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

2. 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:

3. 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 )
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

4. 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

5. 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

6. 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
Access to financing as an important lever to influence performance of SMEs, which requires support from the central bank

7. BNM’s commitment in financial inclusion embedded in legislation and financial sector blueprint1
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

8. 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

9. 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

10. 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

11. Advancing financial inclusion via acceleration of migration to e-payments2 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.

12. 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

13. 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

14. 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.

15. 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.