Fixing the MSME funding gap

“THE authorities are not addressing the elephant in the room. All they need to do is get banks to lend more to micro, small and medium enterprises (MSMEs),” an investment banker told this writer back in June.

That was soon after the Securities Commission (SC) launched a five-year roadmap to bridge the funding gap for MSMEs which lack opportunities to raise funds, be it through loans or equity financing.

More recently, a senior banker said:

“It is easy to fix our funding gap problem by doing this – bring back the finance companies of before.”

He was referring to the roaring business that finance companies had in Malaysia since the 1970s right up to the 1990s.

While those finance companies did brisk business in providing higher rates to depositors while lending aggressively to businesses and individuals, they also crashed and burned following the Asian financial crisis.

This was due to their excesses and lack of governance, besides other problems.

The senior banker is proposing the re-introduction of finance companies with the necessary safeguards put in place. But that may be easier said than done.

The SC estimates the MSME funding gap to be around RM90bil.

But we are not alone. The funding gap is a global problem and has existed for a long time.

Going by some credible statistics, the global funding gap for these smallish companies is estimated to be around US$5.7 trillion, which increases to US$8 trillion when informal enterprises are included.

This gap represents the unmet financing needs of approximately 65 million enterprises in developing countries alone.

It is well established why these enterprises struggle to secure financing. The lack of track record and the absence of any bookkeeping and collateral do not help their cause.

But then, there are a multitude of fintech companies seeking to address these issues.

There are significant initiatives already in place to help MSMEs in Malaysia.

We have the SME Bank, the Credit Guarantee Corp Malaysia Bhd and also crowdfunding platforms like equity crowdfunding and peer-to-peer financing.

We also have a few venture capital companies and angel investors.

Banks have also aggressively pursued lending to SMEs over the last 10 years or so. We also have licensed money lenders and credit providers.

Nevertheless, for one reason or another, the smaller enterprises aren’t able to successfully access these offerings.

Some turn to illegal lenders, again a global phenomenon known in Malaysia as the “Ah Longs”.

Will the idea of “better governed” finance companies work?

The big difference between the idea of these finance companies versus the existing licensed money lenders or credit providers (aside from banks) is that the former will be allowed to take deposits.

That will significantly reduce their capital cost and put them in a more aggressive stance to lend to MSMEs.

They would differ from banks in that they would have a bigger risk appetite and slightly looser regulations than banks in areas such as capital adequacy ratios, internal controls and supervision by the central banks, the senior banker believes.

But could that be a recipe for disaster?

There not seem to be room for any such regulatory concessions.

This is because central banks in most countries, Malaysia included, have for some time now embraced global prudential regulations.

Bank Negara introduced global prudential regulations as part of its efforts to strengthen the financial system following the Asian financial crisis in 1997 to 1998.

Specifically, significant reforms were implemented in the late 1990s and early 2000s to enhance regulatory frameworks, improve risk management practices and align with international standards.

These include the Basel Accords, a set of international banking regulations developed by the Basel Committee on Banking Supervision to promote stability in the global financial system.

Going by that, there is no room for any adjustment to current banking regulations to suddenly allow for the introduction of finance companies with fewer legal requirements.

Instead, other solutions need to be sought.

For one, perhaps institutions such as the SME Bank ought to be evaluated.

Are they doing what they were intended to do or merely competing with other banks in targeting funding for SMEs?

Shouldn’t they be differentiating themselves from existing financial institutions?

They need to be more innovative and look at areas such as taking part in blended finance initiatives to bridge the MSME’s funding gap.

Blended finance is showing some promise in Africa. It is essentially combining funding from philanthropic sources with private sector funding, thereby helping to de-risk the transactions and make it more palatable for private sector lenders.

This in turn, would attract more capital to the MSME sector.

There is no easy answer to bridging the SME funding gap.

We have to keep learning from experiences of other countries, considering this remains a global problem plaguing economic growth.