This study examines the impact of microfinance services on the socio‐economic welfare of urban households in Sabah, which is considered as the poorest state in Malaysia. The data were collected from recipients of microfinance services through self‐administered questionnaire and were analyzed using Smart Partial Least Squares (PLS). The results of this study show that microcredit, microinsurance, savings, training, and social intermediation service have significant effects on socio‐economic welfare of urban households in Sabah. The empirical findings can be used as a guideline for microfinance institutions to provide the best services that will reduce vulnerability of the households in Sabah. It can also assist the government to provide the best microfinance blueprints in the region.

The primary aim of this paper is to investigate the impact of financial (microcredit and microinsurance) and nonfinancial services (training), services by microfinance on the welfare of their urban clients in Malaysia. We contribute to the existing literature by using income as a mediating variable in the analysis. Questionnaires were distributed to 400 respondents across three different urban areas in Malaysia in order to collect the relevant data for this study. We have adopted the quota sampling to collect the data. The results show that most of the services provided by the microfinance institutions including microcredit, micro insurance and training have assisted the urban households to earn more income and enhance their socioeconomic welfare. The recommendations arising from the results of this study are: 1) an environment that promotes cooperation between microfinance institutions and households should be enhanced and 2) well-diversified and dynamic microfinance programs and specific skills-building training programs should be created.