Creating a suitable financial ecosystem for SME growth
by Ronnie Teo and Emy Lindsay, firstname.lastname@example.org. Posted on July 1, 2012, Sunday
KUCHING: It is without a doubt that small and medium enterprises (SMEs) are fast gaining traction in today’s economy.
Representing 99.2 per cent of total active business establishments in Malaysia, SMEs are no longer mere ‘side ventures’ for entrepreneurs with good ideas and the necessary capital to do so.
Today, the Malaysian SME sector is a robust and growing market, making up a majority of the country’s businesses and serving to fulfil many crucial niches that complete the industries – proving that strength does come in numbers.
To note, the total SME industry covers an estimated 32 per cent of Malaysia’s gross development product (GDP) and employ 56 per cent of total workforce in 2012.
Currently, there are 548,267 SMEs in Malaysia, of which six per cent or 33,000 SMEs are in Sarawak.
Of the 33,000 SMEs in Sarawak, 77 per cent are categorised as micro enterprises, which translates as a company with less than five people. An estimated 20 per cent of the SMEs are small enterprises and the rest are medium-sized enterprises.
Over the next eight years, under the 10 Year SME Master Plan, the government will be fully supporting and facilitating the SMEs to achieve 41 per cent of total GDP contribution.
A preliminary assessment based on the 523,132 business establishments that responded to the Census (2005) indicated that 99.2 per cent or 518,996 of the business establishments are SMEs, of which 411,849 are micro enterprises. Most of the SMEs (86.5 per cent or 449,004) are in the services sector, mainly engaged in the retail, restaurant, wholesale, transportation and communication, and professional services businesses.
An estimated 37,866 or 7.3 per cent SMEs are in the manufacturing sector, mainly in the textile and apparel, metal and mineral products, and food and beverages industries.
A total of 32,126 or 6.2 per cent of SMEs are involved in the agriculture sector, mostly in food crops, market produce and horticulture, as well as livestock.
The census confirmed that SMEs are a major source of employment, providing jobs for over three million workers or 65.1 per cent of total employment in these business establishments.
A total of 2.2 million workers were employed by SMEs in the services sector, while 740,000 and 131,000 workers were employed in the manufacturing and agriculture sectors respectively. As of 2012, the number of SMEs is estimated to have grown to 1,000,000 in Malaysia.
In the 132 economies covered, there are 125 million formal Malaysian SMEs of which 89 million operate in emerging markets. These results are in line with a recent study published by IFC and McKinsey & Company in 2010, ‘Two Trillion and Counting,’ which found that there are between 80 and 100 million formal Malaysian SMEs in emerging markets.
Globally, the number of Malaysian SMEs per 1,000 people grew by six per cent per year from 2000 to 2009. Europe and Central Asia experienced the biggest boom, with 15 per cent growth.
Thus, SMEs remain a key source of economic growth, dynamism and flexibility in advanced industrialised countries as well as in emerging and developing economies. Albeit small, SMEs are particularly important for bringing innovative products or particular techniques to the market.
The recent barrage of events in Malaysia promoting SMEs such as the SME Congress, SME Innovation Showcase 2012, Asean-India SME Conference and SME Week 2012, to name a few – affirms the growing importance of this industry to the point where both public and private sectors are building up the platform to enhance the industry further.
In fact, from this year onwards, the first Wednesday of every July will be officially recognised as Malaysia SME Day – with July 4, 2012 being its inception date.
SMEs must now be recognised as assuming a critical role in national building, contributing to the nation’s economic advancement, driven by creativity and innovation.
According to SME Corporation Malaysia (SME Corp) chief executive officer Datuk Hafsah Hashim, competitive and resilient SMEs were a vital component in achieving sustainable economic growth – even more so with the uncertainties seen in the global markets.
“It is a common fact that SMEs in Malaysia have traditionally been domestic-oriented,” she told BizHive Weekly. “But under the impact of a globalised and now-more liberalised market, they now face the full brunt of competition – with the current economic scenario that has resulted in a more competitive environment.”
While free trade agreements (FTAs) provided opportunities for SMEs to compete in a market which was increasingly becoming global, Hafsah said it was paramount for both the public and private sectors to work together in order to encourage the local SMEs to take advantage of the benefits that would accrue as the outcome of increased regional integration, globalisation and market liberalisation, resulting from FTAs and other multilateral and bilateral trade initiatives.
Meanwhile Alliance Bank Malaysia Bhd’s (Alliance Bank) head of SME Banking, Steve Miller, predicted steady growth for SMEs despite the global economic challenges present.
“This is especially so with various support functions and initiatives put in place by the government,” he told BizHive Weekly. “SMEs that are linked to global value chains will be more vulnerable.
“However, with strong domestic demand and key government initiatives such as the Economic Transformation Programme, SME Masterplan (2012–2020), corridor projects as well as various other initiatives in the pipeline, the impact on our SMEs will not be significant.”
Additionally, Bank Perusahaan Kecil & Sederhana Bhd (SME Bank) vice president and head of Corporate Communications and Branding, Ahmad Ikram Abdullah, believed that local SMEs had shown a lot of progress and improvement over the past few years.
“Many have proven their capabilities by venturing into the global market,” he said. “The government’s business friendly policies and numerous forms of assistance provided for SMEs have also contributed to the success of our local SMEs.
“I am very optimistic of the future of this industry.”
SME Corp’s Hafsah noted that the government had a vision to create globally-competitive SMEs that enhanced wealth creation and contributed to the social well-being of the nation.
“In achieving this aim, the government focuses on creating an enabling ecosystem – in order to accelerate the growth of SMEs through productivity gains and innovation – and therefore bring them to the next level of development.
“It is imperative for SMEs to create strategic alliances and synergistic partnerships among themselves in order to increase their productivity and contribution towards the national economy.”
But innovative products and services, however great their potential, need investment to flourish. If SMEs cannot find the financing they need, brilliant ideas may fall into oblivion which would be a loss in potential growth for the economy.
Financing is necessary for SMEs to help them set up and expand their operations, develop new products and invest in new staffs or production facilities.
Potential high growth SMEs, of which many were in the high technology sectors, had played a pivotal role in raising productivity and maintaining competitiveness in this industry for many years, she pointed out.
The government was also providing assistance via the increase of grants for SMEs from RM30,000 to RM100,000 per company from July 1 onwards, Datuk Seri Mustapa Mohamed announced recently.
This RM70,000 increase was hoped to encourage SMEs to become more viable and competitive in addition to aiding business growth.
“The RM70,000 boost in grants offered will have its impact on local players. It has also been expanded to facilitate various export functions such as overseas supermarket or hypermarket listing fee, overseas international certification and initial set-up cost of representative office overseas for service providers,” noted Miller from Alliance Bank.
“With the economic situation now, financing is more challenging for most SMEs thus affecting their business growth; this aid will mitigate one of the many problems SMEs face in these difficult times.”
Even with this aid from the government, it is imperative for local financial institutions to fuel the progressive growth of SMEs in addition to nurturing them towards self-sustenance.
In Malaysia, many banks that give financing or banking facilities to SMEs are government-owned. Hence, credit may be allocated on the basis of government guarantees or in line with the government’s target of developing specific sectors.
BizHive Weekly looks at a few financial institutions in Malaysia providing assistance to players in the SME industry, all of which play an integral part in the development of SMEs.