Despite signs of the economy moderating, the SME sector is poised for growth underpinned by various initiatives like the Economic Transformation Programme (ETP) and the 10th Malaysia Plan. Still, there are creases that need to be ironed out.

WORLD over, it is widely proven that nurturing entrepreneurship is a crucial element for economic growth. The nest that holds this potential is, of course, the small businesses.

There's plenty of data in Malaysia that reveal the role that small and medium enterprises (SMEs) play in the larger economy.

Just over half or 56% of total employment comes from this sector where 19% to the nation's total exports stem from. The segment also represents 99% of total business establishments and is a substantial contributor to the country's gross domestic product at 31%.

Despite the expected moderation in the country's general economy this year, industry watchers appear sanguine on the sector's growth prospects, largely owing to the various initiatives led by the Government to spur business activities.

But that's not to say all's fine and dandy in the SME realm.

According to industry players, some major kinks still remain outstanding which somewhat hampers the growth of the sector.

Then and now

The signs are encouraging. Based on a survey conducted by SME Corp Malaysia, the sector has posted a double digit growth for the first nine months of last year, significantly beating growth estimates of 8% - 8.5% for the year.

For 2011, SMEs are forecast to grow 8.5% versus the overall GDP of about 6%. (SMEs have been consistently growing at some 2% higher than the national GDP since 2004).

The contribution of SMEs to GDP increased by 2.2% from 29% in 2005 to 31.2% in 2009.

OCBC Bank (M) Bhd emerging business head Wong Chee Seng says the bank is upbeat about the SME sector and expects it to perform better this year.

Based on the bank's interaction with various SME trade associations, he says there appears to be a visible improvement in business undertakings among their members.

“SMEs will also benefit from the ETP implementation as increased private investments flow into specific areas of the economy for growth, for example infrastructure, education, healthcare, oil and gas and plantation.

“These investments into strategic industries will provide opportunities for SMEs to invest and expand their businesses.

“The ETP is a good platform to move the economy forward with support to backfill' the transformation from the SMEs. More work needs to be done through the guilds and business associations to tangibly mandate the role and responsibilities of SMEs in the national economic transformation,” Wong adds.

He feels the SME industry is performing even better now than before due to improving economic conditions and heightened business activities.

The Government investments and financial assistance programmes will also have sufficient time to perform their roles in enabling the building up of incremental business activities for SMEs, he notes, adding that the recently launched Working Capital Guarantee Scheme 2 to help provide the required working capital for SMEs for business expansion.

HSBC Bank Malaysia Bhd deputy managing director of commercial banking and director sales Thomas Varughese opines that the likelihood of a hike in interest rates to combat inflation in the latter part of the year, if it does happen, could slow down the pace of business activities over that period.

Nevertheless, he says things appear promising for the sector given the structural changes in the economy such as moving from the low-value manufacturing and plantation base to higher-value electrical and electronics, as well as services sector like health, tourism and education.

The implementation of the 10MP, according to Associated Chinese Chambers of Commerce and Industry Malaysia SMEs deputy chairman Koong Lin Loong will spur the growth of SMEs.

In this regard, SMEs, he says, will stand to benefit from its outsourcing activities as they often act as the “satellite” for the bigger companies in carrying out various projects.

He says they will also be able to tap the China-Asean Free Trade Area (Cafta) as this year marks the first anniversary of the launch of the free trade area.

This trade area, he adds, is the world's biggest trade area by population with a consumer market of 1.9 billion.

Show me the money

There are, however, a few woes that plague the industry which are crying out to be addressed.

They include, as always, access to funding, issues related to research and development, under-utilisation of information and communications technology (ICT), labour shortage, lack of brand awareness as well as lack of access to domestic and international markets.

Funding for SMEs appears to be a perennial problem, perhaps because banks tend to be relatively more selective given inherent risks such as lack of track record and poor cash flow management.

Despite various measures that have been put in place to widen the funding net for small businesses, many wanna-be entrepreneurs still lament the lack of funding access.

SMI Association of Malaysia national president Chua Tiam Wee admits that financing is still a major issue for the sector and those without a sound track record could be side-lined.

Economists, however, are urging banks to extend more financing to the sector amid increasing concerns over the level of household debt.

Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias says though the household sector is generally less risky, the SME sector is a new growth area that can be further tapped as more than 90% of business establishments are SMEs,

He says banks should have a more balanced loan portfolio in order to generate sustainable returns, adding that due to the perception of higher credit risk profile associated with the industry, lending to SMEs has not been forthcoming.

Banking institutions are the main source of financing for SMEs, accounting for 80% of the total financing as at end-2009.

The approval rate for financing to SMEs have also shot up.

It averaged 78% in 2009, with financial institutions approving a total of RM50.9bil worth of loans to 140,141 SME accounts, and for the first-half of 2010 the approval rate further rose to 80%.

As for research and development, compared with the developed countries, Chua says there is room for improvement for local SMEs as many were still not allocating sufficient funds for this purpose.

Branding Association of Malaysia president Datuk Lewre Lew says that although brand awareness among SMEs has improved over the years, education on branding and support from various parties, especially from the Government are still required in order to make it a success.

He says SMEs have to change their mindset on branding and the ways of doing business in order for them to succeed in their businesses.

Tackling the issues

Credit Guarantee Corp Malaysia Bhd (CGC) managing director Datuk Wan Azhar Wan Ahmad calls for a shift in the mindset of the SMEs, especially those who are able to secure funding on their own merit.

Many SMEs fare very well but have yet to establish or build a credit track record with any established agency or institution.

However, a sound credit track record is vital as it can be used to negotiate for better terms with the credit grantors.

In line with this, Wan Azhar says CGC had established the Credit Bureau Malaysia Sdn Bhd to help SMEs overcome some of these issues and provide rating services to facilitate them to obtain funding.

CGC has introduced a risk-adjusted pricing (RAP) a pricing mechanism based on the risk profile/rating of a borrower.

The RAP provides the catalyst for better understanding of the guarantee mechanism and its impact on the company's borrowing cost and operations.

Some participants also suggest that instead of free grants, perhaps soft loans with low interest rates may be better suited for small businesses. Koong says this will encourage businesses to work harder to earn profit and repay the loans.

To deal with the issue of lack of skills or labour shortage, Innosol (M) Sdn Bhd managing director Dr Umasuthan Kaloo suggests going back to basics, which involves the development of the delivery systems of primary, secondary and vocational schools to create large numbers of trainable job seekers for the market.

“So, even after the Government-linked companies and multinational corporations have had their pick, there is still enough left over to meet the needs of micro enterprises and SMEs,” he adds.

The Government should also consider fiscal measures to address the lack of a sound credit culture in the country.

“It is important to have some incentives and conscious efforts to promote and establish credit culture, similar to what is carried out by developed countries like Japan and South Korea.

“This will enable SMEs and micro businesses to enjoy greater access to financing and contribute significantly to economic growth.

“A sound credit culture has long term ramifications for a sustainable and vibrant economy, most notably through reductions in the cost of doing business and by enabling resources to be channelled for the most efficient and viable businesses.”

The annual budget is perhaps a good avenue for suitable measures to be implemented by the Government towards realising good credit practices, he notes.

On another note, some say the Government should strike a healthy balance in controlling the opening and operations of hypermarkets in the country following the aggressive entry of foreign hypermarkets.

This may be necessary as the majority or over 40% of the total SMEs are in the retail and wholesale trade. Observers point out that growth of this segment in recent years has been impacted by the entry of foreign hypermarkets.

Instead on relying on traditional banking financing and Government funds, he says SMEs should also consider other innovative financing or alternative financing such as mezzanine financing, venture capital financing, private equity financing, using barter exchange system and forming cooperatives or consortiums.

Various guarantee schemes have also been rolled out since the last financial crisis to enhance access to financing for SMEs.

In particular, the RM2bil SME Assistance Guarantee Scheme (SAGS) and the RM7bil Working Capital Guarantee Scheme (WCGS) were fully utilised by December 2009.

Due to overwhelming demand, the Government has topped up the allocation for the WCGS by another RM3bil which will come into effect in 2011.

The other scheme, namely the Industry Restructuring Financing Guarantee Scheme (IRFGS) amounting to RM3bil, for SMEs to retool their activity to move up the value chain and to encourage the usage of green technology, will be available until end-2010.