1.0 Introduction Previously in Malaysia, there was no standard definition as to what Small and Medium Enterprises (SMEs) were. Various agencies and banking institutions define SMEs according to their own standards (although there is a significant degree of overlap in criteria). In 2005, however, the National SME Development Council (NSDC) laid out two main criteria: annual sales turnover and number of employees, although some banks also list the amount of shareholder’s funds present as another criterion. These criteria were to be adopted by all Government ministries and agencies, along with financial institutions. These criteria apply to all SMEs of various sectors: agriculture, manufacturing and services. The following two charts show the approved definitions of SMEs based on the number of full-time employees and turnover (according to sectors):
As it can be seen, SMEs are divided up into micro, small and medium sized enterprises respectively.
2.0 Objectives This report attempts to discuss the following issues, namely: The various Government ministries and agencies involved in the SME industry, the incentives that these agencies provide to aid SMEs, banking institutions that have products specifically for SMEs, potential growth areas of SMEs and challenges that these SMEs face. 3.0 Methodology Research for this report has been done primarily through the Internet, with references to Bank Negara’s online database as well as to SME resource websites. Some journal articles have also been utilized.
4.0 Findings 4.1
Agencies involved with the Small and Medium Industry
SME development was highlighted in the Ninth Malaysia Plan. The National SME Development Council (NSDC) was formed to guide and advise Government in their policies and coordinate all initiatives, in development or other matters. The NSDC is the highest policy-making body related to SME development. It is chaired by the Prime Minister and comprises of 18 Ministries and Government Agencies involved in SME development. There are 19 members (including the Prime Minister) of NSDC at present. They include: •
Y.A.B. Perdana Menteri – Chairman
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Minister of Housing and Local Government
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Minister of Energy, Water and Communications
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Minister of International Trade and Industry
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Minister of Agriculture and Agro-Based Industries
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Minister of Human Resource
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Minister of Education
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Minister of Science, Technology and Innovation
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Minister of Finance II
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Minister of Tourism
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Minister of Plantation Industries and Commodities
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Minister of Domestic Trade and Consumer Affairs
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Minister of Higher Education
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Minister of Rural and Regional Development
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Minister of Entrepreneur and Cooperatives Development
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Minister in Prime Minister’s Department (Y.B. Senator Dato’ Sri Effendi Norwawi)
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Governor of Bank Negara Malaysia
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Director-General of Economic Planning Unit
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Chief Executive Officer of Multimedia Development Corporation Sdn Bhd
The main objectives of NSDC are to: 1. Formulate broad policies and strategies to facilitate the overall development of SMEs across all sectors; 2. Review the roles and responsibilities of Government Ministries and Agencies responsible for SME development; 3. Enhance cooperation and coordination, as well as guide stakeholders to ensure effective implementation of SME development policies and action plans;
4. Encourage and strengthen role of the private sector in supporting the overall development of SMEs; and 5. Provide emphasis to the development of Bumiputera SMEs across all sectors of the economy.
The above is the Government’s overall blueprint for SME development in the country. The three strategic thrusts deserved to be expanded upon. They are: Building the capacity and capability of SMEs, specifically in the areas of entrepreneur development, human capital development, advisory services, awareness and outreach, technology enhancement and product development; Strengthening an enabling infrastructure for SME development. This involves developing and enhancing physical infrastructure and information management as well as ensuring conducive regulations and operating requirements relating to SMEs; and Enhancing access to financing by SMEs, which involves developing and strengthening institutional arrangements to support SME financing requirements.
In this respect, the main government agency (which works along with the NSDC) that functions as a “one-stop” centre for SME aid is SMIDEC, the Small and Medium Industries Development Corporation. SMIDEC is aimed at the manufacturing sector SMEs and provides them advisory, fiscal and financial assistance services. By 2010, the Small and Medium Enterprise Industry is expected to accomplish these things: 1. Contribution to Gross Domestic Product (GDP) by SMEs to increase from 32% in 2005 to 37% in 2010 with the bulk of the growth targeted to come from the services sector, making up 23% of GDP contribution by 2010; 2. Contribution to employment (excluding Government) by SMEs to increase from 56% in 2005 to 57% of total employment in 2010; and 3. Share of total exports by SMEs to increase from 19% to 22% in 2010, with SMEs in the manufacturing sector contributing to 12% of the country’s total exports. Besides SMIDEC, there’s a large variety of other government agencies that support SMEs, most of them through financial services, such as MIDF (Malaysian Industrial Development Finance), MIDA (Malaysian Industrial Development Authority) which offers various incentives to SMEs. These agencies and their services to SMEs will be discussed in further detail later. The entire list of Government ministries and agencies supporting SMEs in one way or another is: Ministries • •
Ministry of Entrepreneur and Co-operative Development (MECD) Ministry of Science, Technology and Innovation (MOSTI)
Agencies • • • • • • • • • • • • • • • • • • • • •
Amanah Ikhtiar Malaysia (AIM) Bank Kerjasama Rakyat Malaysia Berhad (BKRMB) Bank Negara Malaysia (BNM) Bank Pembangunan Malaysia Berhad (BPMB) Bank Pertanian Malaysia (BPM) Bank Perusahaan Kecil & Sederhana Berhad (SME Bank) Credit Guarantee Corporation Malaysia Berhad (CGC) ERF Sdn Bhd (ERF) Majlis Amanah Rakyat (MARA) Malaysia Debt Ventures Berhad (MDV) Malaysia External Trade Development Corporation (MATRADE) Malaysian Industrial Development Authority (MIDA) Malaysian Technology Development Corporation Sdn Bhd (MTDC) Malaysian Timber Industry Board (MTIB) Malaysian Venture Capital Management Berhad (MAVCAP) Malaysian Industrial Development Finance Berhad (MIDF) MIMOS Berhad (MIMOS) Multimedia Development Corporation Sdn Bhd (MDC) Perbadanan Nasional Berhad (PNS) Perbadanan Usahawan Nasional Berhad (PUNB) Small and Medium Industries Development Corporation (SMIDEC)
These then reflect the importance of SMEs to the nation’s economy, hence the government’s emphasis on development programs. 4.2 Government Incentives to SMEs There is a whole range of various incentives, grants and other helpful programs designed to aid SMEs. Some of them are designed to help SMEs in critical areas such as product development and marketing. Likewise, SMEs being small businesses, tend to lack economies of scale, among other barriers to achieving cost-effectiveness. The following incentives and programs implemented by the Government is divided according to their respective agencies and ministries:
SMIDEC (Small and Medium Industries Development Corporation) 1. Market Development Grant- Aimed at helping SMEs penetrate overseas markets, the grant can match SMEs up to RM100,000 in relation to their expenses incurred during their efforts to bring their goods abroad. Expenses covered include: promoting the SME’s products, cost of establishing overseas office and other similar expenses. SMIDEC also offers a similar grant, specifically for companies wishing to enter the Halal food business, which provides a company up to RM150,000 to develop and promote their Halal products. 2. Industrial Linkage Program- An example of such programs in action would be the SMIDEC sponsored SMIDEX convention, where SMEs get to showcase their offerings. Likewise, these ILP programs aim at developing SMEs as possible suppliers to MNCs (Multi-National Corporation) through various training programs. To date, the program has generated RM335 million in actual sales and the SMIDEX 2005 convention alone generated RM45 million in potential sales.
3. Product Design Grant- This grant specifically allows up to RM200,000 to be disbursed to a company in order to aid it in designing new and more attractive product packaging, as well as to enable it to purchase the equipment and services necessary to do so. 4. Skills Upgrading Program- SMIDEC, along with 21 Skills Development Centers across the country offer this program to SME employees interested in enhancing their skills in technical and managerial levels in areas, specifically in the electrical, ICT, engineering and industrial design fields.
5. SME Experts Advisory Panel- This panel has been specifically launched by SMIDEC in order to provide SMEs with necessary technical and other advisory services in order to promote efficiency and productivity. SMEs can claim up to RM18,000 reimbursement for expenses incurred. 6. Enterprise 50 Award Program- This recognition program, jointly organized with Deloitte KassimChan is aimed at recognizing the achievements of home-grown companies, as well as promoting them. MECD (Ministry of Entrepreneur and Co-operative Development) 1. Franchise Development Assistance Scheme- Under this scheme (which targets primarily bumiputeras, but is also open to all), help in the form of training and advisory is given to individual entrepreneurs keen on making a franchise out of their products or services as well as entering foreign markets. To that end, MECD organizes seminars and conferences for this purpose. Besides that, Franchisor Directories are also produced by MECD to promote local franchises as well as offering grants up to RM100,000 for the marketing or development of each franchise product.
2. Vendor Development Program- This scheme provides support (via sponsorship and promotion) to Bumiputera SMEs keen on offering their services or products to Government companies or Multi-National Corporation. SMEs are also provided advisory services and technical training. 3. “Showcase Usahawan”- This is a special initiative aimed at promoting local SMEs’ products and services to both local and foreign markets and is essentially a business linkage program, which aims at connecting producers directly to potential distributors.
FAMA (Federal Agriculture Marketing Authority) Any agriculture business based SME has the support of FAMA which was created specifically to oversee the development, marketing and promotion of agriculture products. It also exists as a go-to entity for information on prices as well as demand and supply situations through its info-portal. For example, the AgriBazaar website is an online portal where farmers, producers, retailers and other people may conduct trading as well as gain information on the amount of supply for a certain product, price quotations, logistics services, and market projections among others. MOSTI (Ministry of Science, Technology and Innovations) 1. Local Market Expansion Program- MOSTI’s work in this area consists of enabling local SMEs that are in the ICT industry to provide goods and services to government-linked companies. The total value of contracts that have been created through this scheme amounted to RM254 million. 2. 3. MSC Overseas Expansion- The ministry assists ICT SMEs who are MSC certified here through promoting its products as well as helping it in its marketing and branding efforts overseas. This is done by opening up export opportunities through participation in trade exhibitions, overseas marketing missions and seminars, sponsored or organized by MOSTI. 4. Advisory Support- MOSTI also provides technical and management advisory in regards to health, safety and technological standards, as well as helping SMEs achieve certification or meet international standards in this regard. It also assists SMEs in R&D activities, helping them to develop new products.
5. Technopreneur Development Plan- Along with MDeC, the Technopreneur Development Flagship (renamed Technopreneur Development Program under the Ninth Malaysian Plan) aimed at creating an environment in which ICT based SMEs could emerge, survive and thrive. This program is primarily centers on the development of “technopreneurs” both for start-ups and existing ICT companies. Its ultimate aim is to create a market of competitive ICT SMEs within Malaysia as well as to facilitate the growth of these companies into global organizations. 6. Industry Research and Development Grant Scheme- This grant has numerous objectives behind it, namely, to encourage the industry to be more innovative in R&D; promote the commercialization of R&D outputs and promote collaborations between the public, private and university sectors. There are numerous other Government ministries or agencies that help out SMEs in one way or another. For example, the Department of Standards Malaysia along with MOSTI works to encourage and accredit SMEs to conform to world-class standards and quality certification systems. In the craft industry, PKKM (Perbadanan Kemajuan Kraftangan Malaysia) aims to develop craft entrepreneurs by providing training as well as incentives for research and development. Here is an example of the effects of the programs implemented by NSDC to aid SMEs: A total of 218 government programs amounting to RM7.8 billion were implemented in 2006. The major programs focused on SME development primarily in areas such as entrepreneur development, human capital development and marketing and promotion of SME products. More than 287,000 SMEs have benefited from these programs. Of these amount:
1. About 128,000 SMEs and other entrepreneurs received entrepreneurship and technical training. 2. 34,000 SMEs received advisory services provided by various Government agencies. 3. More than 5,100 SMEs were provided with business and industrial premises. 4. About 780 SMEs benefited from business matching and expansion opportunities, such as SMIDEX 2006. 5. 272 SMEs received grants and financial assistance to improve or upgrade their technology and business processes through various grant programs, such as the Technology Acquisition Fund, Grant for Certification and Quality Management System, and Grant for Product and Process Improvement. In terms of financing, more than RM51 billion is expected to be loaned to over 110,000 SME accounts in 2007 by various banking and financial development institutions, alongside an additional 37,000 Government loans.
This table is a general summary of various public sector incentives provided to SMEs:
4.4 Banks Involved With SMEs Micro, Small or Medium enterprises require financing just as much as any other company. The main problem for SMEs lies in this area: that is, they often find themselves without capital. To that end, many banks have tailored their own SME solutions. The following is a brief survey of the products and services provided by various banks. SME Bank SME Bank, as its name implies, targets mainly SMEs. Being a government-linked bank, their primary purpose is to help SMEs grow, either through the provision of loans or services, such as: Advisory Services- The SME Bank Advisory Centre has been created primarily to prioritise and design service responses to address identified gaps in SME capabilities and resources, developing fact-based analysis for strategic business development and investment. Depending on the needs of the SME and the phase of the business growth, advisory services would include evaluations, training, orientations and access to knowledge and information on how the SME can improve or enhance its business performance. Business Acceleration Services- This special category of services is directed towards companies who demonstrate high potential and capacity for accelerated growth. These companies can be micro, small or medium but have competitive products or services with access to large market opportunities either domestically or internationally.
Information Services- The focus of information services is to create awareness on the growth and risk issues of businesses through the sharing of available knowledge on benchmarks, industry reports, surveys, R&D projects, and links to other SME knowledge sources. This will help the SME to identify its strengths, weaknesses, threat, and opportunities. It will help the SME develop a plan on how to raise its competitiveness in the market and industry. Promotional and Business Matching Services- To support the promotion of SME businesses and also to offer access to potential buyers and markets, the SME Bank works with the Malaysian Government and private institutions to offer business matching opportunities through direct referrals, trade shows, conferences and seminars. Performance Evaluation Services- The SME Bank Advisory Services Centre will also be able to organise an assessment of your business from the various impact perspectives on industry, market, operational, financial and general competitiveness perspectives. This will help SMEs to evaluate their status in the industry. SME Banks has also tailored products specifically for SMEs. They fall into five main categories:
1. SME Start Up- This is a unique loan which aims at providing entrepreneurs with marketable ideas necessary capital to start up a business. Requirements include having a viable business model, necessary credentials for the entrepreneur, and so.
2. SME Professional- Almost similar to that of the above, except it is aimed towards SMEs already established, but who wish either to expand their markets domestically or to foreign shores. Since the business taking the loan is already established, processing time under this scheme will be significantly faster.
3. SME Franchise- SME Bank offers this product in partnership with Perbadanan Nasional Berhad (PNS), whose aim is to develop “franchisepreneurs” with worldclass products and services. This loan covers start-ups, businesses wishing to expand via franchising and established franchises wanting to expand their market.
4. SME Procurement- This product offers much larger loans, and is only available to small and medium sized companies. This scheme is aimed specifically at “vendor” SMEs, or those that supply products or services to much larger companies, such as MNCs or Government linked companies. The two charts show what kind of SMEs are eligible, and the terms of the loan scheme.
5. SME Global- This loan targets larger SMEs, as indicated in the eligibility criteria. As the name of the loan suggests, this scheme is aimed at those SMEs keen on expanding their markets overseas (or have already done so, but wish to expand some more) and so require a substantial amount of capital.
CIMB Bank We now move to a more popular bank, which targets a wide variety of customers (not just businesses). Nevertheless, CIMB has also tailored specific loan schemes. Do note that some loans are aided by a government fund, others are not. Its Fund for Small & Medium Industries, in conjunction with Bank Negara Malaysia, offers up to RM5 million in funds (inclusive of any special BNM funding) with a variable interest rate (4% to 6%, based on the risk assessment of the SME). This is a government aided scheme. Its Small Entrepreneur Guarantee Scheme (which is not government-aided) offers much different terms, and a smaller loan (maximum of RM50,000) with an interest rate of 1.5% per annum + BLR. It should be noted that this scheme covers much smaller (micro) businesses.
CIMB also offers Personal Loans, which can be utilized by the entrepreneur to his benefit. FlexiCash allows up to RM100,000, but has a hefty interest rate of 6.10% + BLR.
RHB Bank Like CIMB, RHB too offers various loans to finance SMEs , thus widening their scope to choose from. RHB provides SMEs with a number of packages to consider from. These are inclusive of: Automatic Standby Overdraft – This unique package permits one to receive immediate supply of cash to attend to either your personal or business needs without having to loose out on your savings! How does it work? Well, this is possible because the Overdraft is taken against your fixed deposit receipt, thus as mentioned earlier, allows you to enjoy the benefit of the cash and at the same time not loose out on you personal savings. Business growth package – As stated as the name of this package, the Business growth package basically is a package designed to help your business grow. In other words it finances your requirements for working capital, of purchasing of completed shop houses or factories, and refinancing completed shop houses, factories or residential properties for your business (own occupation). It gives you the option of choosing to use a Term Loan, Overdraft, Trade Financing, Bank Guarantee or Foreign Exchange Line. It has a financing margin of up to 200% (including trade finance), a Conventional Term Loan of up to 15 years, an Islamic Term Loan of up to 10 years, and an Overdraft that is repayable on demand. The package also has a minimum quantum of RM 0.5 million, and a maximum of RM 10.0 million. Business Loans – The Business Loans package is as u may have already found out is a loan that caters to businesses in need of its services. Businesses are allowed to choose from Term Loan, Overdraft, Trade Financing, Bank Guarantee, Foreign Exchange Contract, Asset Financing, Contract Financing and Bridging Finance. These loans are suitable for both conventional and Islamic financing.
RHB BizPower Equipment Loans – RHB also provides SME’s with the option of Equipment Loans. RHB’s Equipment Loan allows you to borrow up to 5 million in 48 hours! Its services accommodate both new and used equipment. So, lets look a little closer at the details of this loan. It has a long financing margin of up to 7 years, it does not require financing if the loans are 500,000 and below (Thus more ideal for smaller SME s’), and it has a very broad range of equipment that qualify to the loan. These are inclusive of: o
Printing and Packaging
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Plastic and Rubber
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Land and Sea Transportation
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Machine Tools and Metal Working
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Construction and Quarrying
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Wood Working
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Food Manufacturing and Processing
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Electrical and Electronic
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Forklift
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Textile and Apparel
RHB BizPower Property Loans – RHB’s property loan is designed to give SME s’ a chance to finance their commercial property in the quickest way possible. The Loan provides SME s’ with a finance of up to RM 5 million, the guarantee of financing any business premise property regardless of whether is complete or under construction, a flexible convenient finance margin of 95% with a term of up to 25 years, and an Overdraft for working capital needs. The above package loans are some of the many financing packages designed by RHB bank to help the SM’s in Malaysia.
Credit Guarantee Corporation (CGC) The CGC, like other banks, also offer loans to SMEs. However, unlike commercial banks who usually decline to take on high-risk companies, CGC will offer such loans to such companies. Like SME Bank, CGC is a government linked company, hence it’s initiative in enabling SMEs, low or high in risk, to obtain loans. It should be emphasized that CGC does not offer loans in of itself; it works in conjunction with other commercial banks. In this case, the commercial banks are the one who provide the loan and CGC guarantees it, but with an extra surcharge of between 0.50% to 3.50% per annum depending on the risk profile of the SME. For example, suppose an SME wishes to borrow from CIMB, but it is hesitant in loaning that company funds due to their lack of collateral, for instance. However, CGC can step in by “securing” (or guaranteeing) that amount of the loan. So if the SME is unable to repay the loan, the CGC pays it back for the bank, and CIMB doesn’t lose anything. This greatly assists in SMEs unable to obtain loans, but it comes with a surcharge (as stated above). CGC offers several schemes, most notably: Direct Access Guarantee Scheme (DAGS), loans that can be obtained range from RM50,000 to RM3.0 Million (any loans above RM2 million do require at least a good track record of 2 years with CGC). Interest rates ranges from 1.00% to 1.75% + BLR. Participating institutions include CIMB, Maybank and AmBank. Franchise Financing, with a maximum loan limit of RM7.5 million for any registered franchises. Interest rates are a standard BLR+1.5%. Maybank and CIMB are the participators in this scheme.
It should be noted that the guarantee fees charged for these loans are variable. For example, the DAGS loan has a “guarantee fee” ranging from 0.50% to 3.00% for the secured portion of the loan and up to 3.50% for the unsecured portion. As it can be seen, CGC guarantees a portion (although it is usually up to 100%) of the loan, the rest of which of which will be lost if the loan is not repaid fully. 3.5 SME Growth Potential The fact that the Government has paid so much attention to the Small Medium Industry demonstrates its importance. According to SMIDEC, 94% of companies in the manufacturing sector are SMEs. They contribute 32% to the country’s GDP and employ 56% of the country’s workforce (excluding the Government). Furthermore, they make up nearly 20% of Malaysia’s total exports. The National SME Development Council highlights three main areas in which SMEs have a high growth potential in. They are: The Halal Industry- Estimates put the entire value of the halal industry at USD$2.1 trillion, and the government wishes to encourage SMEs to spearhead Malaysia’s effort at becoming the “International Halal Hub” by 2010. To that end, nearly RM100 million has been allocated as incentives to be provided to SMEs keen on developing or marketing Halal products. For example SMIDEC is providing SMEs with a grant that covers 50% of the total cost related to the R&D of Halal Products, its marketing, and other expenses incurred in gaining Halal certification. The MDTCA (Ministry of Domestic Trade and Consumer Affairs) has also organized joint expos to promote Malaysian Halal foodstuffs. They have recently organized an exhibition with Tesco in the United Kingdom promoting products from 30 Malaysian SMEs, which brought in nearly RM18 million in orders as a result. Likewise, Tesco UK has said that it plans to purchase up to RM1 billion worth of Halal foodstuffs to meet
growing demand for Halal products in the UK. The government believes that with all these various incentives and efforts, Malaysian SMEs in the Halal food sector will be on track to increase their presence in the international market. Franchising- Franchising is seen as a big area of opportunity for SMEs to expand in both domestic and international markets. Since franchising involves a relatively short learning curve, a franchise can take of easily through the support of other interested stakeholders and likewise, good franchises can take unpredictability out of the equation since the likelihood of it succeeding can be gauged by other existing franchises. In Malaysia there are 321 franchises in Malaysia, of which 197 are home-grown franchise brands. Franchising accounts for more than 5% of total retail sales, and thus the NSDC sees this method of business as a good opportunity for SMEs to expand. Various incentives and financing schemes are already available to SMEs keen on expanding via franchising. The SME Bank for example, has a dedicated “SME Franchise” product which offers financing ranging from RM500,000 to RM 10 million as well as advisory, analysis and planning services to borrowers. The government has also established PNS (Perbadanan Nasional Berhad) to help develop the franchise sector. While PNS targets primarily Bumiputera entrepreneuers, nevertheless non-Bumiputeras are also allowed to participate in its various offerings, such as its term loans and other financial schemes aimed at helping upstarts convert their business into franchisors as well as offering entrepreneurial training to would be franchisors. PNS also purchases stakes in various franchises. For example, it owns a substantial share in 1901 Hot-Dogs and Gloria Jean’s Coffee, both of which started as small outlets which have since grown into a large franchise network.
One story of a successful SME that has since grown into an international franchise is Smart Reader, which started in 1988 in Malaysia and now has over 225 centers in Malaysia and 135 centers overseas, in ASEAN and the Middle-East. The co-founder of Smart Reader, Dr. Richard Ong, stated that since the introduction of Government loan schemes dedicated to franchises, the “landscape has changed for the better”. Indeed, SMEs today have a better chance of expanding their business both locally and worldwide. Information and Communications Technology- ICT is seen as a ripe field for SMEs to venture into, even though only 30% of SMEs are utilizing basic ICT systems (something which has drawn concern from various parties, including the Government). Nevertheless, SMEs have a great opportunity in ICT, not only as a consumer but as an enabler. The Government has already called on SMEs to collaborate more with Government research institutions and Universities, to make up for their lack of funds for intensive R&D. The government has also set up a dedicated fund for SMEs to draw from in order to commercialize upon potentially useful R&D results. Besides that, SMEs are encouraged to tap into Shared Services and Outsource Opportunities (SSO) provided by Multi-National Companies and the Government, both of which comprise a substantial market. Likewise, the government has also provided several incentives to encourage SMEs to enter the SSO market, such as:
1. Pioneer Status- allowing the company to be 100% exempted from taxation in relation to statutory income. 2. Unrestricted employment of foreign knowledge workers. 3. Intellectual property rights and cyber laws. 4. Tax exemption on SSO revenue.
SMEs that are in the ICT industry will also prove to be a major source of employment for knowledge based workers, and the government has several programs in place to develop human capital. In the Budget 2007, the government had allocated RM154 million to MDeC to help SMEs implement various ICT programs such as RosettaNet, which is a framework of ICT standards that enables businesses to streamline various procedures. Likewise, MDeC has also pushed for SMEs in the ICT industry to aim for MSC status (which will provide additional incentives). 3.5 Challenges SMEs Face Despite being a rapidly emerging force in the Malaysia’s market, SMEs here still face a large amount of challenges, hence why the need for numerous government incentives. But what, exactly, are the difficulties that these SMEs face? Here are some of them: Increased Global Competition It is without question that many multi-national companies have chosen to set up business in countries like China and India, with their blooming economies and cheap workforce. Indeed, such countries produce cheap products and services which rival that of Malaysia’s. Even if quality is not up to par, many businesses may wish to source such products from elsewhere, instead of Malaysia.
A study that surveyed Asian SMEs found out that companies in various industries preferred Chinese SMEs to that of other countries. Filipino and Indonesian SMEs were considered the least competitive, while Malaysian SMEs were considered tenth best. With free trade and free trade agreements looming over the horizon, SMEs are constantly faced with increased pressures from foreign businesses, especially if those businesses have such advantages as economies of scale or having a cheaper exchange rate, meaning cheaper products. All these make it harder for SMEs to compete, and the main problem here is that most SMEs generally do not have the capital to enable them to become more competitive. Limited Ability or Inability to Adopt Technology The lack of technological utilization by SMEs makes it especially difficult for them to become more competitive. Generally, most SMEs do not utilize even basic ICT, such as computers and software. This seriously decreases their productivity and may contribute to higher expenses. The issue here may be primarily due to the lack of capital: deployment of such technology (while increasing efficiency and saving costs in the long run) can prove to be very costly. This issue is not confined to ICT utilization alone, it also stretches to manufacturing equipment, wherein some SMEs are hesitant or unable to purchase better, more advanced equipment due to lack of capital. Likewise, it may also include research and development activities which may be unable to be conducted due to lack of funding.
Cost of Human Resources With technology becoming increasingly advanced and with knowledge-intensive sectors blooming, demand for trained human capital has become rather high. The problem here is that, once again, due to SMEs general lack of finances, employing knowledge-workers (especially trained ones with a university degree) tends to be costly. Another issue here is that labour cost is becoming increasingly expensive (compared to other countries like China, which still has somewhat low labour costs). Limited Access to Financing and Capital Perhaps the biggest obstacle SMEs face is that of getting financing or capital. This is because SMEs usually are not of a very large size, hence banks and other financing institutions may feel hesitant when it comes to loans, especially if those SMEs are unable to offer any appropriate collateral. Thus, SMEs may be “too big for a small loan; too small for a big loan.”
It can be seen thus, that the main reason SMEs are unable to obtain loans is due to their lack of collateral, followed by insufficient documents and lack or non-existence of any financial track record. This is understandable as banks tend to see businesses who lack all these things as posing a substantial amount of risk, and if the amount involved is large then the probability of SMEs obtaining a loan decreases substantially as well. It should be noted that this is a similar trend even in European SMEs, thus the problem is not locally related. The following table displays the sources of financing for SMEs. Small and Medium Enterprises are only financed 13.4% of the time by banks, whereas for large companies the figure is 47.6%:
Focusing on SMEs alone, Medium sized companies attracted more banking institutions than either small or micro sized ones. In fact, only 10% of micro sized companies said that they relied on banks for financing.
Lack of Information Perhaps another challenge that SMEs face is that of lack of information. Data on market, customer and competitor trends are becoming increasingly vital for an SME to stay competitive, but financial or other factors (perhaps plain ignorance) mean that they do not have the access to such important information, or do not seek for it. As noted previously, many have not taken the effort to develop detailed business plans (which may, however, require costly third-party help). Likewise, some may not see the need for the aid of consulting firms to rectify any problems (due to financial issues etc.), which may make it harder for it to face competition, especially if they are in need, for example, of useful ways in which to differentiate and promote their product or service. When SMEs do not go out to seek for vital information on matters such as R&D and marketing, this may cause it to lose out. As it can be seen, most SMEs face numerous challenges especially due to the fact they are generally small enterprises, which makes it hard for them to obtain financing. Despite various government incentives, it is obvious that not all SMEs can benefit from government grants and programmes. This means that an SME is forced to turn to banks or other sources when it needs funding.
This chard, collected from Bank Negara’s SME Council Annual Report shows similar problems to that of the one listed above. It lists the problem and the possible solution the government can provide.
4.0 Conclusion SMEs may be small, but nevertheless they are vital to a country’s economy. They make up 99.2% of all the business establishments in Malaysia (or 518,996 establishments, of which 411,849 are micro enterprises) as of 2005. Nevertheless, an average SME generates very little output compared to a large company: RM0.8 million compared to RM127 million. There are many government agencies involved with SMEs, with NDSC being the main supervisory body and SMIDEC playing the most active role as an administrator of various SME grant schemes and disseminator of information for SMEs. The Government also has various ministries and agencies that provide incentives in one way or another to SMEs, either in the form of grants or through various training and advisory services. Various banking institutions, however, in partnership with Bank Negara or SME Bank have nevertheless tailor made products specially for SMEs. We have also seen the future potential markets for SMEs to expand into, particularly the Halal, Franchising and ICT industries. There are also numerous challenges that SMEs face, particularly from other countries, such as China, with cheaper labour and such. Likewise, SMEs also suffer from an inability to obtain crucial funding, especially from banks due to their small size (which means that they are often unable to provide suitable collateral).
5.0 Recommendations SMEs are crucial to Malaysia’s economy, and the government has also realized that. Nevertheless, they face adverse competition and various other challenges both externally and internally. The government has gone a long way in trying to address these issues (through its incentive schemes), but what else can be done to improve SMEs in Malaysia? 1. The government should play a major role in educating SMEs on the incentives and other advantages offered to them. Likewise, the delivery of incentives should be confined to as few distribution channels as possible, since many channels (such as banks, institutions) can confuse the SME and make it possible for individuals to gain undue profit. 2. The government should also increase the number of consultancy, advisory and other expert service centres to SMEs and make sure that they are getting them at lower costs. This will help address the lack of information that is so prevalent among SMEs. 3. Lowering the requirements for an SME to obtain financing will also be a major boost. While SMEs already benefit from the services of CGC (Credit Guarantee Corporation), wherein the government guarantees loans taken by a high-risk borrower, nevertheless not all SMEs are able to get credit guarantees. The government could take steps to ensure that more SMEs are able to enjoy such benefits. 4. SMEs should not depend on government agencies alone, and could find other options to expand into other markets. One of them could be by finding allies to cooperate with in order to share knowledge, access more funds and such. This makes it easier for SMEs to enter into the global market, or to expand their domestic one.
5. SMEs also need to invest in more market research, R&D and innovation programs to always ensure that they are moving ahead. Such programs are necessary to enable them to be more competitive. 6. Since SMEs are small, they can utilize this fact to their benefit. Being small means the customer base is also tiny, but this means that SMEs can more easily attempt to build a good relationship with them. Research has shown that it is much cheaper to serve an existing customer who is loyal than to find and sell to new ones. 7. Counter-trade is a viable option, wherein an SME will buy another SME’s (or larger company’s) products in exchange for them buying their own products. This may be useful tool in penetrating global markets, and may be helpful to the local SME if it is done with more advanced countries, where technological know-how and other knowledge can be shared or learned in the process. SMEs may be small, but as it can be seen they are capable of expanding into much larger companies. They then serve as a stepping stone to much larger growth, and will prove to be, in the long run, vital to Malaysia’s economic success.
6.0 References SME Development in Malaysia: Domestic and Global Challenges (Ali Salman Saleh & Nelson Oly Ndubisi) http://ideas.repec.org/p/uow/depec1/wp06-03.html SME Information & Advisory Centre (SMIDEC) http://www.smidec.gov.my/ SME Info http://www.smeinfo.com.my/ Bank Negara Malaysia http://www.bnm.gov.my/ CIMB Bank www.cimb.com SME Bank http://www.smebank.com.my/ Credit Guarantee Corporation Malaysia www.iguarantee.com.my
