.S. (2007), price is not right (not even on
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44.

221
Glossary
Chapter 1
Respondents’ profile: Demographic characteristics of SMEs, reasons
of involvement in business, and training attended
Business Profile: Includes year of establishment, type of ownership, busi-
ness sector, source of initial financing capital, type of financing, total
asset turnover, total sales turnover per year, and number of employees.
Kaiser-Meyer-Olkin (KMO): a measure of how suited your data is
for Factor Analysis. The test measures sampling adequacy for each
variable in the model and for the complete model.
Bartlett’s test: A test for homogeneity of variances is used to test that
variances are equal for all samples.
Business Performance: Increase or decrease in certain business aspects
Chapter 2
MSMEs: Micro, small, and medium enterprises
Profile: Personal characteristics and business status
Methodology: Approach used to conduct the chapter.
Expertise: expert skill or knowledge in business
Education level: Last education completed by the respondents
Years of business establishment: Length of business establishment
period.
Form of Business: Legal structure of the business
Chapter 3
Conceptual Framework: general framework of research by identifying
study variables that can provide results to answer the above research
questions.
Hypothesis: A hypothesis is a tentative statement about the relationship
between two or more variables which is testable.
Success Factors: variables that may affect the success of SMEs business
Knowledge skill: training in different areas, such as accounting, team
management, marketing, communication, and technology use.
Reliability test: a test to see the internal consistency of the data for the
variables used in a study.
Correlation matrix: Output of regression analysis shows the correlation
among the variables in a tabular from.
Chapter 4
MEs: Micro Enterprises
ISFI: index of Sharia financial inclusion
Financial inclusion: delivery of financial services, at affordable costs, to
sections of disadvantaged and low-income segments of the society
Micro-finance: making minor loans prepared to poor people through
programmes designed in particular to fulfill their particular needs and
circumstances.
Access to Shariah finance: outreach of sharia financial services
Usage of Shariah finance: frequency with which customers use sharia
financial services.
Chapter 5
Familiarity: Knowledge level on Islamic financing products available in
the markey.

223
Chapter 6
CTR: Current training requirement reported by the respondent during the
survey.
FTR: Future Training Requirement. Training reported to be required in
next one- or two-years’ time
Reliability Statistics: Shows the level of internal consistency for the scale
used in this study
TR: Training Received. Type, and fields of training received by the respon-
dents
Training Gap: Difference between training receive and training need
Chapter 9
DFTZ: Digital Free Trade Zone
External barriers: comprise of industry barriers (industry structure and
competition), market barriers (customer and procedural) and macro en-
vironmental barriers (direct and indirect export)
Internal barriers: include company barriers (marketing knowledge, fi-
nancial and human resource) and product barriers (quality and techni-
cal adaptation
Chapter 11
Business area: fields of business
Financial literacy: financial knowledge to attain the welfare. This finan-
cial literacy is related to the ability of individuals or business firms in
financial planning and management.
Legal form: Legal structure of the business includes co-operative, private
limited, partnership, sole-proprietorship.
Record-keeping: accounting of all financial transactions in the business.
Risk: uncertainty or the possibility of financial loss.

Index
A CTR 118
Abstract 1 D
Accessibility 91 Data analysis 161
Accounting Information 217 Data and Methodology 195
agriculture 35 Demographic factors 173
Animal Husbandry 22 Development knowledge 200
Asia 41 DFTZ 173
Asia-Pacific 191 DISCUSSION 30
assets 28 DISCUSSIONS & IMPLICA-
B TIONS 60
Barkhatov 40 E
Benchmarking 114 EAST JAVA 18
Buddhist 53 East Java 91, 96
Budgeting 216 Eigen value 200
business 17 Empirical Study 39
Business Process 140 ENTREPRENEURS 1
business success 40 Entrepreneurship 4
C ESDC 116
extraction method 13
Capacity 108
CGAP 70 F
CIAST 116 Financial & Accounting 204
Competitiveness 190 FINANCIALINCLUSION 67
competitiveness 132 financing 91
CONCLUSION 62 FINDINGS 53
Conclusion 15, 167 Findings and Discussions 6
construction 35 FMM 116
Corporation 114 FRIM 116

225
FTD 116 Klang valley 127
FTR 118 Kuala Lumpur 6
G Kuala Lumpur, 41
Gap 108 L
GDP 2, 41, 68 leadership 15
Gender 157 Level of Challenges 55
gender 24 LITERATURE REVIEW 134
Gender Differences 35 Literature Review 3
Global Market 154, 190 M
Global Value Chain 177
Malaysia 1, 39, 107, 129
Global Value Chains 173
Malaysia Evidence 172
H Malaysian Central Bank 9
Hotels 22 marital status 24
Houston 141 MATRADE 187
HRM 1, 150 Medium Enterprises 131
Hypotheses 45 METHODOLOGY 52
I Methodology 5
Micro Small and Medium Enterprise
ICT 7
19
ICT development 12
MITI 187
Inclusion 67
MSMEs 18, 19, 31, 91
Income 26
Muslims 6
Indonesia 19, 37, 67, 133, 206
INTRODUCTION 19 N
INTRoDUCTION 40 NSDC 2
Introduction 1 P
Islamic finance 9, 40
perceived training 158
Islamic financing 104
Policy 129
Issues and Challenges 11
Ponorogo 97
ITC improvement 52
PORIM 116
ITIs 116
Principle Component Analysis 190
K Problem Statement 42

PROFILE 18 Utilisation 217
Q V
Quinones 149 Varimax 199
R VUCA 203
Research Method 211 Y

RESEARCH METHODOLOGY Yogyakarta 132, 134, 141, 206
22 YTCs 116
Research Objectives 43
Restaurants 22
RESULTS AND DISCUSSION 23
Russia 40
S
Shahinpoor 70
SHARIA 67
Small and Medium Enterprises 1
SMDC 116
SME Corp 5
SMEs 1, 11, 41, 62, 108
SMIDEC 178
Southeast Asia 41
Survey 173
T
Thailand 130
Training 108
training 132
Training Gap 123
training need analysis 148
training needs 158
Transportation 22
U
UKM 149

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UMY PRESS, May 2020

Cross Border SMEs: Malaysia Indonesia

FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

Moha Asri Abdullah

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International Islamic University Malaysia (IIUM)

FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

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FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

Universitas Islam Sultan Agung, Semarang, In-

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FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

University of Darussalam Gontor UNIDA

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FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

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Universitas Muhammadiyah Yogyakarta UMY

FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

Chapter-1: “Profile of Entrepreneurs and SMEs: Issues & Challenges” By

Chapter-2: “Profile of MSMEs in East Java: challenges and prospects” By Dhika

Chapter-3: “Business Success Factors of SMEs in Malaysia: An Empirical Study”

Chapter-4: “Measuring Sharia Financial Inclusion: Evidence from Indonesia” By

Chapter-5: “Identifying accessibility of financing for MSMEs in East Java Indo-

Chapter-7: “Training Needs: How SMEs Improve Their Competitiveness.” By

Chapter-8: “A Gap Analysis of SMEs’ Training Needs and Knowledge of Chal-

Chapter-9: “Examining Issues and Challenges in Integrating SMEs into Global

Chapter-10: “Determinants of Small and Medium Enterprises (SMEs) Com-

Chapter-11: “Financial Literacy for SMEs in Yogyakarta after a Decade of SMEs

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Table1. 1 SME Definition - 4

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FATWA-FATWA FILANTROPI ISLAM DI INDONESIA

Figure 2. 1 Number of Fulltime Employees - 26

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2.0 LITERATURE REVIEW

CROSS BORDER SMEs: MALAYSIA AND INDONESIA

Given the new definition, the majority (76.5 percent) of SMEs in

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CROSS BORDER SMEs: MALAYSIA AND INDONESIA

4.0 FINDINGS AND DISCUSSIONS

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TABLE1. 2 RESPONDENTS’ PROFILE

CROSS BORDER SMEs: MALAYSIA AND INDONESIA

4.2 SMEs Profile

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CROSS BORDER SMEs: MALAYSIA AND INDONESIA

TABLE1. 3 BUSINESS PROFILE

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4.3 Issues and Challenges

CROSS BORDER SMEs: MALAYSIA AND INDONESIA

TABLE1. 4 ISSUES AND CHALLENGES

Competitive Advantage 0 12 73 143 116 4.06 0.829

Economic Fluctuations 1 13 127 161 42 3.67 0.749

Product Cost 2 10 108 206 18 3.67 0.635

Operational Cost 0 15 176 123 30 3.49 0.716

ICT development 4 30 158 117 35 3.43 0.834

Net Profit (Margin Profit) 1 22 182 118 21 3.40 0.713

Financial difficulties 3 38 156 120 27 3.38 0.817

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TABLE1. 5 KMO AND BARTLETT’S TEST

Using extraction method of principal component analysis (PCA)

CROSS BORDER SMEs: MALAYSIA AND INDONESIA