Release dynamism of Bumiputra business with small banks

  • Letters
  • Thursday, 29 Feb 2024

I WISH the on-going Bumiputra Economic Congress a great success in bringing about policy changes that can lift the standard of living of the Bumiputra, alongside other Malaysians, to the level of the G7 countries in my lifetime. To do that, both the educational level of Bumiputra Malaysians and the technological level of Bumiputra-owned firms must converge to G7 levels. This article would focus on technological convergence.

As over 97% of Malaysian firms are MSMEs (micro-small-medium enterprises) and 84% of MSMEs are Bumiputra-owned, the average Bumiputra firm is an MSME.

What is holding back the Bumiputra-owned firms from upgrading their technological level to meet the needs of our time, now including zero CO2 emission?

One important answer is the lack of affordable credit after the 1998-2002 banking consolidation as the emergency room medicine for the Asian Finance Crisis.

The evidence is revealed in the table below which documents the proportion of firms within the four firm size categories.

In every Western European country, and the United States, the firm size distribution is pyramidal in shape, ie the number of micro firms is higher than the number of small firms, which is, in turn, higher than the number of medium firms, which is then higher than the number of large firms.

This pyramidal firm size distribution is not seen in Malaysia in the 2016-2022 period, eg the proportion of medium firms (1.6%) in 2022 is smaller than the proportion of large firms (2.6%).

The size distribution has in fact been deviating further from the pyramidal shape. The proportion of small firms fell from 22.8% in 2016 to 19.2% in 2022, and medium firms from 1.8% to 1.6 %, while the proportion of large firms rose from 2.1% to 2.6%.

The increasing distortion of firm size distribution with the steady growth at the very bottom and very top categories shows that (1) not enough micro firms are growing to become small firms, and (2) not enough small firms are growing to become medium firms.

Whatever factor that is retarding the growth of micro firms and small firms, it must also be retarding the growth of medium firms into large firms.

The primary causes for the growth in the proportion of large firms were the inflow of foreign direct investment (FDI) and the expansion of domestic conglomerates into new businesses (eg internet companies and medical care).

When SME Corp conducted a survey in 2021 to ascertain the problems faced by MSMEs, the biggest problem was “insufficient cash flow”.

The “insufficient cash flow” problem reflects the great difficulties in borrowing working capital from banks and finance companies to keep production at full capacity when some customers are late in their payments.

When it is so hard for MSMEs to get working capital to operate at full capacity to maximise profits, it is impossible for them to obtain investment capital to modernise to raise productivity. The failure in MSME modernisation is one key reason why Bumiputera economic well-being has stagnated.

The extreme shortage of capital faced by MSMEs is caused by the continued administration of emergency financial sector medicine introduced during the Asian Financial Crisis.

When the regional financial contagion hit Malaysia in 1998, almost all financial institutions had to be recapitalised by the state. To facilitate recapitalisation in 1998-2002, the government forced all small and medium banks (SMBs) and most small and medium financial companies (SMFCs) to merge into ten existing financial conglomerates.

This process of financial market monopolisation has continued since then.

Malaysia had 22 domestic commercial banks and 45 financial companies in 1990. The ten financial conglomerates in 2002 have now been further consolidated into eight financial conglomerates (the Big 8), each with an anchor commercial bank and an Islamic bank.

Effectively, there are no more SMBs and financial companies today because the total portfolio of the Islamic banks (outside of the Big 8), state-owned development banks (eg SME Bank), and independent financial companies is insignificant when compared to that of the Big 8.

Four of the Big 8 commercial banks are controlled by government statutory bodies, and because of their dominance, their ethos and practices set the norms for the banking system.

This state-dominated monopoly banking system has two characteristics.

First, banks adhere to tradition over the pursuit of profits, which is why banks still close at 4pm like in 1964 when the closing of the books at the end of the day had to be done by hand with adding machines.

In today’s digital age, the process of closing accounts can be accomplished by a single click on a keyboard.

Second, banks avoid lending to the MSME sector and prefer lending to large firms because of the former’s higher default rate and the costly paperwork from making many small loans.

As the paperwork cost of making a RM100,000 loan is the same as making a RM1,000,000 loan, the cost of making 10 loans of RM 100,000 each to MSMEs greatly exceeds the cost of making a single RM1,000,000 loan to a large firm.

Worldwide evidence shows that large banks do not lend to SMEs, only SMBs and SMFCs do. The large firms also prefer to deal with the big banks because SMBs and SMFCs cannot provide the full range of financial services they require. SMBs and SMFCs are therefore forced to make lending to MSMEs their specialty.

Malaysia must halt administering emergency financial sector medicine and start issuing licenses to small-medium financial institutions (SMBs-SMFCs).

Only by mobilising private sector funds through SMBs-SMFCs can the scale of financing needed for MSME modernization be met.

The government should permit ten new SMBs and ten new SMFCs immediately. The government should also break one of the large SOBs into five smaller banks and sell them (maybe, to qualified bankers).

With the inevitable requirement for MSMEs to have zero CO2 emissions, it has become even more urgent to have a financial sector transformation to enable the average Bumiputra firm to jumpstart the technological convergence.

Hopefully, this important issue would not be overlooked in this ground-breaking Bumiputra Economic Congress that treats Bumiputra empowerment as a truly national project, that everyone can help to make it work.


Institute for Advanced Studies, University of Malaya

UN Sustainable Development Solutions Network, Asia Headquarters, Sunway University

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