PETALING JAYA: Market financing is critical to empower local small and medium enterprises innovate as Malaysia evolves into a high-income economy, says the Institute for Capital Market Research Malaysia (ICMR).

Based on its latest report Market-based Financing for SMEs in Malaysia: Issues, Challenges and Way Forward, the research house emphasised the growing need for a more diversified financing ecosystem to empower SMEs to thrive in new innovation-driven growth sectors.

Market-based financing offers a range of funding options, including listing opportunities, venture capital, private equity, equity crowdfunding and peer-to-peer lending.

By providing access to these diverse funding sources, market-based financing addresses the challenges posed by limited collateral and credit history, as well as reduces SMEs’ reliance on a single funding channel, thereby enhancing their financial resilience.

“Market- based financing has a promising trajectory to support the needs of new economy, growth-driven and innovative SMEs, to achieve our national economic goals,” director Datin Azleen Osman Rani said during the launch of the report recently.

The report said 64% of SMEs have experience with raising external finance, mostly opting for funding from the banking sector, mainly utilised to meet working capital needs, while market-based financing, primarily for business expansion, is the less utilised option. Among respondents with no experience in market-based financing, 61% were aware of its availability, while 39% remained unaware.

Out of those who were aware of market-based financing, 85% expressed willingness to consider market-based financing.

Azleen said: “64% is not too unique to Malaysia in terms of sources of external financing in general as companies, SMEs generally, will have quite a high percentage that actually uses internal sources of financing.

“As we delved deeper, we understood that a lot of the SMEs in Malaysia right now are very much reliant on bank-based financing. That’s fine because market based financing plays a complementary role to bank-based financing and I think that awareness on the market-based financing is something that we’re trying to basically highlight in the report ... and the awareness has not reached a scale. So we need to push and grow the awareness reachability as well as scale.”

Primary hurdles for SMEs adopting market-based financing include complex and lengthy procedures, stringent requirements, high funding costs, and a surprising lack of outreach by industry players.

In addition, SMEs face a significant challenge due to the scarcity of data available to investors, financial institutions, and agencies providing grants and loans – which result in information asymmetries that lead to higher costs for monitoring and evaluating SMEs.

The report acknowledged that financing alone cannot address all limitations within the SME ecosystem. Moreover, it pointed out that policies to support SMEs should not solely focus on financing but should equally address other challenges faced by SMEs, including knowledge constraints, embedding sustainability principles, limited managerial skills and business acumen, lack of financial management skills, talent shortage, access to technology assets and more.

In light of these findings, ICMR’s recommendations are anchored on two main perspectives, namely by narrowing funding gaps across SMEs’ life cycle; and going beyond pure financing to strengthen the SME ecosystem by leveraging financial technology, enhancing data infrastructure, and focusing on Islamic finance.

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