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