Small and medium-sized enterprises (SMEs) contribute substantially to the nation’s economic growth. Loan from banks have been the most common form of financing among SMEs due to limited internal generated fund. However, obtaining financing from banks is mostly challenging to many SMEs. In Malaysia, there were bundles of bank loan facilities offered by many financial institutions. This fact is affirmed by the World Bank that Malaysia has been the top-ranked country to provide ease of obtaining credit for six consecutive years from 2008 to 2013. The aim of this study is to identify the characteristics of SMEs and other factors that discouraged them from applying bank loans. This study considers the borrowers (SMEs) perspective instead of the loan provider as cited by most literatures. A total of 1,425 self-administered questionnaires were distributed to a randomly selected sample of Malaysian SMEs registered with SME Corporations, covering all the four regions in West Malaysia. The number of
usable questionnaires was 110 responses, yielding about 12.67 percent response rate. The discouraged borrower model in this study was tested using logistic regression analysis. The results indicate that size and age of the SMEs are significant predictors of SMEs being discouraged from applying for bank loan. Gender, experience and ethnicity of the owner/manager of the SMEs are also significantly related to their discouragement. Finally, the application costs that includes financial, in-kind and psychic costs are also significant determinants of SMEs discouraged from applying for bank loan. The results of this study support the Theory of Discouraged Borrowers hence contributes useful input to bankers or loan providers in considering small and opaque firms in marketing their services. Additionally, this study also shed some lights to policy makers in their effort to encourage bankers to provide easily obtainable loan to SMEs or such groups
