KUDOS to Datuk Seri Nazir Razak on his keynote address at the Genesis Alternative Ventures Annual Forum. I was mesmerised by his transformation in investment philosophy wherein purpose takes precedence over profits. There was even a clarion call to fellow finance professionals, especially the younger set, to have “better value systems”. This is indeed very laudable.
My advocacy relates to his new role as chairman of Bank Pembangunan Malaysia (BPM). If one cares to examine the economic roles of a development financial institution (DFI) like BPM, the objective is primarily socio-economic and is in line with national aspirations. DFIs are created to fill the funding gaps caused by asymmetrical conditions in the market and profit motivation of commercial banks. The elephant in the room is whether these noble objectives are fully met.
Let me share the experiences of SMEs with DFIs.
Many SMEs that had viable business propositions were turned away mainly because they did not have collateral to support their loan applications. Instead, SME subsidiaries of larger companies and PLCs were provided the soft loans because they could offer collateral or corporate guarantees from the parent company.
If we care to reflect on the purpose and objectives of DFIs, one of the strategic thrusts is to support the government’s strategic priority areas. Given the strategic importance of SMEs, we would presume that they would fall under the areas of priority.
When economic outcomes for funding are distorted by unequal asset allocation (collateral), the noble objectives of purpose and values may not be realised. The numerous financing requirements of SMEs, which are at expanding phases of growth, could be sustainable based on cash flow or viability lending.
Adopting a heavy weightage on collateral-based lending may be easier from an administrative perspective but would not meet the purpose objective. In fact, one could argue the opposite – that the DFI has to be motivated by “commercial considerations” because public money is at stake.
My contention would be as follows:
1) If DFIs were to adopt the same game plan as commercial banks, which aspect of the market distortions for funding are we addressing?
2) Let us examine the statistics of non-performing loans (NPLs) of SMEs with DFIs over the last 10 years and determine the absolute figure in ringgit that can be attributed to independent or stand-alone SMEs (not subsidiaries of PLCs or GLCs). What then would be the criteria for evaluating such loan applications from SMEs?
By placing less emphasis on asset or collateral-based lending, the
fallback would be on the softer side of the equation, such as character and background of the entrepreneur, his values and purpose in growing the business and, of course, the more detailed analysis of cash flow and thorough due diligence.
This begs the retort that “staff may not be adequately trained and the time taken for the due diligence could be extensive”. I believe that such issues can be overcome with the right resolve by having the “right people on the bus.”
Falling back to the asset-based approach would preclude and negate the window of financing opportunity for SMEs. However, emphasis on the latter would allow SMEs to at least plead their cases if given a fair chance.
Case in Point: SME applied for a RM10mil loan from a DFI. This SME had a profitable track record of more than three years. The loan was under a special fund endorsed by the ministry concerned. However, the SME was asked to provide an equivalent collateral of RM10mil.
If the entrepreneur had that RM10mil, he probably would not be turning to the DFI. He was even willing to mortgage his house, but there would still be an uncovered portion of RM3-4mil.
Unfortunately, the loan was not even given the opportunity to go through the soft-lending criteria. It was stillborn just because not enough collateral could be provided.
There are indeed many cases of a similar nature.
The purpose of this letter is not to point fingers at anyone. We are truly inspired by Nazir’s keynote address. But, going forward, we hope DFIs would “walk the talk” in spite of the political constraints to transform a bureaucratic institution.
YEOH SENG HOOI , Honorary secretary-general Small and Medium Enterprises Association, Malaysia