SERC executive director Lee Heng Guie
SMALL and medium enterprises’ (SMEs) access to finance is a subject of policymakers’ interest both in developed and developing countries, including Malaysia.
As access to financial services for SMEs remains severely constrained, it restricts their business expansion and innovation as well as risk-taking development.
It is a timely manner for the Securities Commission (SC) to launch “Catalysing MSME and MTC Access to the Capital Market: Five-Year Roadmap (2024-2028)” to support micro and small and medium Enterprises (MSMEs) and mid-tier companies (MTCs).
MSMEs are recognised as a fundamental asset of the economy. In 2022, they contributed 74% of Malaysia’s gross domestic product and employed 64% of the Malaysian workforce.
In Malaysia, the government has made significant inroads in developing a comprehensive financing ecosystem to support financing SMEs.
Provision of SMEs financing is also complemented by development financial institutions, Bank Negara’s fund for SMEs and government funds.
In Budget 2024, a sum of RM44bil was set aside to support domestic SMEs, which comes in the form of grants, guarantee schemes, capacity building programmes and other financing facilities.
The numbers speak for themselves amid SMEs still facing financing constraints. In 2023, financing to SMEs comprised almost half of the total outstanding business financing (49.6%), with RM528bil in total financing disbursed by banks into 2.28 million SME accounts.
Bank Negara has allocated a further RM32.4bil in funds to further enhance access to financing for SMEs in strategic and new growth areas.
During 2017 to 2023, the capital market has offered a range of fundraising options in meeting the financing needs of MSMEs and MTCs across diverse growth stages.
These were LEAP Market and ACE Market (RM12.8bil), venture capital and private equity (RM5.9bil) and RM6.6bil through equity crowdfunding and peer-to-peer financing.
Despite scaling up the level of financing to SMEs, there remains an existence of a large financing gap, including greater accessibility to the banks’ financing and other alternatives of funding instruments such as fundraising from the capital market. It is estimated that MSMEs’ financing gap was RM290bil in 2022.
Amongst the reasons that led to the intertwined impacts on MSMEs finance gap are the characteristics embedded in MSMEs, asymmetric information flows and market infrastructure and the banks’ lending behaviour in terms of credit scoring and stringent loan valuation and criteria relative to non-banks.
Banks are reluctant to lend to small businesses given the innate features of MSMEs and market failure.
The nature and business operation characteristics of SMEs render loans to them as risky lending and hence, facing relatively higher credit constraints as the lack of high value collaterals impose high transaction and monitoring costs on banks.
The perception of risk lending to MSMEs is due to a limited track record in delivering decent returns on investment to investors, lack of better internal and external controls, lack of financial expertise and few tangible assets to offer as security.
Despite the capital market offering the fundraising platform to MSMEs and MTCs, they face issues and challenges such as high costs of fundraising (professional fees and compliance expenses), low awareness and lack of readiness to utilise capital market financing options.
Limited access and investment restrictions to MSMEs, giving rise to liquidity and exit concerns and the lack of credible and transparent information was amongst the issues cited by investors investing in MSMEs via participation in the capital market.
The lack of supporting infrastructure for MSMEs and MTCs investments has resulted in difficulty in facilitating or promoting private market deals and trade sales.
The financing difficulties of MSMEs have long been a worldwide phenomenon. The World Bank has assessed the finance gap in developing countries and the results showed that 65 million enterprises, or 40% of formal MSMEs in developing countries, have an unmet financing need of US$5.2 trillion every year.
The SC’s roadmap aims to grow the MSMEs and MTCs capital market fundraising by seven times, from RM6.3bil in 2023 to RM40bil in 2028, an increase of a 46% compounded annual growth rate over the next five years. This represents up to 20% financing to be sourced from the capital market.
Capital market financing complements the traditional banks’ finance to fill the void in MSMEs and MTCs growth capital gap at specific stages in their business development and expansion life cycle.
Capital market financing is best suited for newer, innovative and fast-growing companies, with a higher risk-return profile or the associated profit patterns are often difficult to forecast.
It is, therefore, necessary to broaden the range of alternative financing instruments available to MSMEs and MTCs, which are particularly important for startups, high-growth and innovative SMEs.
The roadmap encompasses nine strategies and 36 initiatives identified under three approaches (regulatory and product innovation, market infrastructure and capacity building).
It is estimated that approximately 15,000 to 28,000 MSMEs and MTCs have the potential to raise financing through the capital market.
Addressing the issues and challenges as well as the gaps faced by MSMEs and MTCs as well as investors are crucial to serve financing needs of MSMEs and MTCs sourced from the capital market.
Hence, we concur that a whole-of-nation approach with the SC as a custodian of the roadmap, in coordination and collaboration with the key partners from ministries, agencies, stakeholders and capital market intermediaries is essential to achieve the outcome.
MSMEs and MTCs must have strategic vision and scale up the quality of their startups business plans, investment propositions, management skills and governance, entrepreneurial skills and capabilities, which are a key prerequisite to tapping the capital market’s financing.
It is not about increasing their awareness and knowledge as well as understanding of the financing instruments, instead, the capital market intermediaries have to support MSMEs and MTCs in developing a strategic pathway to business financing at the different stages of the life cycle – the advantages, costs and risks implied, and what are the appropriate instruments to balance between the debt and equity finance.
The lack of “investor readiness” presents one of the major impediments for young entrepreneurs and starters.
We have to work on four dimensions of readiness (technology, market, management and financial readiness), focusing on improving the capabilities of the management team, a clear description of the vision within the business plan and a clear exit strategy for the investor.
The regulatory framework is a key enabler for the supply of financing instruments. The challenge for the policymakers and regulators is to design and implement effective regulation, which balances between investors’ protection and supporting financing channels for MSMEs and MTCs.
This involves the engineering of investible products and financing instruments to meet the appetite for high returns by financiers and investors while MSMEs and MTCs have accessed capital market financing.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
