Zeti Akhtar Aziz: Reflections on small and medium sized enterprises
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
7th Conference of Asia-Pacific Economic Cooperation (APEC) Financial Institutions Dealing
with SMEs, Lanai Kijang, 16 July 2010.
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Introduction
This conference takes place at a time of great consequence for the financial industry as the
world emerges from the recent global financial and economic crisis. Attention continues to be
focused on supporting this recovery process and to provide more permanent solutions that
would ensure sustainable global growth. In relation to this, the development of small and
medium sized enterprises (SMEs) is an important and urgent agenda. For emerging
economies, in particular in the APEC region, this is not only important as a driver of the
economic growth process but also that it would achieve a more balanced growth. It is my
pleasure to be here this morning to speak at this 7th Conference of APEC Financial
Institutions Dealing with SMEs, that is organised by the Association of Banks in Malaysia.
History has shown that in the 20th century, it was large corporations that drove economic
progress; particularly in the industrial economies. In this century, there is a discernible shift
towards the increased importance of SMEs as drivers of growth. The growing importance of
domestic demand and the emergence of new sources of growth and new business models
have encouraged the emergence of small and medium size businesses. This trend is
particularly pronounced in the APEC economies in which the economic activities are now
more diversified - with the growing importance of the services sector, with the agricultural
sector becoming more advanced and the industrial sector being supported by a supply chain
of small and medium scale businesses.
In the APEC region, SMEs account for 90% of the total business establishments and 60% of
total employment. In Malaysia, SMEs constitute 99% of all businesses and 57% of total
employment. In terms of output, the SME sector in Malaysia accounts for 35% of gross
domestic product and 20% of total exports. The SMEs have the advantage of having greater
flexibility and the ability to adjust more quickly to changes in the market. The SMEs also have
the potential to meet the new challenges to raise productivity and performance. There is
therefore enormous potential for SMEs to create significant positive value for the economy,
and thus contribute towards sustainable and balanced economic growth, employment and
social stability.
This morning allow me to take this opportunity to share with you some reflections on SMEs in
the more globalised economy, and the role of financial institutions and Governments in
supporting the SME sector in the future environment.
Prospects for SMEs in a more globalised economy
Globalisation has been described as one of the defining changes of the 21st century. More
importantly perhaps, is the dramatic change in the nature of the globalization process. The
initial wave of globalization was in the form of trade, and this was followed by the
globalization of corporations. More recently the globalization of financial flows and in the flow
of talent that follow increase in capital and labour mobility across borders. Indeed there has
been a shift from the domestic sphere to a greater global orientation. This is evident in the
stronger trends in international trade, foreign direct investment, international capital flows,
and movement in labour across borders. Greater connectivity enabled by technological
advancements have also significantly increased the pace of globalisation to an extent that
was previously not possible.
For SMEs, gaining access to the expanding global market is a strategic step forward that
would bring tremendous business opportunities. It would enhance the possibilities to exploit
economies of scale and scope of the business, and the potential for enhanced technological
capabilities and greater risk diversification. The globalised economy will, however, challenge
existing comparative advantages and thus drive the search for new business models to
sustain competitiveness. The SMEs in this new environment need to evaluate new markets,
move to higher value-added products and services, and develop new synergies by forging
new business alliances, acquisitions or partnerships.
Given the important socio-economic contribution of SMEs to national economies, promoting
an increased participation of SMEs in both domestic economy and international markets has
become an important agenda in most emerging economies as part of the efforts to enhance
the overall economic growth potential. Today, while SMEs are growing in significance in most
emerging economies, SMEs remain under-represented in international trade, accounting for
only one quarter to one third of manufactured exports and a very small share of foreign direct
investment. By comparison, SMEs in the developed economies contribute about 50% of total
value added.
For SMEs that become increasingly knowledge based and technologically advanced, the
opportunities exist to participate in international strategic alliances, to connect into global and
regional supply chains, and to be part of a production network. These arrangements will
require a transformation of existing business models, management and technological
capability, and the innovative capacity of the SMEs. It will need to involve increased access
to financial resources, collective research efforts, accelerated product development and
wider distribution channels.
The ability of SMEs to realise this potential depends critically on providing the necessary
infrastructure and enabling environment for SMEs to enhance their capacity and capability to
effectively participate and expand in the domestic economy and to venture into the
international markets. The financial sector and Government support are an essential part of
this enabling environment for SME development.
Repositioning of the financial industry to meet the new demands of SMEs
Banks are the dominant providers of financial services to SMEs. In the recent period,
considerable advances have been made among APEC economies towards strengthening the
scope and access to financial services to the SMEs. The financial sector has become more
broad based, competitive and efficient in providing entrepreneurs with alternative sources of
investment capital, a diversified selection of new and innovative products, competitive rates,
and more efficient services. This has been accompanied by increased ancilliary support
services including business advisory services. These mutually complementary elements are
in addition to access, choice of products, pricing and the quality of services to the SMEs.
The more globalised environment however, requires new approaches and paradigm shifts
are required for SME financing. First, there needs to be a recognition that SMEs are going to
be increasingly specialized and diversified. Therefore, the traditional standard transactional
and lending-based banking approach needs to shift towards more customized and
differentiated financial products and services that are tailored to the size, profile and specific
needs of the different SMEs. This in turn, requires a different approach in the way financial
institutions manage their relationships with SMEs. As SMEs become more innovative and
entrepreneurial, financial institutions will need to be able to form sound judgments about the
business of the SMEs based on a broader range of credit information which go beyond the
narrow traditional focus on collateral and historical financial information.
Second, SMEs are likely to see a more pronounced shift towards more innovative and
creative industries, such as green technology, medical sciences, information technology and
computer animation. In such knowledge-based industries, the true value of companies is not
measured in tangible assets, but in intellectual capital and specialist skills. Therefore,
financial institutions will need to deepen their understanding of these new growth industries,
and build capacity to evaluate and manage the associated and related risks.
Third, with the increasing adoption of e-commerce applications by SMEs such as internet
and mobile banking, financial institutions can also encourage the deployment of
technological capabilities to the SME's business operations. This can include working with
SMEs to provide end-to-end supply chain management solutions and the expansion into
regional production networks. Such support for the growth of SMEs can bring substantial
benefits to financial institutions as SMEs evolve into larger corporations.
Role of the government
While the economy is powered by private initiatives, Governments have a critical role in
providing an enabling environment for private enterprises to thrive. In most economies which
have a successful SME sector, the Government has had a major role in coordinating the
support and in strengthening the capacity of SMEs and providing an enabling environment
for SMEs to thrive. In Malaysia, a comprehensive approach has been adopted by the
Government. In 2004, the National SME Development Council (NSDC) was established by
the Government to formulate broad policies and strategies aimed at creating an enabling
environment for the comprehensive development of SMEs across all sectors. The Council,
Chaired by the Prime Minister is the highest policy making body for SME development in
Malaysia and brings together more than 15 ministries and 60 agencies under a coordinated
national strategy. To implement the policies of the Council, the SME Corporation Malaysia
(SME Corp), a specialised government agency, was established in October 2009 to ensure
the effective implementation of SME development programs under three broad strategic
thrusts: strengthening the enabling infrastructure, enhancing capacity and capability of SMEs
and enhancing access to financing. For the year 2010, a total of 354 programs, with a
financial commitment of RM6.02 billion is being implemented to develop high performance
and resilient SMEs.
To strengthen the financial infrastructure for SMEs, Bank Negara Malaysia has implemented
wide ranging measures. The restructuring and consolidation of the banking sector following
the Asian financial crisis as well as the financial reforms and capacity building efforts taken
over the years, including enhancing corporate governance and strengthening risk
management practices, had strengthened their capacity to provide more diversified financial
services to SMEs. The deregulation of the financial sector including the new interest rate
framework allowed for flexible pricing to reflect the risks and it also promoted increased
competition in the financial system. Encouraging banking institutions to establish advisory
units to support SMEs also reinforced increased access to financing. These have been
reinforced by the establishment of the Credit Guarantee Corporation to provide credit
guarantees to SMEs to facilitate their access to financing from financial institutions. An SME
Credit Bureau and the Central Credit Reference Information System (CCRIS) complements
the infrastructure that is in place for SME financing by collating vital credit and transaction
information that enable SMEs to build their credit reputation from a wide range of
informational sources.
The Bank also continues to actively reach out to support SMEs through the provision of
financial planning and risk management services, and the promotion of financial literacy
alongside similar initiatives by financial institutions. Public-private partnerships between The
Association of Banks in Malaysia and Bank Negara Malaysia have also worked successfully
to encourage improvements in customer service levels and the turn-around time taken to
process SME financing applications. These initiatives have yielded tremendous payoffs to
the national economy. Malaysia also ranked in first place in the world in 2009 in the category
of access to credit by the World Bank in their "Doing Business 2010 Report".
International and regional cooperation
In a global economy, efforts to support SMEs must also address frameworks for facilitating
trade, payments and financing beyond national borders. Effective regional and international
collaboration can add significantly to enhance further the long term contribution of SMEs to
the economy. The endeavour by APEC in the establishment of the APEC SME Working
Group in 1995 has provided an important collaborative platform for policymakers and private
sector leaders to come together in designing regional strategies for SME development.
Under this working group, policies have been developed to improve the business
environment for SMEs, build SME management capabilities, enhance access to markets,
promote innovation, enhance access to financing and encourage sustainable business
practices. Successful projects implemented in 2009 include the replication of business
counselor training programmes across the region and the development of strategies for
enhancing the competitiveness of small trading houses and exporters. Under the
Memorandum of Understanding entered into by various APEC financial institutions dealing
with SMEs in 2003, many more financial institutions have benefitted from increased trade
facilitation, transfer of knowledge, expanded cross-border growth opportunities and
information sharing.
Conclusion
Let me conclude my remarks. The importance of SMEs in APEC economies is clear.
However, while their large numbers make them important to the economy, it is their potential
that places them at the centre of the economic transformation agenda. Support for SME
development requires cohesive and cross-cutting strategies which encompasses the
collective efforts of the financial sector, the Governments and SMEs themselves. In the
global economy, common strategies that are well coordinated across borders would facilitate
the participation of SMEs in the globalisation process. The ultimate goal is to promote
entrepreneurship and develop an environment favourable to SMEs that will allow them to
become more competitive in both the domestic and international markets.
In closing, I would like to congratulate the Association of Banks Malaysia for hosting this
event and encouraging wider international dialogue on important developments affecting
SMEs. I wish you a productive and successful Conference.