Jordan Loan Guarantee Corporation – SME Financing and Loan Guarantee Conference 2014 Central Bank’s Programmes Supporting SME Financing Marina Kahar Director of Development Finance and Enterprise Department Bank Negara Malaysia 25 November 2014

Coverage of presentation Strategic importance of SMEs to the economy Building the SME financing eco-system: A Malaysian perspective Malaysia’s holistic approach towards SME policy interventions Promoting and supporting innovation and new growth areas Development of a supportive payment system to drive innovative businesses Proportionate regulation to drive SME development Conclusion My presentation today will cover the following areas:

SMEs are an important contributor to the Malaysian GDP GDP Growth: SMEs and Overall Economy SME GDP growth outpaced the overall economy (cumulative growth of 6.3% for 2006-2013) Contribution to GDP increased by 3.7 ppt since 2005 Services sectors remain as the largest contributor to SME growth Banking system remains supportive of SMEs, in all key economic sectors p: preliminary f: forecast Lending to SMEs by Banking System (RM b) Source: Department of Statistics, SME Corporation Malaysia, Bank Negara Malaysia

Contribution of SMEs to the Economy While SMEs rank high in terms of participation, there is still great potential to contribute more in terms of value creation 98% of registered business establishments are SMEs Micro enterprises constitute the largest sub group of SMEs and a key source of income and self- employment for the low-income households 90% of SMEs operate in the services sectors (value: RM202.4 billion or USD60.2 billion), in line with the country’s growth path as a services-oriented economy Contribution of SMEs to the Economy Despite its size, SME GDP contribution is only 1/3 of total GDP Partly due to lower productivity and lower number of high growth firms compared to larger enterprises Macro policies must therefore focus more on ramping up SME sector’s contribution to GDP through high value-added activities. This requires an unconventional approach Terdapat sebanyak 580,985 PKS dalam sektor perkhidmatan, di mana 462,420 atau 79.6% merupakan perusahaan mikro. Source: Department of Statistics, SME Corporation Malaysia 4

Enhancing Access to Financing Policy interventions are driven holistically, under a single driving force National SME Development Council (NSDC) High level champion to drive broad policies and strategies for comprehensive development of SMEs Building Capacity and Capability Enhancing Access to Financing Strengthening Enabling Infrastructure Entrepreneur Development Human Capital Development Advisory Services Product Development Technology Enhancement Marketing and Promotion Awareness and Outreach Physical Infrastructure Regulatory Infrastructure Information Infrastructure An ‘Inclusive Financial System’ is mandated as a primary objective in the Central Banking Act (Revised) 2009 Start-Ups Business Expansion Rehabilitation

The SME Masterplan 2012-2020 has outlined 4 goals and 6 focus areas - The ‘Game Changers’ to increase SMEs’ contribution to the economy The SME Masterplan 2012-2020 Access to financing as an important lever to influence performance of SMEs, which requires support from the central bank

BNM’s commitment in financial inclusion embedded in legislation and financial sector blueprint 1 Revised Central Bank Act 2009 Principal Objective Promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy Principal Functions Formulate and conduct monetary policy Promote exchange rate regime consistent with fundamentals Regulate and supervise financial institutions Promote sound, progressive and inclusive financial system Provide oversight over the money and foreign exchange market Hold and manage foreign reserves of Malaysia Issue currency Exercise oversight over payment system 2 Financial Sector Blueprint (FSBP) Enhance capability to support high value-added activities Increase supply of a broad range of private risk capital funding Improve access to information Enhance access to financing for micro enterprises 7

The creation of SME financing ecosystem underpinned by five main pillars Microfinance Institutional Framework Strengthening the Development Financial Institutions Central Credit Reference Information System (CCRIS) Credit Guarantee Corporation Credit Bureau Malaysia SME Financing Facilitation (ABM- PARTNER) SME Financing Ecosystem Financial Infrastructure BNM’s SME Funds CGC Guarantee Schemes Venture Capital Financing for new growth areas Green Technology Financing Scheme Financial inclusion and education 28 programmes in 2014 SME events Media promotions Distribution of promotional materials through local authorities Outreach & Awareness Programmes Financing & Guarantee Schemes BNMLINK, BNMTELELINK, MOBILELINK Financing Help Desks at SME Business Associations ABMConnect Bankinginfo & SMEinfo Complaint & SME Advisory Units at FIs Debt Resolution & Management Avenues to Seek Information & Redress Small Debt Resolution Scheme Credit Counselling & Credit Management

More than USD1.8 bil in financing assistance provided Collaborative approach between BNM and Government agencies to support innovative and new growth areas Creating a stable environment to spur innovation and growth Examples: Assessment tools by experts to complement credit assessment by FIs Green Technology Financing Facility (USD1.06 bil) comprising of 30 actively participating FIs Commercialisation Innovation Fund (USD0.15 bil) 1 IP Financing Scheme by MDV and CGC Products and Services 2 Green Tech certification Technical Assessment by Experts More than USD1.8 bil in financing assistance provided 4 Capacity Building 3 Business matching with financial institutions Conference on Green Technology Financing and IP Financing Business Facilitation/ Market Platform IP Marketplace by Malaysia Intellectual Property Corporation (MyIPO) Technical briefings by MDeC and Biotech Corp Green Tech Business Review by Malaysia Green Tech Corporation Seminar on Intellectual Property Awareness by the Intellectual Property Corp of Malaysia Technology Commercialisation Platform to assist in end-to-end R&D&C by Agensi Inovasi Malaysia GT Financing Programmes by Asian Institute of Chartered Bankers

The evolution of Credit Guarantee Corporation’s role 1972 – 2000: Paving the path for FIs to lend to SMEs 2000 – 2005: Address needs of SMEs in changing environment 2005 and beyond: Perform social mandate sustainably Provide guarantees to banks, to increase receptiveness of SME customers Concessionary guarantee fee to keep borrowing cost low Expanded branch network nationwide Implemented Direct Access Guarantee Scheme Enhanced advisory services to SMEs Achieve financial sustainability Expand products and services to meet evolving needs of SMEs Balance financial sustainability with developmental role Key roles of CGC Role of BNM in ensuring sustainable performance Provides guarantee for loans without collateral / with inadequate collateral and track record Provides advisory services such as financial management . Provides direct financing for specific segments such as start-ups Implements Government-funded schemes targeting specific sectors such as innovative and new growth areas. As a major shareholder, BNM initiated transformation plan for CGC to undertake more effective role in assisting viable SMEs Greater emphasis on enhancing outreach, while maintaining financial sustainability Close engagement with CGC’s Board to ensure effective performance and achievement of mandate Close monitoring through regular reports submitted by CGC SMEs benefitted from CGC schemes 422,585 Total value of loans guaranteed RM52.9 billion

Advancing financial inclusion via acceleration of migration to e-payments 2 65 197 9 E-payments per capita Cheques cleared (‘mil) Card Terminals (per 1,000 inhabitants) 200 100 2013 2020 25 Debit card transactions per capita 30 BNM Financial Sector Blueprint Targets Key initiatives to accelerate migration to e-payments Initiatives Benefits to SMEs Pricing reforms Affordable e-payment fee ePIF framework Incentives to adopt e-payments Improved e-payment services Payment card reforms Affordable card acceptance cost Industry-wide effort to expand card usage and acceptance JomPAY More efficient bill payment services Adoption of e-payments would benefit SMEs by enhancing efficiency and productivity. BNM’s 3-pronged approach to create the enabling environment to spur SMEs to adopt e-payments. Address price distortions to make e-payments more affordable Enhance e-payment infrastructure to improve accessibility, security and convenience Promote greater awareness and confidence in the use of e-payments With risk and cost minimisation outcomes embedded in the policy design.

Barriers for SME growth Continuous efforts undertaken to address challenges in SME development Barriers for SME growth High cost of doing business Uncompetitive / low productivity Lower profits Difficulty obtaining funding Low expansion opportunity Business / Entrepreneurial impediments Financing issues Low innovation and technology adoption High Transaction Costs Information Asymmetry Market access – lack marketing and branding knowledge Lack Collateral / Track Records Human capital – skill mismatch of workforce Source: Bank Negara Malaysia; SME Corporation Malaysia

Balanced regulatory approach adopted for SME development - Balancing between regulatory expectations and developmental agenda Regulators’ Dilemma: Financial Stability Developmental Agenda Intended Outcomes: Effective intermediation through prudent lending Reduce risk of institutional failure Institutional safety and soundness Intended Outcomes: Support economic transformation objectives Greater risk-taking on financing innovation Enhance financing access to underserved Approach to Balance the Conflicting Agenda: Principle-based Regulation Regulations not prescriptive Flexible and encourage pioneering Recognises individuality of regulatees E.g. priority sector lending, microfinance, agent banking Minimise Information Asymmetry CCRIS – assists FIs ascertain behaviour of applicants Credit Bureau Malaysia – independent credit ratings on SMEs Risk-sharing with CGC for lending to SMEs and targeted sectors Proportionate Regulation Phased implementation through pilot initiatives DFI Act – balancing mandate achievements and sustainability AFI platform – Global Standards Sub-committee and Global Proportionality Working Group 1 2 3

Continuous surveillance and oversight over SMEs’ performance and access to financing Pro-active measures taken by BNM for effective surveillance to ensure continued access to financing Robust surveillance and oversight over market practices and new products offered by financial institutions. Keep abreast of new emerging risks and vulnerabilities for timely identification and mitigation of risks. Ensure compliance by FIs with regulatory requirements on the offering of new financial products and services particularly management and control of risks. Continuous engagements with FIs, SMEs, Government agencies and business associations on challenges faced by SMEs to address their concerns. Perform assessment through demand side survey on SMEs to facilitate formulation of policies to support the growth of SMEs.

In conclusion Collaborative efforts among stakeholders must be championed by a higher voice to harmonise conflicting objectives – ecosystems need all parts to work cohesively. The Central Bank needs to strengthen SME market surveillance and promote a market-driven approach to encourage industry players in enhancing SMEs’ access to financing. The awareness level of financiers needs to be accelerated in order to increase understanding of the new growth areas and the associated risks. Innovation leads to growth and ultimately prosperity but financial stability must not be compromised. All stakeholders including the Government and the Central Bank must continuously enhance the eco-system to support SME growth.