Legal Governance of Microfinance in Malaysia: Addressing Borrower Default Through Tiered Enforcement and Institutional Sustainability

Microfinance plays a pivotal role in supporting Malaysia’s small enterprises and financially underserved communities. Yet, borrower defaults pose a significant threat to institutional sustainability and financial inclusion. This article examines the role of legal enforcement in addressing borrower default and promoting good governance among Malaysian microfinance institutions. Using a doctrinal legal approach, complemented by qualitative interviews with five major related institutions, the study analyses enforcement mechanisms ranging from civil litigation to bankruptcy proceedings. It also investigates institutional practices and borrower categorization in the context of contractual obligations. The findings reveal that while legal action is an important tool for protecting institutional integrity, alternative strategies such as borrower education, community-based monitoring, and adaptive repayment structures offer complementary pathways to sustainability. The study concludes that an integrated legal-governance framework, combining enforcement with borrower-centric approaches, is essential for enhancing microfinance institutions resilience and policy alignment with the government financial inclusion agenda.