MALAYSIA has dreamed of achieving high-income status ever since the introduction of Wawasan 2020 in the Sixth Malaysia Plan in 1991. Despite missing the target, the ambition persists.
To escape the middle-income trap and achieve high-income status, Malaysia needs to embrace technological advancement, innovation and digitalisation. This need extends beyond large corporations to small and medium-sized enterprises, which are crucial for driving economic growth and job creation.
Our government has rightfully prioritised SME support as a key component of economic reforms under the Madani Economy Framework – which requires greater capital allocation from both public and private sectors to unlock the full potential of SMEs.
The Institute for Capital Market Research Malaysia (ICMR) recently published a research report on “Market-Based Financing (MBF) for SMEs in Malaysia”, which provides a comprehensive overview of the financing landscape for SMEs throughout their lifecycle stages.
MBF refers to fundraising and financial services through market systems, for example, equity and debt markets; private funds, such as venture capital and private equity; and digital financing, for instance, peer-to-peer (P2P) and equity crowdfunding (ECF)) to support the wider economy.
According to Bank Negara Malaysia, the banking sector is the primary source of funding for SMEs, accounting for over 90% of total SME financing. Our study, based on a survey of 401 SMEs and qualitative interviews with stakeholders within the SME financing ecosystem, also revealed that only a small percentage of SMEs have utilised MBF instruments, in contrast to other financial tools such as banks, government grants, non-bank credit, and development financial institutions.
Why focus on MBF?
Globally, the role of MBF in providing capital for SMEs has gained momentum, especially post-Covid-19.
According to a report by the Organisation for Economic Cooperation and Development titled Evolution and Trends in SME Finance Policies since the Global Financial Crisis, policy developments in SME finance since the global financial crisis MBF, such as equity instruments, gained more attention in the post-crisis landscape as governments undertook strong action regarding SME access to finance, which continues to be a policy priority to foster economic growth and well-being.
This shift from cyclical issues to more longstanding structural issues in SME finance indicates that relying solely on straight debt is unsustainable and risky for businesses. SMEs should have a wider range of financing options tailored to their life cycle stages, risks, and business needs. This is reflected in ICMR’s findings, where 85% of SMEs familiar with MBF expressed the willingness to use MBF instruments to meet their future financing needs.
Role of MBF in SME growth
While MBF provides necessary diversified financing options for SMEs, not all capital market instruments are suitable for all types of SMEs due to scalability, liquidity and investor demand. Our report suggests that MBF plays a more critical role in allocating capital for high-growth startups and scale-up SMEs driven by innovation, investment, and business expansion. The risk transfer mechanism in MBF allows for greater risk-taking.
New economy such as industry identified under the National Energy Transition Road-map may imply higher risks, requiring an innovation ecosystem that embraces the potential for failure – an aspect that may not align well with the risk-averse nature of traditional banking.
This is where MBF can play a pivotal role in supporting entrepreneurs, from the inception of ideas to commercialisation to eventually reaching mature stages suitable for the public market.
Overcoming challenges to MBF adoption
The key challenges to promoting MBF among SMEs are the lack of awareness and knowledge about MBF.
Even among SMEs that are aware of MBF, their willingness to consider it depends on addressing concerns related to lack of understanding, ownership control, and trust. For those unwilling to consider market-based financing, they attribute it to perceptions of complexity, high issuance costs, and the approachability of capital market intermediaries.
This underscores the need for enhanced market literacy to provide SMEs with sufficient knowledge about MBF options and how they function, which in turn empowers them to make more informed financing decisions.
The SC’s five-year roadmap “Catalysing MSME and MTC Access to the Capital Market: 2024-2028” lists initiatives to address these issues by focusing on regulatory and product innovation, market infrastructure, and capacity building.
Key learnings for SMEs and policymakers
► Complementary role: MBF is not a replacement for bank-related straight debt financing. Both have their roles in supporting SMEs.
► Beyond capital: MBF extends beyond transactional capital raising to include business development support for business growth.
Firms opting for MBF, such as by listing on the LEAP Market or raising crowdfunding, do so not only for capital but also to achieve other purposes such as branding, accessing new markets, attracting talent, and facilitating ease of financing.
► Holistic support: Providing access to financing alone does not solve all barriers faced by SMEs.
Addressing challenges such as knowledge constraints, limited managerial skills, business acumen, financial management skills, access to technology and innovation assets, talent shortage, adaptation of digital technologies, and embedding sustainability principles within business organisations is equally as important.
One-size-fits-all solutions are insufficient, and policy interventions to support SMEs should target multiple levels, that is, broad-based policies, sectoral policies and policies targeting specific SMEs or startups.
Ultimately, MBF offers diversified financing options, but awareness gaps persist in Malaysia.
As we navigate the post-pandemic landscape, supporting SMEs through MBF becomes even more critical.
By promoting market literacy and targeted policies, Malaysia can empower SMEs on their growth journey. Imagine a Malaysia where every SME has the financial support to innovate, grow, and compete on a global scale.
Let us collectively work towards a resilient and prosperous future for our small and medium enterprises.
This article is contributed by Institute for Capital Market Research Malaysia macro and market analytics associate director Dr Gopi Krishnan.
