SME funding puzzle | The Star

IT is a moot point to say that there is a massive funding gap for small businesses in Malaysia, which remains a highly banked economy.

Almost all banks in Malaysia have placed much emphasis on funding the medium-size company or SME segment.

Malaysia also has loads of companies that get listed on the ACE Market and an equal amount of capital is raised annually from licensed peer-to-peer lending platforms, where SMEs and start-ups raise debt from the general public.

This week, however, the Securities Commission (SC) released a five-year plan with a target of raising RM40bil for micro, small and medium-sized enterprises (MSMEs) and mid-tier companies (MTCs, which have annual revenues ranging from RM20mil to RM50mil).

That does sound like a massive amount of capital for this segment of companies. But first, is there such a huge funding gap for these companies?

Yes, according to the SC which reveals some interesting data in its presentation deck.

There is a disproportionate amount of capital raised for these companies when compared to larger companies.

The data also shows that MSMEs make up 97% of all registered companies in Malaysia. They contribute 38% to national GDP and employ 48% of the national workforce. Even so, this segment only accounted for 2% of funds raised in the local capital market in 2023 when combined with MTCs.

SC also points out a growing MSME financing demand, citing an eye-popping figure — the funding gap for that sector in 2022 was RM290bil.

How did it get to that figure? PwC used the methodology of the International Finance Corporation along with data from the International Monetary Fund to calculate this financing gap estimate, which the SC recently released in its five-year roadmap document on MSME financing.

The SC also says it conducted one-on-one interviews, conducted workshops and used questionnaires when developing the roadmap.

If that figure of RM290bil is correct, then one would think that targeting RM40bil worth of capital market funding for MSMEs and MTCs won’t be that tough, would it? Wrong. It is going to be a big challenge.

For a start, the government has in the past spent billions of ringgit to fund SMEs via government agencies such as Malaysia Venture Capital Management (Mavcap), Cradle Fund, Ministry of Science, Technology and Innovation (Mosti), Malaysia Debt Ventures, Ekuinas and MSC Ventures.

Some of those investments have resulted in success stories.

That being the case, isn’t there already a lot of venture capital and early-stage money available?

Some would argue that these funders tend to take fewer risks. Even so, these government schemes have made bad choices and have had to write off a fair amount of their investments.

Is it then a question of simply not having sufficient high-quality small companies to invest in?

Another aspect of the five-year roadmap is to have “regulatory flexibility”. The SC’s plan talks about creating a pathway from equity crowdfunding (ECF) platforms into the public market; usage of “growth” metrics for LEAP Market listings and their transfer into the ACE Market; facilitate the listings of MSMEs and MTCs in national priority sectors; facilitate listings by ‘introduction’ and facilitate speedier IPO approvals.

All these are good proposals but there are challenges.

While these ideas stem from the SC itself, it is the market regulators who tend to take a more cautious approach in IPOs.

Take the example of listings on the ACE Market. While the listing rules do not specify particular profit track records of companies seeking to list, the regulators tend not to entertain loss-making entities to be listed.

More recently, the regulator has started consulting advisers on the possibility of tightening reverse takeover guidelines, making it more challenging for listed companies to make acquisitions and diversify their businesses.

To be fair, the regulator’s role is to ensure the integrity of the market but the question is, are our regulators still taking a protective stance and less of a buyer-beware attitude in our capital market?

If the former is the case, then perhaps it needs to also be addressed if we are trying to close the funding gap for small companies in the country.

This article first appeared in Star Biz7 weekly edition.