Mohd Razif bin Abd Kadir: SME Credit Bureau in the financial landscape
of Malaysia
Keynote address by Mr Mohd Razif bin Abd Kadir, Deputy Governor of the Central Bank of
Malaysia, at the SME Credit Bureau Seminar, Kuala Lumpur, 27 May 2008.
* * *
It gives me great pleasure to be here with you this morning. I would like to express my
appreciation to the Credit Guarantee Corporation or CGC, for inviting me to deliver the
keynote address. It is encouraging to see many financial institutions and small and medium
enterprises (SMEs) in the audience. The Bureau is also Malaysia's first, under a joint
initiative of CGC and Dun and Bradstreet Malaysia Sdn. Bhd., a subsidiary of Dun and
Bradstreet Corporation in the US, which has vast experience in establishing and operating
credit bureaus globally.
The development of a strong and dynamic SME sector is a priority on the national economic
agenda. The reasons for this are clear when one considers that 99.2% of the total business
establishments in Malaysia are SMEs. The SME sector currently employs about 5.6 million
people, and contributes about 32% of gross domestic product.
Given its economic potential, the Government has accorded significant emphasis to
developing and strengthening the SME sector, to enhance its contribution to the economy.
The Government took a major stride forward in June 2004 with the establishment of the
National SME Development Council. It may surprise some of you to know that there are
fifteen Government Ministries and 38 Agencies involved in supporting the development of
SMEs. The formation of the Council was therefore a mammoth undertaking that clearly
signals the commitment of the Government to the SME agenda. The Council, chaired by the
Prime Minister and supported by Bank Negara Malaysia as the Secretariat, provides the
policy direction of the programmes to support the SMEs, and ensures the effective
implementation and coordination of these programmes.
The national SME strategy is focused on the development of high performance and resilient
SMEs under three broad strategic thrusts, namely, strengthening the enabling infrastructure;
enhancing the capacity and capability of SMEs; and enhancing access to financing. Bank
Negara Malaysia has been at the forefront of initiatives to ensure that SMEs, at different
stages of the business life cycle, have adequate access to financing. These included among
others, initiatives to develop a vibrant and sustainable microfinance industry, the
establishment of two venture capital funds of RM150 million each for the agriculture sector
and the establishment of the Small Debt Resolution Scheme.
The various measures have already yielded positive results. SMEs today have greater
access to financing, with financial institutions being the main SME financing provider. In
2007, banking institutions approved RM55.1 billion in new financing to more than 109,000
SME accounts. SME financing continues to remain robust. For the first three months of 2008
alone, a total of RM12.4 billion in new financing was approved to more than 34,000 SME
accounts. As at end-March 2008, SME financing outstanding by banking institutions
amounted to RM118.8 billion. Indeed, an increasing number of banking institutions have
announced strategic plans focusing specifically on the SME sector. This has seen the share
of SME financing increase significantly from 30% of total business financing of banking
institutions in 1999 to 44% at end-March 2008.
Within the overall SME financing landscape in Malaysia, the CGC has been positioned to
play a key role. Established at the initiative of Bank Negara in 1972, CGC set out to address
one of the main constraints of SMEs in accessing financing, which is the lack of collateral.
Since then, CGC with Bank Negara as its main shareholder and with shareholders funds
amounting to RM2.7 billion and guaranteed financing outstanding of RM10.2 billion at end-
March 2008, has evolved itself as an integral part of the financial landscape, with the
financial capacity to deliver its mandate.
In 2005, Bank Negara embarked on a strategy to transform CGC beyond that as a provider
of credit guarantees to enhance the contribution of the fast-growing SME sector to the
national economy. CGC is being now positioned to provide a wider range of credit
enhancement products. More importantly, it is also being positioned to provide advisory
services on financial and business development to SMEs. This represents a significant shift
in CGC's strategic orientation and is validated by studies of the experiences in other
countries that have found such advisory support to be critical in enhancing the viability of
SMEs.
A number of recent initiatives under CGC's transformation plan deserve mention. These
include widening the scope of guarantees to also cover financing by Islamic banks and
development financial institutions, introducing a new guarantee scheme for start-up SMEs,
participating in Malaysia's first synthetic securitisation of SME loans, introducing an equity
financing arm, and introducing risk-based models for determining guarantee fees.
The establishment of the SME Credit Bureau is indeed a watershed event in CGC's
evolution. As a source of credible and reliable credit information that serves the needs of
both the SMEs and the potential financiers, it is a natural progression of CGC's continuous
effort to enhance access to financing by SMEs. The establishment of a SME Credit Bureau
by CGC and D&B would no doubt complement the other initiatives of the Government and
the financial sector.
The significance of the SME Credit Bureau lies in dispelling the general misconception that
SMEs pose higher financial risk to financiers, lack financial management disciplines and
would be unable to provide relevant financial information to their financiers to facilitate
assessment and monitoring of loans extended to them. Yet, SMEs are often skeptical of the
benefits of credit bureaus, believing them to hurt rather than assist SMEs in obtaining access
to financing. The reality is very different.
Our own experience in Malaysia with the Centralised Credit Reference Information System or
CCRIS that is managed by Bank Negara, and the experience in other developed and
developing countries where SMEs form the backbone of the economy have shown that
greater access to credit information has in fact contributed to greater access to financing and
reduced loan processing times. By enriching the information available to financiers to support
credit risk assessments, the asset quality of financial institutions are also improved, thereby
reducing the cost of financing to borrowers and enhancing the capacity of financial
institutions to continue extending credit to deserving SMEs. Allow me to elaborate the
benefits to SMEs, with particular reference to the SME Credit Bureau:
Firstly, the Bureau assists the SMEs to build track records. One of the key factors in credit
evaluation is the historical conduct of accounts. SMEs that have no previous banking history
would not have the "reputational collateral" that would otherwise give them easier access to
financing. The SME Credit Bureau will be able to address this information gap by collecting
and disseminating information from a wider base, including trade credit data that captures
the dealings between SMEs and their suppliers. In this manner, SMEs which have no
financial relationships with banks, but which have strong credit standing among their trade
creditors and suppliers, will be rewarded through favourable ratings that can be used to
support financing applications when the need arises.
Secondly, SMEs with good track records will not only enjoy a wider acceptance from banks,
they will also be able to access financing on more favourable terms, and obtain faster
decisions on their financing applications. This is because the Bureau acts as a one-stop
center for banks to obtain consolidated information on SMEs, which is currently scattered,
and will take longer for banks to obtain and verify individually. We have already seen how
this can work in the case of consumer financing, where real-time and comprehensive
information on consumers' credit exposures and history that is available from CCRIS has
significantly shortened loan-processing times. With greater availability of information on
SMEs, the processing time for SME loans can be similarly shortened.
Thirdly, the Bureau includes and takes into account both positive and negative information on
SMEs. Certain third party information that financial institutions use in the evaluation of credit
applications only provides negative information on the business conducts. Examples are
information on bankruptcy and legal suits, which are sometimes not updated and may result
in a biased assessment of creditworthiness. By collecting and disseminating both positive
and negative information, the SME Credit Bureau will benefit SME loan applicants by
providing a more balanced view of SMEs' credit standings. In an objective rating process,
credit bureaus typically accord greater weight to the more recent credit information or
behavior. Negative records in the past can thus be mitigated by more current and consistent
good track records.
Lastly and perhaps of most value to SMEs, is the insights that SMEs would gain from a
better understanding of their financial deficiencies which lead to rejections of financing
applications by financial institutions. This can be deduced from the analysis provided through
the Bureau ratings and reports. The credit reports would also serve as a convenient tool for
SMEs to carry out a self-evaluation to identify areas that need improvement and initiate
adequate remedial actions to increase their competitiveness. SMEs are thereby empowered
to improve their own profile, with correspondingly enhanced prospects for the SME sector as
a whole.
As I mentioned earlier, it is also encouraging to see a considerable turnout by financial
institutions at this seminar. This underscores the sustained and growing attention by financial
institutions in the SME sector that is critical to provide the enabling environment for the SME
sector to thrive. Bank Negara has seen a paradigm change in the way in which financial
institutions approach the business of SME financing. Banks have, and continue to invest
significantly, in supporting SME financing niches, and the organisational changes that we
have seen have been pervasive in many banks. These banks have acquired tremendous
insights on effective strategies for successful interfaces with SME customers. In some banks,
completely new business cultures for their SME segments have evolved as a result which
bodes well for the SME industry.
The information provided by the SME Credit Bureau can further support efforts by banks to
strengthen risk management for their SME portfolios, regardless of the level of sophistication
and size of the institutions. Banks with an SME credit model already in place can benefit from
the Bureau information in various ways. For example, as the Bureau rating is determined
based on diverse information obtained from various sources including CCRIS, trade credit
data and the Companies Commission of Malaysia, banks can use such information to bridge
any information gaps and address the limited pool of internal data available for their internal
models. Such gaps currently exist, as banks in general are highly dependent on borrower
information alone. In addition, given the diversity of information available within the SME
Credit Bureau, banks would now have access to information on various economic sectors
that may not be available within existing credit portfolios. At the same time, Bureau ratings
could be used by the banks to validate the robustness of their own internal models by
comparing the ratings produced between their internal ratings and that by the SME Credit
Bureau.
For smaller and less sophisticated banks, the Bureau information will supplement the current
SME credit assessment methodology that is traditionally qualitative in nature. Such banks will
be able to obtain quantitative information from the Bureau database to enhance the overall
credit evaluation process, thereby supporting more informed and objective credit decisions.
The benefit is not limited only to enhancing credit evaluation, but also provides the
foundation for more effective portfolio analysis and management on an ongoing basis that
are the hallmarks of any effective risk management system. For example, the overall quality
of the SME portfolio can be monitored based on information available from the Bureau to
support analyses on the distribution of financing by rating, migration analysis and stress
tests. The findings from portfolio analysis supported by the bureau information would assist
SME financiers to better price their SME financing and facilitate more effective allocations of
capital.
Moving forward, one of the roles that the SME Credit Bureau can effectively play is to provide
market research and reports on the SME industry. This will expand its user base beyond
SME financiers and creditors to include policy makers, economic and investment analysts,
and even academic scholars.
The credit information infrastructure in Malaysia is advance, relative to other countries in a
similar stage of economic development. Our main credit information database currently is the
CCRIS that captures information on all credit facilities extended by licensed banking
institutions in Malaysia , as well as other institutions regulated by Bank Negara. While access
to CCRIS is limited for the time being mostly to regulated financial institutions, we are
encouraged by the progress made by private bureaus, such as the SME Credit Bureau, in
providing access to credit information to a wider user base, as well as developing new value
added products and services.
With the expanded role of private credit bureaus comes the responsibility to protect privacy
and ensure the accuracy and timeliness of credit information. The Government is in the final
process of developing the regulatory framework for the protection of credit information and
other personal data. In addition to according greater protection to consumers, the
Government is formulating the new credit reporting law and regulatory framework to achieve
an appropriate balance between consumers' right to privacy and financiers' right to access
credit information. To preserve this balance, SMEs will need to provide consent to financial
institutions, for them to obtain the ratings from the SME Credit Bureau. As described earlier,
the sharing of credit information will benefit the majority of SMEs, primarily through expanded
access to credit, shorter processing times and lower borrowing costs. Therefore, while
participation is optional, it would be in the best interests of businesses to participate in this
effort and be more forthcoming in providing the information that in the final analysis will be
beneficial not just to individual SMEs, but for the development of the SME sector as a whole.
From Bank Negara's perspective, the information compiled by private credit bureaus would
provide us with more information on the financial, household and corporate sectors for
financial surveillance and policy calibration purposes. The more comprehensive and granular
information will enable Bank Negara to detect emerging risks or vulnerabilities within the
respective sectors at an earlier stage, and enable us to implement pre-emptive policy
measures with greater speed and precision.
Indeed, the SME Credit Bureau initiative represents a convergence of different objectives by
various stakeholders, namely the Government, SME financiers and creditors, CGC and D&B.
It is a big step in bridging the current gaps in the availability of credit information on SMEs.
Nevertheless, the real and largest beneficiaries of the initiative would be the SMEs
themselves.
On this note, I would like to congratulate CGC and Dun & Bradstreet Malaysia Sdn. Bhd. in
their new venture. I am also confident that this will open up a new chapter in the history of
credit bureaus and enable these entities to play an even greater role in the future
development of the financial industry in Malaysia, and consequently, enhance access to
financing by SMEs.