Zeti Akhtar Aziz: Strengthening the financial infrastructure for SMEs in
Malaysia
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Launch of
Strategic Partnership between Credit Guarantee Corporation Berhad and the Islamic Financial
Institutions, Kuala Lumpur, 6 February 2007.
* * *
It is my great pleasure to be here this morning to witness the launch of the strategic partnership
between the Credit Guarantee Corporation (CGC) and Islamic financial institutions. This strategic
partnership will provide an important platform to the Islamic financial institutions to expand lending
activities to the small and medium scale enterprises (SMEs). It therefore, marks an important initiative
in the efforts to provide an increased range of financing products to SMEs in addition to enhancing the
access to financing.
A key national agenda of the Government is to promote a strong and dynamic SME sector which
would contribute to ensuring sustainable and balanced economic development. The development of
diverse and competitive SMEs will also promote greater resilience of the economy. The SMEs also
represent important "incubators" of entrepreneurial talents that will provide for the potential for the
development of larger Malaysian corporations. The SMEs can expect to represent an increasingly
important source of endogenous growth and employment. The importance of the SME sector to the
national economy is evidenced by the fact that it constitutes 99.2% of the total business
establishments, employs about 5.6 million people, and contributes about 32% of gross domestic
product.
In view of the potential of SMEs in the economy, significant emphasis has been accorded by the
Government in developing and strengthening the capacity of the SMEs to contribute to the economy.
Twelve Government Ministries and 38 Agencies are involved in supporting the development of SMEs.
To ensure the effectiveness of the strategies to support SMEs, the Government established the
National SME Development Council in June 2004. The Council, chaired by the Prime Minister,
provides the policy direction of the programmes to support the SMEs, and to ensure that these
programmes are implemented effectively. Bank Negara Malaysia is the Secretariat to the Council.
The Government's commitment to promoting the role of the SME sector in the economy has been to
provide an enabling environment for their development. A comprehensive approach has therefore
been adopted. In 2007, a total of 190 key programmes, involving a financial commitment of RM3.7
billion, is being implemented by the Government, to strengthen the enabling infrastructure, to build the
capacity and capability of the SMEs, and to enhance SME access to financing. Indeed, for access to
financing, several key strategies and measures have already been implemented to ensure that SMEs,
at different stages of the business life cycle, have adequate access to financing.
The banking system continues to be the most significant source of financing in the economy. An
important strategy to ensure access to financing by the SMEs has therefore been to increase access
to financing from the banking institutions. Attention therefore was given for banking institutions to
accord a special focus on providing financial services to SMEs, in particular in strengthening their
facilities, outreach and services to SMEs. Today, all commercial banks have dedicated SME divisions
and Bumiputera Development Units that are responsible for providing lending as well as ancillary
support and advisory services to the SMEs. The commercial banks also have a specific client charter
for SMEs, providing the necessary information to facilitate SMEs in applying for financing.
The strategy to provide increased access to financing is also reinforced by the provision of information
and financial advisory services to SMEs. In 2005, Bank Negara Malaysia established Laman
Informasi, Nasihat dan Khidmat (or the LINK), as a one-stop centre for SMEs to obtain information and
raise matters on access to financing directly with Bank Negara Malaysia. The LINK has dedicated staff
that provides financial advisory services including for dealing with problems of obtaining financing and
for restructuring of existing loans. To date, about 11,000 SMEs have sought assistance from the LINK.
Another important initiative in disseminating information to the SMEs is the establishment of the
SMEinfo Portal, an information gateway for SMEs. The Portal provides comprehensive information
required by SMEs, including details on the Government's financial and non-financial assistance,
financing products for SMEs by the financial sector, training programmes as well as advise on how to
start and manage a business. The Portal also provides a platform for SMEs to advertise their products
and services. To date, more than 14,000 SMEs have registered in the SME Business Directory of the
Portal.
In strengthening the financial infrastructure for SMEs, Bank Negara Malaysia has also established the
Small Debt Resolution Scheme where viable SMEs that are constrained by non-performing loans are
assisted through loan restructuring and the provision of additional funding. In addition, through EXIM
Bank, two new trade financing products for SMEs have been introduced in 2006.
The Census that was completed in 2005 had however, indicated that about 80% of SMEs are micro
enterprises which had limited access to financing from the formal financial system to maintain and
expand their businesses. To meet the financing needs of this key segment of the SMEs,
microfinancing has now been established in our financial system. A number of financial institutions are
participating in providing fast, flexible and convenient access to financing to individuals and micro
enterprises for their business activities.
The various measures that have been undertaken have now already yielded positive results. SMEs
today have had greater access to financing, with the banking institutions being the main source of
financing. In 2006, RM40 billion in new loans was approved to more than 84,000 SME accounts. Of
this, the Islamic banking institutions provided RM5 billion in new financing, compared with RM3 billion
in 2005. The share of SME loans of the banking institutions has increased from 30% of total business
loans at end-1999 to 45% at end-2006. Total SME outstanding loans of the banking institutions have
now breached the RM100 billion level in 2006.
The Credit Guarantee Corporation is a key institutional arrangement in facilitating greater access to
financing by the SMEs. By providing guarantee to loans obtained by SMEs, CGC addresses one of the
main constraints of SMEs that is the lack of collateral. Bank Negara Malaysia, as the largest
shareholder of CGC, is committed to ensure that CGC is in a position to have an effective role.
Towards achieving this, RM1 billion was injected into CGC in 2000 to enhance its financial capacity to
provide guarantees. In 2005, a process to transform CGC was initiated to enhance its role and to
expand its range of products and services offered.
The aim is to position CGC as not only a provider of credit guarantees, but as an important institution
that enhances the ability of SMEs to obtain financing from the financial institutions, in particular,
through the provision of wider credit enhancement products, advisory services on financial and
business development and credit information services. In 2006, CGC has shown commendable
progress in this transformation process. Indeed, the strategic partnership that is being entered today
between CGC and Islamic financial institutions is part of the initiative for CGC to expand the outreach
of its products.
This strategic partnership between CGC and Islamic financial institutions is an important milestone as
it brings together the two important objectives of the Government, namely enhancing SMEs' access to
financing and promoting the growth of Islamic finance. Islamic finance has now not only experienced
significant growth but is becoming more internationally integrated. This is underpinned by its great
potential as a competitive form of financial intermediation. In Malaysia, the Islamic banking system has
evolved into a dynamic, competitive and internationally integrated industry. In this recent five years,
the Islamic banking industry has continued to record double-digit growth rate of about 20 percent. It is
also an important contributor to the strong levels of profitability recorded by the banking groups. In
terms of assets, the Islamic banking sector now accounts for 12 percent of the total banking system. It
is envisaged that by year 2010, the Islamic banking industry will constitute 20 percent of the overall
banking industry market share.
Financing extended by the Islamic financial institutions to SMEs has shown an encouraging upward
trend, growing at an average annual rate of 34.2% for the period 2001-2006. As at end-2006, Islamic
financing to SMEs reached RM10 billion, accounting for 9.6% of total SME loans outstanding of the
banking system. This is a significant increase compared with the amount of Islamic financing extended
to SMEs at end-2000, which was only RM1.7 billion or 2.4% of total SME loans outstanding of the
banking system.
Indeed, there is great potential for Islamic financial institutions to play a more significant role in
providing greater choice to SMEs to meet their financing needs. Increasingly now, SMEs from the
different sectors require more customised and differentiated financial products and services that
accommodate their unique requirements. This reflects the more highly diversified nature of the
Malaysian economy. Islamic financial institutions therefore need to understand these requirements
and be able to provide not only new innovative products but also attractive financing packages. In
addition, Islamic financial institutions need to intensify efforts to create greater awareness amongst the
SMEs on the unique features associated with Islamic products and services. Enhanced financial
literacy on Islamic financial products will facilitate the process for SMEs to make informed and
effective decisions on their financial transactions.
Today's event that marks the establishment of strategic partnership between CGC and the Islamic
financial institutions augurs well for SMEs. It provides a platform for the Islamic financial institutions to
extend greater financing to SMEs. For CGC, this is an opportunity to expand the scope of its
guarantee beneficiaries to include Islamic financial institutions. The real beneficiaries would be the
SMEs.
On this note, it is my pleasure to once again congratulate CGC and the Islamic financial institutions for
this initiative to forge this strategic alliance and collaboration to maximize the potential opportunities in
SME financing. I wish every success in this strategic collaboration.