SMEs need more diversified financing ecosystem


THE financing ecosystem in Malaysia needs to be diversified to allow small and medium enterprises (SMEs) obtain funds beyond the orthodox banking system, Finance Minister Lim Guan Eng (picture) said.

Lim said approximately 90% of SME financing is currently obtained from financial institutions, while the remainder 10% is from the capital market.

“Beyond the orthodox banking system, we need to help diversify the financing ecosystem in order to help SMEs obtain funds for growth purposes,” he said in his opening remarks during the focus group meeting for Budget 2020 at the Securities Commission Malaysia on Monday.

Lim said financing from the capital market and innovative platforms such as the Leading Entrepreneur Accelerator Platform Market, equity crowdfunding (ECF), peer-to-peer (P2P), private equity and venture capital should be further explored as funding options for SMEs and start-ups.

“With the range of funding that can be obtained via ECF and P2P between RM1,000 and RM3 million, there are financing opportunities for SMEs across all stages of the business cycle.

“With the rise of financial technology, financing solutions are becoming more personalised, accessible and attractive through a wide range of products and services offered at competitive rates,” he said.

As it is, 900 SMEs had successfully raised a total funding of RM344 million through more than 3,400 deals since 2015.

According to Bank Negara Malaysia’s 2018 SME financing survey, financing access difficulty is ranked as among the top 10 factors constraining SME growth.

Among the hindrances are insufficient collateral, lack of documentation, limited cashflow to meet repayment obligations, complex application process and high risk involved in the business venture.

Lim said the shortcomings also stem from requirements existing in the traditional banking system that take a conservative approach towards risk.

“Without even accounting for the various stages of the SME life cycle — which may affect financing options available — SMEs find it challenging to secure financing from external sources.

“As a result, more than 70% of SMEs’ financing needs are sourced internally such as from family members or personal savings, and 30% are derived from financial institutions such as banks and microcredit institutions,” he added.

Lim said while the share of SME loans to total business loans stands at 50.2%, the increase in total loans disbursed to SMEs is marginal at 3% — where RM127.4 billion was disbursed for the period of January to May 2019 compared to RM123.4 billion for the same period last year.

“SMEs need financing not only for operational expenditure, but also to strategically grow and develop their value-add in the fast-changing business and technological landscape,” Lim said.

According to SME Corp Malaysia, the main reasons for financing are for working capital, the purchase and renting of machinery, improving or updating production process, and research and development activities.

“Enhancing the access to financing for SMEs effectively will require a coordinated approach from the public and private sectors. We can assist SMEs and start-ups to make the digitalisation leap by ensuring they have access to the necessary funds to do so.

“One way to assist them in participating and shaping the digital economy is by improving their access to financing,” Lim said.

On the whole, SMEs play an important role in the Malaysian economy as they contributed to 37% of the nation’s GDP in 2018 and that figure is projected to rise to 41% by 2020.

SMEs comprise about 98.5% of total business establishments in the country, and employ two-thirds of all workers in Malaysia.