Financial Literacy among SMEs: Over-Indebtedness Causes, Consequences, and Regulatory Measures in Malaysia

Abstract

This study explores the growing issue of over-indebtedness among Malaysian SMEs, where microfinance intended to promote financial inclusion has, paradoxically, created cycles of debt. The research highlights a gap in understanding how multiple borrowing, financial illiteracy, and weak regulatory enforcement combine to push SMEs into financial distress, especially with the rise of digital lenders. Using a qualitative case study approach, semi-structured interviews were conducted with 20 stakeholders, including SME owners, microfinance managers, and regulators. Thematic analysis was applied to uncover systemic, institutional, and behavioral drivers of over-indebtedness. Findings reveal that SMEs often rely on sequential borrowing, with new loans servicing old debts, creating debt spirals. Institutional pressures such as easy loan approvals and aggressive marketing amplify risks, while fragmented regulation leaves loopholes. The study concludes that SME over-indebtedness reflects systemic failure rather than individual mismanagement, calling for stronger credit registries, borrower education, and regulatory reform to ensure sustainable microfinance.