Are banks truly helping MSMEs?

THE turmoil in the oil market due to the Iran war has disrupted supply chains across many economies around the world.

There is barely any country insulated from the effects of this supply chain-driven crisis.

Malaysia, while a net energy exporter (oil and gas), remains a net importer of crude oil.

This effectively means that our country’s economy is also affected by the supply chain crisis, with inflationary pressure creeping and unemployment rate spiking.

In the month of April, unemployment rate jumped 20% to around 7,000 people losing their jobs.

While it is not yet at an ­alarming level, the cracks are showing.

In particular, micro, small and medium enterprises (MSMEs) are once again the most impacted category with cash-flow constraints, with some estimated to have an average runway of only six months amid the ongoing uncertainty.

This has caught our policymaker’s attention because MSMEs make up 40% of the country’s gross domestic product and employ nearly 48% of the workforce.

We are seeing many announcements of late targeting the MSMEs, including a RM5bil special funding allocation under the SME Stabilisation Relief Facility to help affected businesses manage their cash flow.

Another would be the RM5bil guarantee facility provided by Credit Guarantee Corp Malaysia Bhd and Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP), bringing total support for the MSME sector to RM60bil.

These are substantial allocations.

However, the key question is whether the funds are reaching the right businesses and those most in need.

House always wins

Speaking from personal experience, I have had a series of disappointing encounters when seeking bank financing to build my businesses.

After the initial years of bootstrapping, in order to take on bigger job orders, my business partner and I decided to apply for one of the SME loan facilities heavily advertised by this particular bank.

The financing we sought was relatively modest at RM500,000.

Our annual profits for the past three years were more than sufficient to service the loans.

After providing all the necessary documentation such as audited accounts, certifications, invoices and purchase orders, we waited for more than a month before receiving a response.

The bank officer said that our company is not eligible for the SME loan because of its negative shareholders’ equity.

For context, the negative shareholders’ equity stemmed from retained losses accumulated during our startup years.

In fact, the company was already profitable for three consecutive years and the deficit had been reducing steadily.

So, the bank officer told us, if we want to get the SME bank loan approved, we will need to inject our own money to increase the paid-up capital of the company to turn the shareholders’ equity from negative to positive.

Now the question both of us asked the bank officer was, “If we had RM500,000 cash lying around, why would we even bother approaching the bank for a RM500,000 loan?”.

The bank officer nonchalantly replied, “Well this is the standard bank assessment criteria and there is nothing I can do about it.”

Interestingly, after this bank, we tried another two more banks. Both had the same issue.

One bank was slightly more flexible, whereby the bank officer was willing to submit a supporting paper for consideration, provided our company has proof of environmental, social and governance credentials or was involved in the renewable energy sector.

He highlighted that the financing would have come under a special green financing programme, which carried more lenient requirements.

In the end, the only institution willing to extend financing was Bank Simpanan Nasional (BSN), which approved a micro loan rather than an SME loan.

This is a true story, with not a tinge of exaggeration, and it remains an indelible experience.

Building my business from the ground up with no external fundraising and with only a micro loan from BSN, I can say with certainty that the banking system in Malaysia does not foster entrepreneurial endeavours.

In fact, it is a major hurdle to MSMEs as the bank establishments are too entrenched following the post 1997 Asian financial crisis consolidation exercise.

The banks prefer to only lend to highly profitable businesses that may not need it and deprive those who have genuine financing needs.

They back winners or those who they think are winners.

In turn, the house always wins.

This is why regardless whether it is an economic crisis such as Covid-19, the banks all remain highly profitable so much so they can afford to pay windfall taxes to the government during the period.

Many programmes, little impact

Some may argue that, with the government rolling out many programmes today, the situation must be different.

While larger allocations may increase banks’ capacity to disburse loans, the more important question is who ultimately receives the financing.

Based on my first-hand experience and feedback from high-net-worth clients, many have been approached by relationship managers and bankers to take up special SME loan facilities with low interest rates, even though they do not need additional financing.

This includes owners of listed companies and large private corporations.

How you might ask?

In many cases, financing is channelled through associated companies or subsidiaries of privately held groups.

Even where traditional collateral may be lacking, banks are often willing to accept corporate guarantees from financially strong parent entities.

What this effectively means is that banks hardly lose.

They only finance profitable companies with little to no risk of default.

In addition, many facilities remain collateral-backed and may require borrowers to purchase key-person insurance from related insurance providers at exorbitant premiums.

As a result, banks can generate income not only from lending activities but also from associated financial products.

Therefore, it is a major misconception when we hear big numbers being announced in Parliament, ministry press releases or social media of politicians that they are doing a lot to help struggling MSMEs.

What actually transpires on the ground is very different from the superficial impression on the surface.

Take SJPP as an example.

We must remember it is a credit guarantee programme, and not actual disbursement of capital.

It is a programme to replace the need for collateral but in return, it may also increase the overall cost of financing through guarantee and administrative fees payable to the guarantor.

Financing itself still comes from participating banks.

This means that credit assessments and approval decisions are still largely in the hands of the banks.

Credit financing alone is insufficient

MSMEs need help beyond credit financing.

Credit may be one of the cheapest funding sources but it is not easily accessible.

This is why you see the rise of peer-to-peer lenders registered under the Securities Commission as well as the continued relevance of licensed moneylenders regulated by the Housing and Local Government Ministry.

Even pawnshops have gotten a second wave of resurgence due to higher gold prices.

Together, these alternative financing channels have become an important part of the ecosystem supporting Malaysian MSMEs, filling gaps left by conventional lenders.

However, is this sustainable?

If we truly want to foster entrepreneurship and help the MSMEs evolve into high-quality public-listed companies, this is not the way.

There is a pressing need to have a larger pool of dedicated funds that invest directly in MSMEs.

Beyond lending, these funds should provide equity financing and growth capital to promising businesses with the potential to scale.

After all, the banks will always only look out for their own balance sheet before anything else.