Financing SMEs and Entrepreneurs 2020

30. Malaysia

Key facts on SME financing

SMEs represent the vast majority of firms in the Malaysian economy, outnumbering large enterprises, both in terms of number and employment. According to the released Economic Census 2016, SMEs accounted for 98.5% of total business establishments in Malaysia in 2015.

Finance is becoming increasingly important for Malaysian companies, as reflected by the 9.3% growth in outstanding SME loans in 2016 (MYR 299.8 billion, from MYR 274.4 billion in 2015). Outstanding SME loans continued to grow in 2017, albeit at a slightly slower pace, increasing by 5.3% to MYR 315.7 billion. As total outstanding loans did not grow as rapidly, the share of SME lending in total business lending increased to 50.6% in 2017, from 48.7% in 2016 and 46.7% in 2015.

The annual average interest rate on SME loans by banking institutions (BIs) decreased from 7.8% in 2015 to 6.6% in 2016, but again increased slightly to 7.0% in 2017.

As of the end of December 2017, there were a total of 110 registered corporations within the Venture Capital and Private Equity sector (101 venture capital corporations (VCC) or venture capital management corporations (VCMC) and 9 private equity managing corporations (PEMC) or private equity corporations (PEC)). A total of MYR 7.0 billion are under management within these funds, which represents an increase of 7.7% year-on-year. Investments made in 2017 decreased significantly by 26.6%, to MYR 417.8 million, from MYR 569.5 million in 2016.

In 2017, the Credit Guarantee Corporation Malaysia Berhad (CGC) recorded a lower approval value of MYS 3.4 billion, as compared to MYS 4.2 billion in 2016, mainly due to the increased penetration to the microenterprise market segment, with lower average financing size. This is evidenced by the double-digit growth of 14.0% in the number of SME accounts approved, from 7 568 in 2016 to 8 637 in 2017.

Impaired financing, a proxy for non-performing loans, of the overall financial sector stood at 3.3% of total business loans, stable from 2016 and 2015 (3.3% and 3.2% respectively). Despite the rapid expansion of bank credit to SMEs, SME impaired financing substantively decreased from a peak of 7.5% in 2010, to 3.2% in 2017, and was thus almost on par with the share of large firms.

Since its inception in 2004, the National SME Development Council (NSDC) has continued to steer SME development in Malaysia by setting the strategic direction, and by formulating policies to promote the growth of SMEs across all sectors. The success of the NSDC can be measured through a number of outcomes, such as the adoption of a national definition for SMEs, the development of an SME database and statistics, the monitoring and analyse of SME performances to facilitate policy formulation, the streamlining dissemination of information on SMEs, the development of SME financial infrastructures and the endorsement of the formulation of an SME Masterplan.

More recently, the policy focus of the authorities has been to further expand the non-bank possibilities for risk capital, particularly to enhance access to finance for SMEs that are innovative, high-growth and active in new growth areas. The advent of Financial Technologies (FinTech) is transforming the financial landscape and these are expected to offer more financing alternatives to SMEs, including equity crowdfunding, investment account platforms (IAP) and peer-to-peer (P2P) lending.

Table 30.1. Scoreboard for Malaysia

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
Debt
Outstanding business loans, SMEs	MYR billion	128.0	138.9	141.6	141.2	165.3	187.6	211.0	243.7	274.4	299.8	315.7
Outstanding business loans, total	MYR billion	290.7	328.3	343.1	375.3	422.0	465.1	499.8	545.9	588.1	616.0	623.8
Share of SME outstanding loans	% of total outstanding business loans	44.00	42.30	41.30	37.60	39.17	40.34	42.22	44.64	46.66	48.66	50.60
New business lending, total	MYR billion	163.1	129.0	104.9	141.1	171.4	169.5	178.8	196.4	179.3	178.7	200.0
New business lending, SMEs	MYR billion	63.2	58.9	50.9	62.2	75.2	84.7	78.3	77.7	72.0	74.6	70.7
Share of new SME lending	% of total new lending	38.77	45.70	48.50	44.06	43.90	49.94	43.78	39.57	40.12	41.77	35.33
Share of short-term SME loans outstanding	% of total SME lending	..	..	..	..	..	..	28.73	26.52	24.18	23.61	24.10
Share of long-term SME loans outstanding	% of total SME loans	..	..	..	..	..	..	71.27	73.48	75.82	76.39	75.90
Guarantee and Financing Schemes	No. of accounts (in thousands)	13.00	10.37	14.07	7.67	7.50	2.15	2.37	6.84	8.23	7.57	8.64
Guarantee and Financing Schemes	MYR million	4 567	3 014	3 112	2 495	2 861	1 066	1 546	3 175	3 356	4 224	3 380
Impaired financing, total (amount)	MYR billion	..	20.2	18.1	23.6	21.3	18.4	17.7	17.9	18.9	20.5	20.8
Impaired financing, total	% of all business loans	..	6.16	5.29	6.28	5.05	3.97	3.55	3.27	3.21	3.32	3.33
Impaired financing, SMEs (amount)	MYR billion	..	9.9	8.9	10.6	9.6	8.5	8.2	8.6	8.9	8.9	10.1
Impaired financing, SMEs	% of all SME loans	..	7.12	6.28	7.50	5.78	4.53	3.89	3.51	3.24	2.96	3.19
Interest rate, SMEs	%	..	6.39	5.50	5.69	5.74	5.72	6.06	7.18	7.81	6.60	7.00
Interest rate, large firms	%	..	6.08	5.08	5.00	4.92	4.79	3.79	5.41	5.11	5.06	4.82
Interest rate spread	% points	..	0.31	0.42	0.69	0.82	0.94	2.28	1.77	2.69	1.54	2.17
Collateral, SMEs	% of SMEs needing collateral to obtain bank lending	..	..	..	..	..	..	49.11	51.85	46.08	41.56	43.58
Non-bank finance
Total investment as at end of the period	MYR billion	1.78	1.93	2.59	3.39	3.59	2.76	3.43	3.25	2.22	2.92	2.45
Total investment as at end of the period	%, Year-on-year growth rate	53.90	8.13	34.06	31.05	5.81	23.12	24.52	5.45	31.58	31.61	16.05
Leasing and Factoring	MYR million	..	..	..	..	721	918	1 099	1 170	1 086	834	1 280

Note: Malaysia uses the term "Impaired financing" instead of “non-performing loans” and “Total investment as at end of the period” instead of “Venture and growth capital”.

Source: see Table 30.4.

SMEs in the national economy

Small and medium enterprises (SMEs) have long been recognised as the backbone of the Malaysian economy, as they outnumber large enterprises, both in terms of number and employment. According to the Economic Census 2016, SMEs account for 98.5% of all business establishments, or 907 065 in number, in 2015. Most of these SMEs were microenterprises (76.5%), while small-sized SMEs accounted for 21.2% and medium-sized SMEs account for the remaining 2.3% of all SMEs.

A majority of SMEs operate in the services sector (89.2%), followed by manufacturing (5.3%), construction (4.3%), agriculture (1.1%), and the remaining 0.1% are found in the mining and quarrying sector. In 2017, SMEs contributed to 37.1% of the country’s gross domestic product (GDP), to 17.3% of its exports, and to 66% of total employment.

Table 30.2. Distribution of SMEs in Malaysia by size, 2015

Size	Number of Establishments	% share
Microenterprises	693 670	76.5
Small	192 783	21.2
Medium	20 612	2.3
Total	907 065	100

Source: Economic Census 2016, Profile of SMEs, Department of Statistics Malaysia (DOSM).Economic Census 2016, Profile of SMEs, Department of Statistics Malaysia (DOSM).

Table 30.3. Distribution of SMEs in Malaysia by Sector, 2015

Size	Number of Establishments	% share
Microenterprises	693 670	76.5
Small	192 783	21.2
Medium	20 612	2.3
Total	907 065	100

Source: Economic Census 2016, Profile of SMEs, Department of Statistics Malaysia (DOSM).

SME lending

Financial institutions (FIs), which comprise banking institutions (BIs) and development financial institutions (DFIs), continue to represent the main source of external funding for companies, accounting for more than 90% of total SME financing in recent years.

The key role played by the banking system for SME financing was reflected in the 9.3% growth in outstanding SME loans in 2016 (MYR 299.8 billion, from MYR 274.4 billion in 2015). Outstanding SME loans continued to grow in 2017, albeit at a slightly slower pace, increasing by 5.3% to MYR 315.7 billion. As total outstanding loans did not grow as rapidly, the share of SME lending in total business lending increased to 50.6% in 2017, from 48.7% in 2016 and 46.7% in 2015.

In contrast to that, new SME lending has been declining in recent years, after peaking at MYR 77.7 billion in 2014. It gradually reduced to MYR 72.0 billion in 2015 and slightly increased further to MYR 74.6 billion in 2016. Nevertheless, the figure decreased again to MYR 70.7 billion in 2017.

FIs play an important role in meeting the long-term financing needs of SMEs, as short-term loans accounted for only 24.1% of all SME outstanding loans in 2017. SMEs need long-term financing generally for assets and projects, while short-term financing is typically used for working capital and day-to-day expenses.

Credit conditions

The annual average interest rate on SME loans by banking institutions (BIs) has followed an erratic pattern in recent years, starting from 7.2% in 2014, to 7.8% in 2015, to 6.6% in 2016, to finally reach 7.0% in 2017. The interest rate spread between the average interest rate for SME loans and for a loan to a large enterprise rose notably between 2008 and 2015, from 0.3 percentage points (pp) in 2008, to 2.3 pp in 2013. In 2014, the spread narrowed to 1.8 pp, but then increased once more to 2.7 pp in 2015, narrowed again to 1.5 pp in 2016 and further up to 2.2 pp in 2017.

Alternative sources of SME financing

Malaysia offers a wide and diversified financing landscape for SMEs. In addition to financial institutions (FIs), SMEs also have access to a wide range of special funds and schemes made available by the Government through various Ministries and agencies, including the Central Bank of Malaysia. Aside from these sources of financing, there are also options from non-banking set-ups, such as venture capital companies, guarantee schemes, factoring and leasing, and microfinance institutions.

At the end of 2017, there were a total of 110 registered venture capital corporations in the country, with a total of MYR 7.0 billion under management in committed funds, which represented an increase of 7.6% year-on-year. However, total investments made during the year decreased significantly by 26.6%, to MYR 417.8 million, from MYR 569.5 million in 2016.

There was a slight 1.3% increase in the number of investee companies, from 376 in 2016 to 381 in 2017. The number of investee companies that received funding in 2017 stood at 62 investee companies, receiving RM 280.6 million. Meanwhile, divestments decreased by 41.9% from MYR 532 million in 2016 to MYR 375 million in 2017, as 59 companies were divested in 2017, compared to 276 companies in 2016. Divestments recorded during the year were mainly through initial public offering (IPOs), or sales to public markets and redemption of investee company shares.

While the data on asset-based financing, namely leasing and factoring, is based on an annual survey and may therefore not be representative of the overall industry, available data still suggests that asset-based financing is becoming more widely used, with volumes increasing by almost 50.6% between 2011 and 2015, from MYR 721 million in 2011 to MYR 1.1 billion in 2015. In 2016, the volume decreased significantly by 23.2%, down to MYR 834 million, while it rose again to RM 1 280 million in 2017.

Other indicators

Impaired financing, a proxy for non-performing loans, of the overall financial sector stood at 3.3% of total business loans, stable from 2016 and 2015 (3.3% and 3.2% respectively). Despite the rapid expansion of bank credit to SMEs, SME impaired financing substantively decreased from a peak of 7.5% in 2010, to 3.2% in 2017, and was thus almost on par with the share of large firms.

Government policy response

The Credit Guarantee Corporation Malaysia Berhad

The Credit Guarantee Corporation Malaysia Berhad (CGC) remains the main institution providing guarantees to SMEs which may have otherwise not succeeded in getting financing from FIs. The institution continued to leverage on FIs as the key channel to market and provide products and services to SMEs, while forging alliance with non-FIs to further expand its outreach to SMEs.

Besides the various guarantee schemes, CGC also plays the role of a catalyst for new growth areas by providing direct financing schemes to start-ups and women entrepreneurs, as well as for SMEs involved in green technology and intellectual property. CGC’s support for SMEs is not confined to the provision of loan guarantees and financing facilities, but also includes advisory services on issues such as financial and business development, credit information and credit rating services, in collaboration with the Credit Bureau Malaysia Sdn. Bhd. In 2017, more than 8 637 new financing projects were approved, valued at MYR 3.4 billion.

In addition, CGC has introduced innovative products designed to improve the turnaround time for loan processing and disbursement of funds. One of the products include the Portfolio Guarantee (PG), which allow banks to select customers based on a pre-determined set of criteria and process loan applications on a portfolio basis. This enabled both CGC and the banks to expedite the approval and disbursement of loans to SMEs. In 2017, CGC approved a total of MYR 1.9 billion worth of PGs.

The National SME Development Council

Since its inception in 2004, the National SME Development Council (NSDC) has continued to steer SME development in Malaysia by setting the strategic direction, and by formulating policies to promote the growth of SMEs across all sectors. As the highest policy making body, the Council is crucial in promoting a more holistic and coordinated approach in SME development. The success of the NSDC can be measured through a number of outcomes, such as the adoption of a national definition for SMEs, the development of an SME database and statistics, the monitoring and analyse of SME performances to facilitate policy formulation, the streamlining dissemination of information on SMEs, the development of SME financial infrastructures and the endorsement of the formulation of an SME Masterplan.

As a result, SMEs have progressed well over the years with their contribution to GDP increasing steadily from 29.6% in 2005 to 37.1% in 2017 (36.6% in 2016).

The SME Masterplan (2012-2020)

The SME Masterplan (2012-2020) introduced in July 2012, aims to bring SMEs to the next level, by raising their contribution to GDP to 41% by 2020. The implementation of the Plan is currently underway with some areas already showing results, particularly in innovation and enhancing the ease of doing business. The Masterplan served as the basis for SME development in the Eleventh Malaysian Plan (11MP), as the country moved toward becoming a high income nation.

With various policy reforms underway, SMEs are expected to also require adjustments and recalibration of their business operations to remain competitive. The Government, through SME Corporation Malaysia as the central agency tasked to coordinate and drive the SME Masterplan, outlined six High Impact Programmes (HIPs) which are critical for the success of the Plan. At the same time, the Plan also enlisted 26 other supporting measures to reinforce the ecosystem.

Taking into consideration the developments in the economy and statistics, including the new SME definition introduced in 2014, the macro-targets set under the SME Masterplan were reviewed in 2015. The SME GDP target for 2020 of 41% remained unchanged, but the SME share to employment was revised slightly upward to 65% in 2020 (from previously 62%), while the share of SME exports was revised to 23% from previously 25%.

More recently, the policy focus of the authorities has been to further expand the non-bank opportunities for risk capital, particularly to enhance access to finance for SMEs that are innovative, high-growth and active in new growth areas. The advent of Financial Technology (FinTech) is transforming the financial landscape and these are expected to offer more financing alternatives for SMEs, including Equity Crowdfunding (ECF), Investment Account Platforms (IAP) and Peer-to-Peer (P2P) lending.

As of June 2018, seven ECF operators and six P2P financing operators have registered with Security Commission Malaysia (SC) to offer not only differentiated services, but also their wide range of networks both at the regional and global level.

The introduction of the ECF and Peer-to-Peer lending (P2P) platforms in April 2016 by the Securities Commission Malaysia (SC) has enabled sole proprietorships, partnerships, limited liability partnerships, private limited and unlisted public entities to access market-based financing to fund their projects or businesses, via an electronic platform. To date, ECF and P2P platforms have supported more than 300 small and medium enterprises (SMEs) to raise a total of MYR 118 million capital through more than 1 000 successful campaigns.

Figure 30.1. Trends in SME and entrepreneurship finance in Malaysia

Source: see Table 30.4.

Statlink

Table 30.4. Definitions and sources of indicators for Malaysia's scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, SMEs	**SME loans from financial institutions, amount outstanding as at end period using the national SME definition	Central Bank of Malaysia, "Supply-side data" from Financial Institutions Statistical System (FISS) and Development Financial Institutions Statistical System (DFISS)
Outstanding business loans, total	Business loans from financial institutions to all non-financial enterprises, outstanding amount as at end period	Central Bank of Malaysia, "Supply-side data" from Financial Institutions Statistical System (FISS) and Development Financial Institutions Statistical System (DFISS)
Share of SME outstanding loans	SME loans from financial institutions as a percentage of total business loans	Central Bank of Malaysia, "Supply-side data" from Financial Institutions Statistical System (FISS) and Development Financial Institutions Statistical System (DFISS)
New business lending, total	Business loans approved by financial institutions to all non-financial enterprises during the period	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
New business lending, SMEs	SME loans approved by financial institutions during the period using the national SME definition	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Share of new SME lending	SME loans approved as a percentage of total business loans approved	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Share of short-term SME loans outstanding	SME loans up to one year maturity; outstanding amount	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Share of long-term SME loans outstanding	SME loans with more than one year maturity; outstanding amount	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Guarantee and Financing Schemes	Guaranteed and financing schemes (approved amount)	Credit Guarantee Corporation Malaysia Berhad (CGC)
Impaired business loans, total	Loan is classified as impaired: Where the principal or interest or both of the loans is past due for more than 90 days or 3 months. In the case of revolving facilities (e.g. overdraft facilities), the facility shall be classified as impaired where the outstanding amount has remained in excess of the approved limit for a period of more than 90 days or 3 months; or Where the amount is past due or the outstanding amount has been in excess of the approved limit for 90 days or 3 months or less, the loan exhibits weaknesses in accordance with the banking institution’s credit risk grading framework; or When the loans is classified as rescheduled and restructured in CCRIS.	Central Bank of Malaysia, "Supply-side data" from Financial Institutions Statistical System (FISS) and Development Financial Institutions Statistical System (DFISS)
Impaired loans, SMEs	Loan is classified as impaired: Where the principal or interest or both of the loans is past due for more than 90 days or 3 months. In the case of revolving facilities (e.g. overdraft facilities), the facility shall be classified as impaired where the outstanding amount has remained in excess of the approved limit for a period of more than 90 days or 3 months; or Where the amount is past due or the outstanding amount has been in excess of the approved limit for 90 days or 3 months or less, the loan exhibits weaknesses in accordance with the banking institution’s credit risk grading framework; or When the loans is classified as rescheduled and restructured in CCRIS.	Central Bank of Malaysia, "Supply-side data" from Financial Institutions Statistical System (FISS) and Development Financial Institutions Statistical System (DFISS)
Interest rate, SMEs	Average annual interest rate of newly approved term loans; for maturity up to 1 year	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Interest rate, large firms	Average annual interest rate for newly approved loans for the large firms; for maturity up to 1 year	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Interest rate spread	Difference between average annual interest rates of SMEs and large enterprises; for maturity up to 1 year	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Collateral, SMEs	Percentage of SME borrowers with collateral	Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)
Non-bank finance
Total investment as at end of the period	Total investment as at end of the period	Securities Commission Annual Report
Leasing & factoring	Loans outstanding of leasing and factoring to SMEs	Central Bank of Malaysia, "Supply-side data"

References

Central Bank of Malaysia, "Supply-side data" from Financial Institutions Statistical System (FISS) and Development Financial Institutions Statistical System (DFISS)

Central Bank of Malaysia, "Supply-side data" from Borrower Credit Information Data Mart (BCIDM)

Credit Guarantee Corporation Malaysia Berhad (CGC), “Annual Report 2017”

https://www.cgc.com.my/publications/

Department of Statistics Malaysia (DOSM) (2016), “Economic Census 2016 - Profile of Small & Medium Enterprise”

Economic Planning Unit (EPU), (2015), “Eleventh Malaysia Plan 2016-2020”

http://epu.gov.my/en/rmk/eleventh-malaysia-plan-2016-2020

Securities Commission Malaysia (SC), “2017 Annual Report”

https://www.sc.com.my/home/sc-annual-report/

SME Corporation Malaysia (SME Corp.) (2012), “SME Masterplan 2012-2020”

http://www.smecorp.gov.my/index.php/en/resources/2015-12-21-11-07-06/sme-masterplan

SME Corporation Malaysia (SME Corp.) (2017), “SME Annual Report 2017/18”

http://www.smecorp.gov.my/index.php/en/resources/2015-12-21-11-07-06/sme-annual-report