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

Minister of Housing and Local Government

Minister of Energy, Water and Communications

Minister of International Trade and Industry

Minister of Agriculture and Agro-Based Industries

Minister of Human Resource

Minister of Education

Minister of Science, Technology and Innovation

Minister of Finance II

Minister of Tourism

Minister of Plantation Industries and Commodities

Minister of Domestic Trade and Consumer Affairs

Minister of Higher Education

Minister of Rural and Regional Development

Minister of Entrepreneur and Cooperatives Development

Minister in Prime Minister’s Department (Y.B. Senator Dato’ Sri Effendi

Norwawi)

Governor of Bank Negara Malaysia

Director-General of Economic Planning Unit

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 world-

class 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

o Plastic and Rubber

o Land and Sea Transportation

o Machine Tools and Metal Working

o Construction and Quarrying

o Wood Working

o Food Manufacturing and Processing

o Electrical and Electronic

o Forklift

o 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